Document:

Exhibit
4.1

 

AMENDMENT
NO. 1 TO RIGHTS AGREEMENT

 

This Amendment No. 1,
dated as of December 24, 2003 (the “Amendment”), is between Arena
Pharmaceuticals, Inc., a Delaware corporation (the “Company”), and
Computershare Trust Company, as Rights Agent (the “Rights Agent”).

 

WHEREAS, the Company and
the Rights Agent are parties to a Rights Agreement dated as of October 30, 2002
(the “Rights Agreement”); and

 

WHEREAS, pursuant to
Section 27 of the Rights Agreement, the Company and the Rights Agent desire to
amend the Rights Agreement as set forth below.

 

NOW, THEREFORE, in
consideration of the premises and the mutual agreements herein set forth, the
parties hereby agree as follows:

 

Section 1.               Amendments to Section 1.

 

(a)           The definition of “Acquiring Person”
in Section 1(a) of the Rights Agreement is hereby amended in its entirety to
read as follows:

 

“(a)         “Acquiring
Person” shall mean any Person (as such term is hereinafter defined)
who or which, together with all Affiliates and Associates (as such terms are hereinafter
defined) of such Person, shall be the Beneficial Owner (as such term is
hereinafter defined) of 10% or more of the Common Shares of the Company then
outstanding, but shall not include the Company, any Subsidiary (as such term is
hereinafter defined) of the Company, any employee benefit plan of the Company
or any Subsidiary of the Company, or any entity holding Common Shares of the
Company for or pursuant to the terms of any such plan.  Notwithstanding the foregoing, (i) BVF (as
such term is hereafter defined) shall not be deemed an Acquiring Person unless
it becomes the Beneficial Owner of Common Shares of the Company representing
more than the BVF Percentage (as such term is hereinafter defined) of the
Common Shares of the Company then outstanding, (ii) following the Closing Date
(as such term is hereinafter defined), no Purchaser (as such term is
hereinafter defined) shall be deemed an Acquiring Person by virtue of such
Purchaser being the Beneficial Owner of any Securities (as such term is hereinafter
defined) acquired pursuant to the terms of any of the Transaction Documents (as
such term is hereinafter defined); provided that if any Purchaser
acquires Beneficial Ownership of any Common Shares of the Company other than
pursuant to the terms of any of the Transaction Documents and, immediately
following such acquisition, such Purchaser Beneficially Owns 10% or more of the
Common Shares of the Company then outstanding (including by virtue of its
Beneficial Ownership of Securities), such Purchaser shall be deemed to have
become an Acquiring Person as a result of such acquisition, and (iii) no Person
(including BVF or any Purchaser) shall be or become an “Acquiring Person” as
the result of an acquisition of Common Shares of the Company by the

 

 

Company which, by reducing the number of shares
outstanding, increases the proportionate number of shares beneficially owned by
such Person to 10% or more (or more than the BVF Percentage in the case of BVF)
of the Common Shares of the Company then outstanding; provided, however,
that if a Person shall be or become the Beneficial Owner of 10% or more (or
more than the BVF Percentage in the case of BVF) of the Common Shares of the
Company then outstanding by reason of share purchases by the Company and shall
thereafter become the Beneficial Owner of any additional Common Shares of the
Company (other than, in the case of any Purchaser, pursuant to the terms of any
Transaction Documents), then such Person shall be deemed to be an “Acquiring
Person”.  Notwithstanding the foregoing,
if the Board of Directors of the Company determines in good faith that a Person
who would otherwise be an “Acquiring Person”, as defined pursuant to the
foregoing provisions of this paragraph (a), has become such inadvertently, and
such Person divests as promptly as practicable a sufficient number of Common
Shares of the Company so that such Person would no longer be an “Acquiring
Person,” as defined pursuant to the foregoing provisions of this paragraph (a),
then such Person shall not be deemed to be an “Acquiring Person” for any
purposes of this Agreement.”

 

(b)           The definition of “BVF Percentage” in
Section 1(f) of the Rights Agreement is hereby amended in its entirety to read
as follows:

 

“(f)          “BVF
Percentage” shall mean 19%; provided, however, that whenever BVF
disposes of beneficial ownership of any Common Shares of the Company and,
immediately thereafter, BVF shall be the Beneficial Owner of less than 18% of
the Common Shares of the Company then outstanding, the BVF Percentage shall automatically
decrease to equal the percentage of the then outstanding Common Shares of the
Company beneficially owned by BVF after giving effect to such disposition,
rounded up to the next highest whole percentage; provided further that the BVF
Percentage shall in no event be less than the percentage set forth in Section
1(a) hereof, and shall in no event increase as a result of any acquisition of
beneficial ownership of Common Shares of the Company by BVF following any
decrease in the BVF Percentage caused by any disposition of beneficial
ownership of Common Shares of the Company by BVF.

 

(c)           The following definitions are hereby
added to the end of Section 1 of the Rights Agreement to read as follows:

 

(r)            “Closing Date” shall have the meaning
ascribed to such term in the Securities Purchase Agreement.

 

(s)           “Securities” shall have the meaning
ascribed to such term in the Securities Purchase Agreement.

 

(t)            “Securities Purchase Agreement” shall mean
the Securities Purchase Agreement dated as of December    , 2003,
among the Company and the

 

2

 

purchasers
indicated on the signature pages thereto (such Persons, together with their
permitted assigns under the Securities Purchase Agreement, are referred to
herein as the “Purchasers”);
capitalized terms used herein without definition shall have the meanings
ascribed to such terms in the Securities Purchase Agreement.

 

(u)           “Transaction Documents” shall have the
meaning ascribed to such term in the Securities Purchase Agreement.

 

Section 2.               New Section 35.

 

The following is added as
a new Section 35 to the Rights Agreement:

 

“Section 35.           The Securities Purchase Agreement,
etc.

 

Notwithstanding anything contained in this Agreement to the contrary,
neither the approval, execution or delivery of the Transaction Documents nor
the consummation of the transactions contemplated thereby shall cause (i) any
Purchaser to be an Acquiring Person, (ii) a Shares Acquisition Date to occur or
(iii) a Distribution Date to occur.”

 

Section 3.               Severability.  If any term, provision, covenant or
restriction of this Amendment is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Amendment shall remain in
full force and effect and shall in no way be affected, impaired or invalidated.

 

Section 4.               Governing Law.  This Amendment shall be deemed to be a
contract made under the laws of the State of New York and for all purposes shall
be governed by and construed in accordance with the laws of such State
applicable to contracts made and to be performed entirely within such State.

 

Section 5.               Counterparts.  This Amendment may be executed in any number
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.

 

Section 6.               Effect of Amendment.  Except as expressly modified herein, the
Rights Agreement shall remain in full force and effect.

 

3

 

IN WITNESS
WHEREOF, the parties hereto have caused this Amendment to be duly executed all
as of the day and year first above written.

 

	
   

  	
  ARENA PHARMACEUTICALS,
  INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jack Lief

  	
   

  
	
   

  	
  Name:  Jack
  Lief

  
	
   

  	
  Title:    President
  and Chief Executive Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  COMPUTERSHARE TRUST
  COMPANY

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Ian Yewer

  	
   

  
	
   

  	
  Name:  Ian
  Yewer

  
	
   

  	
  Title:    President
  and Chief Operating Officer

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Zachary De Lisa

  	
   

  
	
   

  	
  Name:  Zachary
  De Lisa

  
	
   

  	
  Title:    Operations
  Manager

  

 

4Exhibit 10.1

 

SECURITIES PURCHASE AGREEMENT

 

This
Securities Purchase Agreement (this “Agreement”) is dated as of December 24,
2003, among Arena Pharmaceuticals, Inc., a Delaware corporation (the “Company”),
and each of the purchasers identified on the signature pages hereto (each 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”), the Company desires to issue and sell to each Purchaser, and
each Purchaser, severally and not jointly, desire 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
agrees as follows:

 

ARTICLE I

DEFINITIONS

 

1.1                                 Definitions.

 

In addition to
the terms defined elsewhere in this Agreement, the following terms have the
meanings indicated:

 

“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,
Additional Units and Shares, ignoring any limits on the number of shares of
Common Stock that may be owned by a Purchaser at any one time and (i) assuming
that (a) any previously unconverted Shares are held until the fifth anniversary
of the Closing Date and all dividends thereon are paid in shares of Common
Stock, (b) the Closing Price at all times on and after the date of
determination equals 100% of the actual Closing Price on the Trading Day
immediately prior to the date of Closing, and (ii) giving effect to the
Conversion Price (as defined in the Certificate of Designations) as in effect
on such date, without regard to potential changes in the Closing Price that may
occur thereafter; provided, however, that prior to the issuance
of the Series B-2 Preferred Stock, the Conversion Price for such Series B-2
Preferred Stock will be assumed to equal $7 per share (as adjusted for stock
splits, stock dividends, stock combinations or other similar events).

 

“Additional
Unit” means, collectively, (i) one share of Series B-2 Preferred
Stock and (ii) a Warrant to acquire up to 391.304 shares of Common Stock, with
respect to each Additional Unit issuable upon exercise of the Unit Warrants.

 

“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.  With
respect to the Company, “Affiliate” shall not include any BVF Entity and their
Affiliates, including Mark N. Lampert, and Associates (as defined in Rule 12b-2
of the General Rules and Regulations promulgated under the Exchange Act).

 

“Bankruptcy Event” means any of the following
events: (a) the Company or a Subsidiary of the Company commences a case or
other proceeding under any bankruptcy, reorganization, arrangement, adjustment
of debt, relief of debtors, dissolution, insolvency or liquidation or similar
law of any jurisdiction relating to the Company or any Subsidiary thereof; (b)
there is commenced against the Company or any Subsidiary any such case or
proceeding that is not dismissed within 60 days after commencement; (c) the
Company or any Subsidiary is adjudicated insolvent or bankrupt or any order of
relief or other order approving any such case or proceeding is entered; (d) the
Company or any Subsidiary suffers any appointment of any custodian or the like
for it or any substantial part of its property that is not discharged or stayed
within 60 days; (e) the Company or any Subsidiary makes a general assignment
for the benefit of creditors; (f) the Company or any Subsidiary fails to pay,
or states that it is unable to pay or is unable to pay, its debts generally as they
become due; (g) the Company or any Subsidiary calls a meeting of its creditors
with a view to arranging a composition, adjustment or restructuring of its
debts; or (h) the Company or any Subsidiary, by any act or failure to act,
expressly indicates its consent to, approval of or acquiescence in any of the
foregoing or takes any corporate or other action for the purpose of effecting
any of the foregoing.

 

“Business Day” means any day other than
Saturday, Sunday or other day on which commercial banks in the City of New York
or San Diego, California are authorized or required by law to remain closed.

 

“BVF Entity”
means, individually or collectively, Biotechnology Value Fund, L.P., a Delaware
limited partnership, Biotechnology Value Fund II, L.P., a Delaware limited
partnership, BVF Investments, L.L.C., a Delaware limited liability company, BVF
Partners L.P., a Delaware limited partnership, and BVF Inc., a Delaware
corporation.

 

“Capital
Lease” means, with respect to the Company and its Subsidiaries, any
lease of any property that is, in accordance with GAAP, classified and
accounted for as a capital lease on a consolidated balance sheet of the Company
and its Subsidiaries.

 

“Certificate of Designations” means the
certificate of designations of the Series B Preferred Stock, in the form of Exhibit
A.

 

“Change of Control” means the occurrence of
any of the following in one or a series of related transactions: (i) an
acquisition after the date hereof by an individual or legal entity or “group”
(as described in Rule 13d-5(b)(1) under the Exchange Act) of more than one-half
of the voting rights or voting equity interests in the Company; (ii) a
replacement of more than one-half of the members of the Company’s board of
directors that is not approved by those individuals who are members of the
board of directors on the date hereof (or other directors previously approved
by such individuals); (iii) a merger or consolidation of the Company or any
Subsidiary or a sale of all or substantially all of the assets of the Company
in one or a series of related transactions, unless following such transaction
or series of transactions, the holders of the 

 

2

 

Company’s securities prior to the first such transaction continue to
hold at least half of the voting rights or voting equity interests in of the
surviving entity or acquirer of such assets; (iv) a recapitalization,
reorganization or other transaction involving the Company or any Subsidiary
that constitutes or results in a transfer of more than one-half of the voting
rights or voting equity interests in the Company; (v) consummation of a “Rule
13e-3 transaction” as defined in Rule 13e-3 under the Exchange Act with respect
to the Company; or (vi) the execution by the Company of an agreement providing
for or reasonably likely to result in any of the foregoing events..

 

“Closing” has the meaning specified in Section
2.2.

 

“Closing Date” has the meaning specified in Section
2.2.

 

“Closing Price”
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 an Eligible
Market or any other national securities exchange, the closing bid price per
share of the Common Stock for such date (or the nearest preceding date) on the
primary Eligible Market or exchange on which the Common Stock is then listed or
quoted; (b) if prices for the Common Stock are then quoted on the OTC
Bulletin Board, the closing bid price per share of the Common Stock for such
date (or the nearest preceding date) so quoted; (c) if prices for the
Common Stock are then reported in the “Pink Sheets” published by the Pink
Sheets LLC (or a similar organization or agency succeeding to its functions of
reporting prices), the most recent closing 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 an independent appraiser selected in
good faith jointly by Purchasers holding a majority of the Securities and the
Company, the cost of which shall be paid by the Company.

 

“Commission” means the Securities and
Exchange Commission.

 

“Common Stock” means the common stock of the
Company, par value $0.0001 per share, and any securities into which such common
stock may hereafter be reclassified.

 

“Common Stock Equivalents” shall mean,
collectively, Options and Convertible Securities.

 

“Company Counsel” means Milbank, Tweed,
Hadley & McCloy LLP, special counsel to the Company.

 

“Contingent
Obligation” means, with respect to any Person, without duplication,
any obligation, contingent or otherwise, of such Person pursuant to which such
Person has directly or indirectly guaranteed any Debt or other payment
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
first Person (i) to purchase or pay (or advance or supply funds for the
purchase or payment of) such Debt or other obligation (whether arising by
agreement to keep well, to purchase assets, goods, securities or services or to
take-or-pay), or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Debt or other obligation of the payment
thereof or to protect such obligee against loss in respect thereof (in whole or
in part); provided, however, that the term Contingent Obligation
shall not include endorsements for collection or deposit in the ordinary course
of business obligations.

 

3

 

“Convertible Securities” means any evidence
of indebtedness, shares, options, warrants or other securities directly or
indirectly convertible into or exercisable or exchangeable for shares of Common
Stock.

 

“Debt”
means, with respect to the Company and its Subsidiaries at any date and without
duplication, any of the following: 
(i) all Debt for Money Borrowed; (ii) all obligations to pay
the deferred purchase price of property or services of any such Person, except
trade payables and obligations to employees, officers or directors, in each
case arising in the ordinary course of business; (iii) all obligations of
any such Person secured by a Lien on any asset of the Company and its
Subsidiaries, other than Permitted Liens; (iv) all Contingent Obligations
of any such Person; (v) obligations in the form of earn-out obligations to
be paid in cash; (vi) all obligations of any such Person under Capital
Leases; (vi) all obligations incurred by any such Person pursuant to
Hedging Agreements; (vii) any synthetic lease or other lease obligations
of such Person; (viii) any obligations of such Person in respect of
off-balance-sheet agreements or transactions that are in the nature of, or in
substitution of, financings; (ix) any other item that would be required to be
classified as a liability in an audited financial statement under GAAP (other
than deferred revenue and other than judgments subject to appeal and bonded),
and (x) any indebtedness or other obligations of any other Person of the
type specified in any of the foregoing classes, the payment or collection of
which such Person has guaranteed or in respect of which such Person is liable,
contingently or otherwise, including liable by way of agreement to purchase
products or securities, to provide funds for payment, to maintain working
capital or other balance sheet conditions or otherwise to assure a creditor
against loss.

 

“Debt for
Money Borrowed” means, with respect to the Company and its
Subsidiaries at any date and without duplication, any of the following:  (i) all liabilities, obligations and
indebtedness for borrowed money, including obligations evidenced by bonds,
debentures, notes or other similar instruments of any Person; (ii) all
Contingent Obligations of any such Person with respect to Debt for Money
Borrowed; and (iii) all obligations, contingent or otherwise, of any such
Person relative to the unexpired face amount of letters of credit, whether or
not drawn, and banker’s acceptances issued for the account of any such Person.

 

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

 

“Eligible Market” means the New York Stock
Exchange, the American Stock Exchange, the NASDAQ National Market or the NASDAQ
SmallCap Market.

 

“Event Equity Value” means the arithmetic
average of the Closing Prices for the five Trading Days preceding either (a)
the date of delivery of the notice requiring payment of the Event Equity Value,
or (b) the date on which such required payment (together with any other
payments, expenses and liquidated damages then due and payable under the
Transaction Documents) is paid in full, whichever is greater.

 

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

 

“Excluded Stock” means any shares of Common
Stock or Common Stock Equivalents issued or issuable (A) upon exercise,
conversion or exchange of any Common Stock Equivalents 

 

4

 

described in Schedule 3.1(g) (provided that such exercise,
conversion or exchange occurs in accordance with the terms thereof, without
amendment or modification, and that the applicable exercise, conversion or
exchange price or ratio is described in such schedule); (B) to officers,
directors, employees or consultants of the Company pursuant to any contract,
plan or arrangement approved by the Company’s board of directors; (C) in
connection with any strategic partnership or joint venture with a Person not
engaged primarily in the business of investing in companies and the primary
purpose of which is not to raise capital for the Company or any Subsidiary; (D)
pursuant to a bona fide firm commitment underwritten public offering with a
nationally recognized underwriter 
(excluding any equity line) with gross proceeds to the Company of
greater than $35,000,000; or (E) in connection with a transaction involving a
merger or acquisition of an entity, business or assets, not principally for the
purpose of obtaining cash.

 

“GAAP”
means United States generally accepted accounting principles, as recognized by
the American Institute of Certified Public Accountants or the Financial
Accounting Standards Board, consistently applied and maintained on a consistent
basis for the Company and its Subsidiaries throughout the period indicated and
consistent with the prior financial practice of the Company; provided, however,
that any accounting principle or practice required to be changed by the
American Institute of Certified Public Accountants or the Financial Accounting
Standards Board (or other appropriate board or committee of either) in order to
continue as a generally accepted accounting principle or practice may be so
changed.

 

“Going Concern Opinion” means the issuance
of an audit letter containing a “going concern” qualification by the Company’s
independent public accountant in connection with the Company’s annual report on
Form 10-K pursuant to Section 13 or 15(d) under the Exchange Act or any other
filing with the Commission.

 

“Hedging
Agreement” means any interest rate, foreign currency, commodity or
equity swap, collar, cap, floor or forward rate agreement, or other agreement
or arrangement designed to protect against fluctuations in interest rates or
currency, commodity or equity values (including any option with respect to any
of the foregoing and any combination of the foregoing agreements or
arrangements), and any confirmation executed in connection with any such
agreement or arrangement, all as amended or modified.

 

“Initial Unit”
means, collectively, (i) one share of Series B-1 Preferred Stock and (ii) a
Warrant to acquire up to 424.629 shares of Common Stock.

 

 “Lien”
means any lien, mortgage, pledge, charge, claim, security interest,
encumbrance, right of first refusal or other restriction upon or in any
property or assets (including accounts and contract rights).

 

 “Losses”
means any and all losses, claims, damages, liabilities, settlement costs and
expenses, including, without limitation, costs of preparation of legal action
and reasonable attorneys’ fees (but in no event for more than one law firm) .

 

“Options”
means any rights, warrants or options to subscribe, directly or indirectly for
or purchase Common Stock or Convertible Securities (taking into account all
Securities that can be issued under the Transaction Documents and assuming that
prior to the issuance of the Series B-2 

 

5

 

Preferred Stock the conversion price is equal to $7 per share (as
adjusted for stock splits, stock dividends, stock combinations or other similar
events)).

 

“Person” means any 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.

 

“Permitted
Debt” means (i) any Permitted Subordinated Debt, (ii) Capital Leases
and leases relating to real and personal property incurred in the ordinary
course of business and on an arm’s-length basis and letters of credit relating
to such leases and associated deferred rent and balance sheet liabilities,
(iii) sale and leaseback transactions relating to real property and associated
balance sheet liabilities, and (iv) Debt (other than any Debt for Money
Borrowed and Debt referred to in clauses (i) through (iii) above) in an amount
(x) from the date hereof through and including the two year anniversary of this
Agreement, not exceeding $10 million in the aggregate at any one time
outstanding, and (y) following the two year anniversary of this Agreement, not
exceeding $25 million in the aggregate at any one time outstanding.

 

“Permitted Liens” means
(i) any Lien for taxes not yet due or delinquent or being contested in good
faith by appropriate proceedings, (ii) any materialmans, mechanics or similar
statutory Lien arising in the ordinary course of business by operation of law
with respect to Debt that is not yet due or delinquent and (iii) any minor
imperfection of title or similar Lien which individually or in the aggregate
with other such Liens does not materially impair the value of the property
subject to such Lien or the use of such property in the conduct of the
business.

 

“Permitted
Subordinated Debt” means Debt that (x) is made expressly subordinate
to the Series B Preferred Stock in right of payment, whether with respect to
dividends or upon liquidation or dissolution, or otherwise, on terms
satisfactory to the holders of a majority of the shares of Series B Preferred
Stock then outstanding and (y) does not provide at any time for the payment,
prepayment, repayment, repurchase or defeasance, directly or indirectly, of any
principal or premium, if any, thereon until at least 91 days after the
Mandatory Redemption Date (as defined in the Certificate of Designations).

 

“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.

 

“Registration Rights Agreement” means the
Registration Rights Agreement, dated as of the date hereof, among the Company and
the Purchasers, in the form of Exhibit B.

 

“Required Effectiveness Date” means the date
on which an Underlying Shares Registration Statement is required to become
effective pursuant to the Registration Rights Agreement.

 

“Required 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, Additional Units and Shares, ignoring any limits on the number of
shares of Common 

 

6

 

Stock that may be owned by a Purchaser at any one time and (i) assuming
that (a) any previously unconverted Shares are held until the fifth anniversary
of the Closing Date or, if earlier, until maturity, and all dividends thereon
are paid in shares of Common Stock, and (b) the Closing Price at all times on
and after the date of determination equals 50% of the actual Closing Price on
the Trading Day immediately prior to the date of Closing, and (ii) giving
effect to the Conversion Price (as defined in the Certificate of Designations)
as in effect on such date, without regard to potential changes in the Closing
Price that may occur thereafter; provided, however, that prior to
the issuance of the Series B-2 Preferred Stock, the Conversion Price for such
Series B-2 Preferred Stock will be assumed to equal $7 per share (as adjusted
for stock splits, stock dividends, stock combinations or other similar events).

 

“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.

 

“Securities” means the Shares, the Warrants,
the Unit Warrants and the Underlying Shares issued or issuable to the
Purchasers pursuant to the Transaction Documents.

 

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

 

“Series B Preferred Stock” means,
collectively, the Series B-1 Preferred Stock and the Series B-2 Preferred
Stock.

 

“Series
B-1 Preferred Stock” means the Series B-1 Convertible
Preferred Stock, par value $0.0001, of the Company, which are convertible into
shares of Common Stock.

 

“Series
B-2 Preferred Stock” means the Series B-2 Convertible
Preferred Stock, par value $0.0001, of the Company, which are convertible into
shares of Common Stock

 

“Shares” means (i) an aggregate of 3,500
shares of Series B-1 Preferred Stock which are being purchased by the
Purchasers pursuant to this Agreement, and (ii) an aggregate of 1,150 shares of
Series B-2 Preferred Stock, which may be purchased by the Purchasers upon
exercise of the Unit Warrants.

 

“Subsidiary” means any significant
subsidiary of the Company as defined in Rule 1-02(w) of Regulation S-X
promulgated by the Commission.

 

“Trading
Day” means (a) any day on which the Common Stock is
listed or quoted, and traded, on its primary Trading Market, or (b) if the
Common Stock is not then listed or quoted, and traded, on any Eligible Market,
then any Business Day.

 

“Trading Market” means the NASDAQ National
Market or any other national securities exchange, market or trading or
quotation facility on which the Common Stock is then listed or quoted.

 

“Transaction Documents” means this
Agreement, the Registration Rights Agreement, the Unit Warrants, the Warrants,
the Certificate of Designations, the Transfer Agent Instructions 

 

7

 

and any other documents or agreements executed or delivered in
connection with the transactions contemplated hereunder and thereunder.

 

“Transfer Agent Instructions” means the Irrevocable Transfer
Agent Instructions, in the form of Exhibit D, executed by the Company
and delivered to and acknowledged in writing by the Company’s transfer agent.

 

“Trigger Date”
means the 120th day following the Closing Date.

 

“Triggering Event” means any of the
following events: (a) immediately prior to any Bankruptcy Event; (b) the
Company fails for any reason to deliver a certificate evidencing any Securities
to a Purchaser within ten consecutive Trading Days after delivery of such
certificate is required pursuant to any Transaction Document or the exercise or
conversion rights of the Holders pursuant to the Transaction Documents are
otherwise suspended for any reason except as in accordance with Section 18 of
the Certificate of Designations or Section 11 of the Warrant; (c) any Event (as
defined in the Registration Rights Agreement) occurs and remains uncured for 60
days; (d) the Company fails to make any cash payment required under the
Transaction Documents and such failure is not cured within five Trading Days
after notice of such default is first given to the Company by a Purchaser; (e)
the issuance of a Going Concern Opinion which is not cured within 90 days;  (f) the Company breaches Section 4.15 or
4.16; provided, that with respect to Debt that the Company does not have any
knowledge of or could not have any knowledge of (after due inquiry), within 30
days following the Company obtaining knowledge of such Debt; or (g) the Company
defaults in the timely performance of any other obligation under the
Transaction Documents and such default continues uncured for a period of 20
days after the date on which notice of such default is first given to the
Company by a Purchaser (it being understood that no prior notice need be given
in the case of a default that cannot reasonably be cured within 20 days).

 

“Underlying Shares” means the shares of
Common Stock issuable upon conversion of the Shares and upon exercise of the
Warrants (including the Warrants issuable upon exercise of the Unit Warrants
and Exchange Warrants (as defined in the Unit Warrant)) and in satisfaction of
any other obligation of the Company to issue shares of Common Stock pursuant to
the Transaction Documents.

 

“Underlying Shares 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.

 

“Units”
means, collectively, the Initial Units and the Additional Units.

 

“Unit
Warrants” means the unit warrants, in the form of Exhibit F,
to purchase Additional Units.

 

 “Volume
Weighted Average Price” means, with respect to any particular
Trading Day or for any particular period, the volume weighted average
trading price per share of Common Stock on such Trading Day or for such period
on an Eligible Market as reported by Bloomberg, L.P., or any successor
performing similar functions.

 

8

 

“Warrants” means the Common Stock purchase
warrants, in the form of Exhibit C, including any Exchange Warrants (as
defined in the Warrants).

 

ARTICLE II

PURCHASE AND SALE

 

2.1                                 Sale and Issuance of Initial Units
and Unit Warrants at Closing. 
Subject to the terms and conditions of this Agreement, each Purchaser
agrees, severally and not jointly, to purchase at the Closing and the Company
agrees to sell and issue to each Purchaser at the Closing, for the aggregate
purchase price set forth opposite such Purchaser’s name on Schedule A
hereto under the heading “Purchase Price”:

 

(a)                                  that
number of Initial Units set forth opposite such Purchaser’s name on Schedule
A hereto under the heading “Initial Units;” and

 

(b)                                 a
Unit Warrant exercisable for that number of Additional Units set forth opposite
such Purchaser’s name on Schedule A hereto under the heading “Additional
Units.”

 

2.2                                 Closing. 
The closing of the purchase and sale of the Initial Units and the Unit
Warrants pursuant to the terms of Section 2.1 (the “Closing”)
shall take place at the offices of Proskauer Rose LLP in New York, New York, at
10:00 a.m. (New York City Time) on the date each of the conditions set forth in
Sections 2.3 have been satisfied, but in no event later than December
31, 2003, or at such other time and place as the Company and the Purchasers
mutually agree upon in writing (which time and place are designated as the “Closing Date”).

 

2.3                                 Closing Deliveries.

 

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

 

(i)                                     one
or more stock certificates evidencing that number of shares of Series B-1
Preferred Stock corresponding to the Initial Units purchased by such Purchaser
as indicated on Schedule A hereto under the heading “Initial Units
–Initial Shares”, registered in the name of such Purchaser;

 

(ii)                                  a
Warrant, registered in the name of such Purchaser, pursuant to which such
Purchaser shall have the right to acquire that number of shares of Common Stock
corresponding to number of the Initial Units purchased by such Purchaser as
indicated on Schedule A hereto under the heading “Initial Units-Initial
Warrant Shares;”

 

(iii)                               a
Unit Warrant, registered in the name of such Purchaser, as set forth in Section
2.1(b) above, entitling such Purchaser to subscribe for (i) that number of
Shares as indicated on Schedule A hereto under the heading “Additional
Units –Additional Shares”, and (ii) a Warrant exercisable for that number of
shares of Common Stock as indicated on Schedule A hereto under the
heading “Additional Units-Additional Warrant Shares;”

 

9

 

(iv)                              evidence
that the Certificate of Designations has been filed and become effective on or
prior to the Closing Date with the Secretary of State of the State of Delaware,
in form and substance mutually agreed to by the parties;

 

(v)                                 the
legal opinion of Company Counsel, in the form of Exhibit E-1, executed
by such counsel and delivered to the Purchasers; and the legal opinion of the
General Counsel of the Company, in the form of Exhibit E-2, executed by
such counsel and delivered to the Purchasers;

 

(vi)                              the
Registration Rights Agreement duly executed by the Company;

 

(vii)                           duly
executed Transfer Agent Instructions acknowledged by the Company’s transfer
agent; and

 

(viii)                        any other
documents reasonably requested by the Purchasers or Proskauer Rose LLP in
connection with the Closing.

 

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

 

(i)                                     the
purchase price set forth opposite such Purchaser’s name on Schedule A
hereto under the heading “Purchase Price,” in United States dollars and in
immediately available funds, by wire transfer to an account designated in
writing by the Company for such purpose; and

 

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

 

ARTICLE
III

REPRESENTATIONS AND WARRANTIES

 

3.1                                 Representations and Warranties of
the Company.  The Company hereby
makes the following representations and warranties to each of the Purchasers:

 

(a)                                  Subsidiaries.  The Company does not directly or indirectly
control or own any interest in any other corporation, partnership, joint
venture or other business association or entity (other than investments in
funds), other than those listed in Schedule 3.1(a).  Except as disclosed in Schedule 3.1(a),
the Company owns, directly or indirectly, all of the capital stock of each
Subsidiary free and clear of any Lien, 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.

 

(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 

 

10

 

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 a material adverse effect
on the results of operations, assets, business or financial condition 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 and thereunder.  The execution and delivery of each of the Transaction Documents
by the Company and the consummation by it of the transactions contemplated
hereunder and thereunder 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, its Board of Directors or its stockholders.  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.

 

(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 hereby and 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 to which the Company or a Subsidiary is
subject (including federal and state securities laws and regulations) and the
rules and regulations of any self-regulatory organization to which the Company
or its securities are subject, 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 

 

11

 

under Section
4.8 and the required filing of the Certificate of Designations pursuant to Section
2.3, (ii) the filing with the Commission of the Underlying Shares
Registration Statement, (iii) the application(s) to each Trading Market for the
listing of the Securities for trading thereon in the time and manner required
thereby, (iv) applicable Blue Sky filings, and (v) 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 have or result in,
individually or in the aggregate, a Material Adverse Effect (collectively, the
“Required Approvals”).

 

(f)                                    Issuance
of the Securities.  The Securities
are duly authorized and, when issued and paid for in accordance with the
Transaction Documents, will be duly and validly issued, fully paid and
nonassessable, free and clear of all Liens and shall not be subject to
preemptive rights or similar rights of stockholders.  The Company has reserved from its duly authorized capital stock a
number of shares of Common Stock for issuance upon the conversion or exercise
of the Underlying Shares at least equal to the Required Minimum on the date
hereof.

 

(g)                                 Capitalization.  The number of shares and type of all
authorized, issued and outstanding capital stock, options and other securities
of the Company (whether or not presently convertible into, or exercisable or
exchangeable for, shares of capital stock of the Company) is set forth in Schedule
3.1(g).  All outstanding shares of
capital stock are duly authorized, validly issued, fully paid and nonassessable
and have been issued in compliance with all applicable securities laws.  Except as disclosed in Schedule 3.1(g),
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 exercisable 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 into, or exercisable or
exchangeable for, shares of Common Stock. 
Except as disclosed in Schedule 3.1(g), there are no
anti-dilution or price adjustment provisions contained in any security issued
by the Company (or in any agreement providing rights to security holders) and
the issue 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.  To the knowledge of the
Company, except as specifically disclosed in Schedule 3.1(g), no Person
or group of related Persons beneficially owns (as determined pursuant to Rule
13d-3 under the Exchange Act), or has the right to acquire, by agreement with
or by obligation binding upon the Company, beneficial ownership of in excess of
5% of the outstanding Common Stock, ignoring for such purposes any limitation
on the number of shares of Common Stock that may be owned at any single time.

 

(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 this Agreement and 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 delivered to
the Purchasers, prior to the execution and 

 

12

 

delivery of
this Agreement, a copy of any SEC Report filed by the Company 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 the light of the circumstances under
which they were made, not misleading. 
The financial statements of the Company included in the SEC Reports
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 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.  All material agreements to
which the Company or any Subsidiary is a party or to which the property or
assets of the Company or any Subsidiary are subject that are required to be
filed with the Commission are included as part of or specifically identified in
the SEC Reports.  Each press release
disseminated during the 12 months preceding the date of this Agreement did not
at the time of release contain any untrue statement of a material fact or omit
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 are
made, not misleading.

 

(i)                                     Material
Changes.  Except as set forth in Schedule
3.1(i), 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, individually or in
the aggregate, has had or that reasonably could be expected to 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 equity
compensation option 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,
have or result in a Material Adverse Effect. 
To the knowledge of the Company, Schedule 3.1(j) of the
Disclosure Schedule contains a complete list and summary description of any
pending or threatened proceeding 

 

13

 

against or
affecting the Company or any of its Subsidiaries, without regard to whether it
would have a Material Adverse Effect. 
Neither the Company nor any Subsidiary, nor to the knowledge of the
Company any director or officer thereof, is or during the last three years 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.
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 or
any current or former director or officer of the Company.  The Commission has not issued any stop order
or other order suspending the effectiveness of any registration statement filed
by the Company or any Subsidiary under the Exchange Act or the Securities Act.  No material strike, work stoppage, slow down
or other material labor problem exists or, to the knowledge of the Company, is
threatened or imminent with respect to any of the employees of the Company or
the Subsidiaries.

 

(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 assets or
properties is bound or affected (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, including without limitation all
foreign, federal, state and local laws relating to taxes, environmental
protection, occupational health and safety, product quality and safety and
employment and labor matters, except in each case as could not, individually or
in the aggregate, have or result in a Material Adverse Effect.

 

(l)                                     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, 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.

 

(m)                               Title
to Assets.  To the Company’s
knowledge, the Company and the Subsidiaries have good and valid 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 valid 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 in all material respects.

 

(n)                                 Patents
and Trademarks.  The Company and the
Subsidiaries have, or have rights to use, all patents, patent applications,
trademarks, trademark applications, service marks, 

 

14

 

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 could reasonably be expected to 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, except for failures which, individually or in the aggregate, would
not have a Material Adverse Effect.

 

(o)                                 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.  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.

 

(p)                                 Transactions
With Affiliates and Employees. 
Except as set forth in SEC Reports filed at least ten days prior to the
date hereof, none of the 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.

 

(q)                                 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.

 

(r)                                    Solvency.  Based on the financial condition of the
Company as of the Closing Date, (i) the Company’s fair saleable value of its
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 

 

15

 

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).

 

(s)                                  Certain
Fees.  Except for the fees described
in Schedule 3.1(s), all of which are payable to registered broker-dealers,
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.

 

(t)                                    Private
Placement.  Neither the Company nor
any Person acting on the Company’s behalf has sold or offered to sell or
solicited any offer to buy the Securities by means of any form of general
solicitation or advertising.  Neither
the Company nor any of its Affiliates nor any Person acting on the Company’s
behalf has, directly or indirectly, at any time within the past six months,
made any offer or sale of any security or solicitation of any offer to buy any
security under circumstances that would (i) eliminate the availability of the
exemption from registration under Regulation D under the Securities Act in
connection with the offer and sale of the Securities as contemplated hereby or
(ii) cause the offering of the Securities pursuant to the Transaction Documents
to be integrated with prior offerings by the Company for purposes of any
applicable law, regulation or shareholder approval provisions, including
without limitation under the rules and regulations of any Trading Market.  The Company is not, and is not an Affiliate
of, an “investment company” within the meaning of the Investment Company Act of
1940, as amended.  The Company is not a
United States real property holding corporation within the meaning of the
Foreign Investment in Real Property Tax Act of 1980.

 

(u)                                 Form
S-3 Eligibility. The Company is eligible to register its Common Stock for
resale by the Purchasers under Form S-3 promulgated under the Securities Act.

 

(v)                                 Listing
and Maintenance Requirements.  The
Company has not, in the two years preceding the date hereof, received notice
(written or oral) from any Trading 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 Trading 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.  Except as set forth in Schedule
3.1(w), 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 the Purchasers as a result
of the Purchasers and the Company fulfilling their obligations or exercising
their rights under the Transaction Documents, including 

 

16

 

without
limitation the Company’s issuance of the Securities and the Purchasers’
ownership of the Securities.

 

(y)                                 Indebtedness.  Except as set forth in Schedule 3.1(y),
there is no other Debt that would be required to be disclosed in accordance
with GAAP as of September 30, 2003 on the Company’s balance sheet included in
the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30,
2003 filed with the Commission on November 12, 2003.  As of the date hereof, the Company does not have any Debt other
than Permitted Debt.

 

(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 each of 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 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.  No event or
circumstance has occurred or information exists with respect to the Company or
any of its Subsidiaries or its or their business, properties, operations or
financial conditions, which, under applicable law, rule or regulation, requires
public disclosure or announcement by the Company but which has not been so
publicly announced or disclosed (assuming for this purpose that the Company’s
reports filed under the 1934 Act are being incorporated into an effective
registration statement filed by the Company under the 1933 Act).  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)                            Acknowledgment
Regarding Purchasers’ Purchase of Securities.  The Company acknowledges and agrees that each of the Purchasers
is acting solely in the capacity of an arm’s length purchaser with respect to
this Agreement and the transactions contemplated hereby.  The Company further acknowledges that no
Purchaser is acting as a financial advisor or fiduciary of the Company (or in
any similar capacity) with respect to this Agreement and the transactions
contemplated hereby and any advice given by any Purchaser or any of their
respective representatives or agents in connection with this Agreement and the
transactions contemplated hereby is merely incidental to the Purchasers’
purchase of the Securities.  The Company
further represents to each Purchaser that the Company’s decision to enter into
this Agreement has been based solely on the independent evaluation of the
Company and its representatives.

 

3.2                                 Representations and Warranties of
the Purchasers.  Each Purchaser
hereby, as to itself only 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 

 

17

 

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 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 and the Registration Rights Agreement, at all
times to sell 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.

 

(c)                                  Purchaser
Status.  At the time such Purchaser
was offered the Securities, it was, and at the date hereof it is an “accredited
investor” as defined in Rule 501(a) under the Securities 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.

 

(e)                                  Access
to Information.  Such Purchaser
acknowledges that it has reviewed the Disclosure Materials and has been
afforded (i) the opportunity to 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 Securities and the merits and risks
of investing in the Securities; (ii) access to information about the Company
and the Subsidiaries and their respective financial condition sufficient to
enable it to evaluate its investment; and (iii) the opportunity to obtain such
additional information that 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. 
Neither such inquiries nor any other investigation conducted by or on
behalf of such Purchaser or its representatives or counsel, nor any other
provisions of this Section 3.2, shall modify, amend or affect such
Purchaser’s right to rely on the truth, accuracy and completeness of the
Disclosure Materials and the Company’s representations and warranties contained
in the Transaction Documents.

 

(f)                                                                                    Reliance.  Such Purchaser understands and acknowledges
that (i) the Securities are being offered and sold to it without registration
under the Securities Act in a private placement 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 such Purchaser hereby
consents to such reliance.  Such
Purchaser acknowledges and agrees that the Company does not make or has not 

 

18

 

made any
representations or warranties with respect to the transactions contemplated
hereby other than those specifically set forth in Section 3.1 or any other
Transaction Document.

 

ARTICLE IV

OTHER AGREEMENTS OF THE PARTIES

 

4.1                                 Transfer Restrictions.

 

(a)                                  Securities
may only be disposed of pursuant to an effective registration statement under
the Securities Act or pursuant to an available exemption from the registration
requirements of the Securities Act, and in compliance with any applicable state
securities laws.  In connection with any
transfer of Securities other than pursuant to an effective registration
statement or to the Company or pursuant to Rule 144(k), except as otherwise set
forth herein, the Company may require the transferor 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 under the Securities Act.  Notwithstanding the foregoing, the Company
hereby consents to and agrees to register on the books of the Company and with
its transfer agent, without any such legal opinion, any transfer of Securities
by a Purchaser to an Affiliate of such Purchaser, provided that (x) such
transferee certifies to the Company that it is an “accredited investor” as
defined in Rule 501(a) under the Securities Act, (y) such transferee executes
an instrument reasonably satisfactory to the Company agreeing to be bound to
the provisions of the Transaction Documents and any subsequent related
agreement as though it were an original Purchaser and (z) the Purchasers and
their transferees make no more than five such transfers in the aggregate.

 

(b)                                 The
Purchasers agree 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 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.  NOTWITHSTANDING THE
FOREGOING, THESE SECURITIES [AND THE SECURITIES ISSUABLE UPON [EXERCISE]
[CONVERSION]] OF THESE SECURITIES] MAY BE PLEDGED IN CONNECTION WITH A BONA
FIDE MARGIN ACCOUNT OR OTHER LOAN OR FINANCING ARRANGEMENT SECURED BY SUCH
SECURITIES, PROVIDED THAT ANY EXERCISE OF ANY RIGHTS BY ANY SECURED PARTY SHALL
COMPLY WITH THESE LEGEND REQUIREMENTS.

 

Certificates
evidencing Securities shall not be required to contain such legend or any other
legend (i) while a Registration Statement covering the resale of such
Securities is effective 

 

19

 

under the Securities Act, or (ii) following any sale of such Securities
pursuant to Rule 144, or (iii) if such Securities 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).  The Company shall cause its counsel
to issue the legal opinion included in the Transfer Agent Instructions to the
Transfer Agent on the Effective Date. 
Following the Effective Date or at such earlier time as a legend is no
longer required for certain Securities, the Company will, no later than three
Trading Days following the delivery by a Purchaser to the Company’s transfer
agent (with a notice to the Company thereof) of a legended certificate
representing such Securities, deliver or cause to be delivered to such
Purchaser a certificate representing such Securities 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.

 

(c)                                  The
Company acknowledges and agrees that a Purchaser may from time to time pledge
or grant a security interest in some or all of the Securities in connection with a bona fide margin
agreement or other loan or financing arrangement secured by the Securities
and, if required under the terms of such agreement, loan or arrangement, such
Purchaser may transfer pledged or secured Securities to the pledgees or secured
parties.  Such a pledge or transfer
would not be subject to approval of the Company and no legal opinion of the
pledgee, secured party or pledgor shall be required in connection
therewith.  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.

 

(d)                                 In
addition to any other rights available to a Purchaser, if the Company fails to
deliver to such Purchaser a certificate representing Common Stock by the third
Trading Day after the date on which delivery of such certificate is required by
any Transaction Document, and if after such third Trading Day such Purchaser
purchases (in an open market transaction or otherwise) shares of Common Stock
to deliver in satisfaction of a sale by such Purchaser of the shares that the
Purchaser anticipated receiving from the Company (a “Buy-In”), then, in the Purchaser’s sole discretion, the
Company shall, within three Trading Days after such Purchaser’s request either
(i) pay cash to such Purchaser in an amount equal to such Purchaser’s total
purchase price (including brokerage commissions, if any) for the shares of
Common Stock so purchased (the “Buy-In Price”),
at which point the Company’s obligation to deliver such certificate (and to
issue such Common Stock) shall terminate, or (ii) promptly honor its obligation
to deliver to such Purchaser a certificate or certificates representing such
Common Stock and pay cash to such Purchaser in an amount equal to the excess
(if any) of the Buy-In Price over the product of (A) such number of shares of
Common Stock, times (B) the Closing Price on the date of the event giving rise
to the Company’s obligation to deliver such certificate.

 

4.2                                 Acknowledgment of Dilution.  The Company acknowledges that the issuance
of the Securities will 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 

 

20

 

obligations
under the Transaction Documents, including, without limitation, its obligation
to issue the Securities 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.

 

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 such Person, the
Company shall deliver to such Person 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 the
Purchasers and make publicly available in accordance with paragraph (c) of Rule
144 such information as is required for the Purchasers 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 commercially reasonable 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 Trading 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 this Section 4.5.

 

(b)                                 If,
on any date, the number of authorized but unissued (and otherwise unreserved)
shares of Common Stock (the “Remaining
Authorized Shares”) is less than 125% 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 its 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 the Required Minimum at such
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 will not be required at
any time to authorize a number of shares of Common Stock greater than the
maximum remaining number of shares of Common Stock that could possibly be
issued after such time pursuant to the Transaction Documents.

 

21

 

(c)                                  If,
at the time any Purchaser requests an exercise or conversion of any Securities,
the Actual Minimum minus the number of shares of Common Stock previously issued
pursuant to the Transaction Documents exceeds the Remaining Authorized Shares,
then the Company shall issue to the Purchaser requesting such exercise or
conversion a number of Underlying Shares not exceeding such Purchaser’s
pro-rata portion of the Remaining Authorized Shares (based on such Purchaser’s
share of the aggregate purchase price paid hereunder and considering any
Underlying Shares previously issued to such Purchaser), and the remainder of
the Underlying Shares issuable in connection with such exercise or conversion
(if any) shall constitute “Excess Shares”
pursuant to Section 4.5(g) below.

 

(d)                                 The
Company shall (i) in the time and manner required by each Trading Market,
prepare and file with such Trading Market an additional shares listing
application covering a number of shares of Common Stock at least equal to the
greater of (A) the Required Minimum on the Closing Date and (B) the Required
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 each Trading Market
as soon as possible thereafter, (iii) provide to the Purchasers evidence of
such listing, and (iv) maintain the listing of such Common Stock on each such
Trading Market or another Eligible Market.

 

(e)                                  If,
on any date, the number of shares of Common Stock previously listed on a
Trading Market is less than 125% of the Actual Minimum on such date, then the
Company shall take the necessary actions to list on such Trading Market, as
soon as reasonably possible, a number of shares of Common Stock at least equal
to the Required Minimum on such date; provided that the Company will not be
required at any time to list a number of shares of Common Stock greater than
the maximum number of shares of Common Stock that could possibly be issued
pursuant to the Transaction Documents.

 

(f)                                    If
the Trading Market is the NASDAQ National Market or the NASDAQ SmallCap Market,
then the maximum number of shares of Common Stock that the Company may issue
pursuant to the Transaction Documents at an effective purchase price less than
the Closing Price on the Trading Day immediately preceding the Closing Date
equals 5,121,877 shares (the “Issuable Maximum”),
unless the Company obtains shareholder approval in accordance with the rules
and regulations of such Trading Market. 
If, at the time any Purchaser requests an exercise or conversion of any
Securities, the Actual Minimum (excluding any shares issued or issuable at an
effective purchase price in excess of the Closing Price on the Trading Day
immediately preceding the Closing Date) exceeds the Issuable Maximum (and if
the Company has not previously obtained the required shareholder approval),
then the Company shall issue to the Purchaser requesting such exercise or conversion
a number of Underlying Shares of Common Stock not exceeding such Purchaser’s
pro-rata portion of the Issuable Maximum (based on such Purchaser’s share of
the aggregate purchase price paid hereunder and considering any Underlying
Shares previously issued to such Purchaser), and the remainder of the
Underlying Shares issuable in connection with such exercise or conversion (if
any) shall constitute “Excess Shares”
pursuant to Section 4.5(g) below.

 

(g)                                 Any
Purchaser whose receipt of Excess Shares upon exercise or conversion of
Securities is restricted based on the number of Remaining Authorized Shares or
the Issuable Maximum shall have the option, by notice to the Company, to
require the Company 

 

22

 

to either: (i)
use its best efforts to obtain the required shareholder approval necessary to
permit the issuance of such Excess Shares as soon as is possible, but in any
event not later than the 75th day after such notice, or (ii) within five
Trading Days after such notice, pay cash to such Purchaser, as liquidated
damages and not as a penalty, in an amount equal to the number of Excess Shares
multiplied by the average Closing Price over the five Trading Days immediately
prior to the date of such notice or, if greater, the five Trading Days
immediately prior to the date of payment (the “Cash Amount”), and the Company shall have no further
obligation to issue any of such Excess Shares. 
No shares of Common Stock that were issued pursuant to the Transaction
Documents may be entitled to vote to approve the issuance of such Excess
Shares.  If the exercising or converting
Purchaser elects the first option under the first sentence of this Section
4.5(g) and the Company fails to obtain the required shareholder approval on or
prior to the 75th day after such notice, then within five Trading Days after
such 75th day, the Company shall pay the Cash Amount to such Purchaser, as
liquidated damages and not as penalty.

 

4.6                                 Conversion and Exercise Procedures.  The form of Exercise Notice included in the
Warrants and the Unit Warrants, respectively, and the form of Conversion Notice
included in the Certificate of Designations set forth the totality of the
procedures required in order to exercise the Warrants and the Unit Warrants, or
convert the shares of Series B Preferred Stock under the Transaction
Documents.  No additional legal opinion
or other information or instructions shall be necessary to enable the
Purchasers to exercise their Warrants and Unit Warrants, or convert any shares
of Series B Preferred Stock.  The
Company shall honor exercises of the Warrants and Unit Warrants, and
conversions of the shares of Series B Preferred Stock and shall deliver
Underlying Shares in accordance with the terms, conditions and time periods set
forth in the Transaction Documents.

 

4.7                                 Subsequent Placements.

 

(a)                From the date
hereof until 30 Trading Days following the Effective Date (the “Blockout Period”), the Company will not, directly or
indirectly, offer, sell, grant any option to purchase, or otherwise dispose of
(or announce any offer, sale, grant or any option to purchase or other
disposition of) any of its or the Subsidiaries’ equity or equity equivalent
securities, including, without limitation, any debt, preferred stock or other instrument
or security that is, at any time during its life and under any circumstances,
convertible into or exchangeable or exercisable for Common Stock or Common
Stock Equivalents (any such offer, sale, grant, disposition or announcement
being referred to as a “Subsequent Placement”).

 

(b)               The Blockout Period
set forth in the preceding paragraph (a) shall be extended for the number of
Trading Days during such period in which (i) trading in the Common Stock is
suspended by any Trading Market, (ii) the Registration Statement is not
effective, or (iii) the prospectus included in the Registration Statement may
not be used by the Purchasers for the resale of Registrable Securities
thereunder, provided that this Section 4.7(b) shall not apply once the Blockout
Period has expired.

 

(c)                From the end of
the Blockout Period and for so long as a Purchaser holds 20% of the Shares
originally purchased by such Purchaser, the Company will not, 

 

23

 

directly or indirectly, effect
any Subsequent Placement unless the Company shall have first complied with this
Section 4.7(c).

 

(i)                                     The
Company shall deliver to each Purchaser a written notice (the “Offer”) of any proposed or intended issuance or sale or
exchange of the securities being offered (the “Offered
Securities”) in a Subsequent Placement, which Offer shall (w)
identify and describe the Offered Securities, (x) describe the price and other
terms upon which they are to be issued, sold or exchanged, and the number or
amount of the Offered Securities to be issued, sold or exchanged, (y) if known,
identify the Persons or entities to which or with which the Offered Securities
are to be offered, issued, sold or exchanged and (z) offer to issue and sell to
or exchange with each Purchaser (A) a pro rata portion of fifty percent (50%)
of the Offered Securities, based on such Purchaser’s pro rata portion of the
aggregate purchase price paid by the Purchasers for all of the Shares purchased
hereunder (the “Basic Amount”), and (B) with respect
to each Purchaser that elects to purchase its Basic Amount, any additional
portion of the Offered Securities attributable to the Basic Amounts of other
Purchasers as such Purchaser shall indicate it will purchase or acquire should
the other Purchasers subscribe for less than their Basic Amounts (the “Undersubscription Amount”).

 

(ii)                                  To
accept an Offer, in whole or in part, a Purchaser must deliver a written notice
to the Company prior to the end of the fifth (5) Trading Day from the delivery
of the Offer, setting forth the portion of the Purchaser’s Basic Amount that
such Purchaser elects to purchase and, if such Purchaser shall elect to
purchase all of its Basic Amount, the Undersubscription Amount, if any, that
such Purchaser elects to purchase (in either case, the “Notice of
Acceptance”).  If the Basic
Amounts subscribed for by all Purchasers are less than the total of all of the
Basic Amounts, then each Purchaser who has set forth an Undersubscription
Amount in its Notice of Acceptance shall be entitled to purchase, in addition
to the Basic Amounts subscribed for, the Undersubscription Amount it has
subscribed for; provided, however, that if the Undersubscription
Amounts subscribed for exceed the difference between the total of all the Basic
Amounts and the Basic Amounts subscribed for (the “Available
Undersubscription Amount”), each Purchaser who has subscribed for
any Undersubscription Amount shall be entitled to purchase that portion of the
Available Undersubscription Amount as the Basic Amount of such Purchaser bears
to the total Basic Amounts of all Purchasers that have subscribed for
Undersubscription Amounts, subject to rounding by the Board of Directors to the
extent its deems reasonably necessary.

 

(iii)                               The
Company shall have seven (7) Trading Days from the expiration of the period set
forth in Section 4.7(c)(ii) above to issue, sell or exchange all or any part of
such Offered Securities as to which a Notice of Acceptance has not been given
by the Purchasers (the “Refused Securities”),
but only to the offerees described in the Offer and only upon terms and
conditions (including, without limitation, unit prices and interest rates) that
are not more favorable to the acquiring Person or Persons than those set forth
in the Offer.

 

(iv)                              In
the event the Company shall propose to sell less than all the Refused
Securities (any such sale to be in the manner and on the terms specified in 

 

24

 

Section 4.7(c)(iii) above),
then each Purchaser may, at its sole option and in its sole discretion, reduce
the number or amount of the Offered Securities specified in its Notice of
Acceptance to an amount that shall be not less than the number or amount of the
Offered Securities that the Purchaser elected to purchase pursuant to Section
4.7(c)(ii) above multiplied by a fraction, (i) the numerator of which shall be
the number or amount of Offered Securities the Company actually proposes to
issue, sell or exchange (including Offered Securities to be issued or sold to
Purchasers pursuant to Section 4.7(c)(ii) above prior to such reduction) and
(ii) the denominator of which shall be the original amount of the Offered
Securities.  In the event that any
Purchaser so elects to reduce the number or amount of Offered Securities specified
in its Notice of Acceptance, the Company may not issue, sell or exchange more
than the reduced number or amount of the Offered Securities unless and until
such securities have again been offered to the Purchasers in accordance with
Section 4.7(c)(i) above.

 

(v)                                 Upon
the closing of the issuance, sale or exchange of all or less than all of the
Refused Securities, each Purchaser shall acquire from the Company, and the
Company shall issue to each Purchaser, the number or amount of Offered
Securities specified in the applicable Notices of Acceptance, as reduced
pursuant to Section 4.7(c)(iv) above if any Purchaser has so elected, upon the
terms and conditions specified in the Offer. 
The purchase by a Purchaser of any Offered Securities is subject in all
cases to the preparation, execution and delivery by the Company and such
Purchaser of a purchase agreement relating to such Offered Securities
reasonably satisfactory in form and substance to such Purchaser and the Company
and their respective counsel.

 

(vi)                              Any
Offered Securities not acquired by the Purchasers or other Persons in
accordance with Section 4.7(c)(iii) above may not be issued, sold or exchanged
until they are again offered to the Purchasers under the procedures specified
in this Agreement.

 

(d)               The restrictions
contained in paragraphs (a) and (c) of this Section shall not apply to Excluded
Stock.

 

4.8                                 Securities Laws Disclosure; Publicity.  The Company shall, on or before 8:30 a.m.,
New York City Time on December 26, 2003, issue a press release acceptable to
the Purchasers disclosing all material terms of the transactions contemplated
hereby.  On the Closing Date, the
Company shall file a Current Report on Form 8-K describing the terms of the
transactions contemplated by the Transaction Documents in the form required by
the Exchange Act, and attaching the material Transaction Documents as exhibits
to such Form 8-K (including all attachments, the “8-K Filing”)
(or, if it is not reasonably practicable to make such filing on the Closing
Date with the exercise of commercially reasonable efforts, then on the next
succeeding day on which it can be filed). 
From and after the filing of the 8-K Filing with the Commission, no
Purchaser shall be in possession of any material, nonpublic information
received from the Company, any of its Subsidiaries or any of its respective
officers, directors, employees or agents, that is not disclosed in the 8-K
Filing.  The Company shall not, and
shall cause each of its Subsidiaries and its and each of their respective officers,
directors, employees and agents, not to, provide any Purchaser with any
material, nonpublic information regarding the Company or any of its
Subsidiaries from and after the filing of the 8-K Filing with the SEC 

 

25

 

without the
express written consent of such Purchaser. 
In the event of a breach of the foregoing covenant by the Company, any
of its Subsidiaries, or any of its or their respective officers, directors,
employees and agents, in addition to any other remedy provided herein or in the
Transaction Documents, a Purchaser or the Company shall have the right to make
a public disclosure, in the form of a press release, public advertisement or
otherwise, of such material nonpublic information without the prior approval by
the Company, its Subsidiaries, or any of its or their respective officers,
directors, employees or agents; provided that any Purchaser shall give the
Company a reasonable opportunity to review and comment on the terms of any such
press release, public advertisement or other public disclosure and shall in no
event make any such public disclosure if the Company certifies to such
Purchaser in writing that such information does not constitute material,
nonpublic information.  No Purchaser
shall have any liability to the Company, its Subsidiaries, or any of its or
their respective officers, directors, employees, stockholders or agents for any
such disclosure, except to the extent that their actions constitute gross
negligence or willful misconduct. 
Subject to the foregoing, neither the Company nor any Purchaser shall
issue any press releases or any other public statements with respect to the
transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior approval of any Purchaser, to make
any press release or other public disclosure with respect to such transactions
(i) in substantial conformity with the 8-K Filing and contemporaneously
therewith and (ii) as is required by applicable law and regulations (provided
that in the case of clause (i) the Purchasers shall be consulted by the Company
in connection with any such press release or other public disclosure prior to
its release).  Notwithstanding the
foregoing, 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 Trading Market, without the prior written consent of such
Purchaser, except to the extent such disclosure (but not any disclosure as to
the controlling Persons thereof) is required by law or Trading Market
regulations, in which case the Company shall provide the Purchasers with prior
notice of such disclosure. Notwithstanding anything to the contrary herein, (a)
the delivery by the Company of the notice pursuant to Section 4.7(c) shall not
be deemed a breach by the Company of any provision in this Section 4.8, (ii)
any breach by the Company of the provisions in this Section 4.8 shall not
constitute a Triggering Event if such breach directly resulted from the
Purchaser’s bad faith solicitation of material, nonpublic information and (iii)
the Company shall not be in breach of this Section to the extent that the
Purchaser receives material, nonpublic information through solicitation of such
information from Persons that are not executive officers or directors of the
Company.

 

4.9                                 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, equipment
operating leases and accrued expenses in the ordinary course of the Company’s
business and prior practices), to repurchase any Company equity or
equity-equivalent securities or to settle any outstanding litigation.  This Section 4.9 shall not apply to any
available cash on hand on the date hereof (before giving effect to the net
proceeds from the sale of the Shares) or any future financings.

 

4.10                           Reimbursement. 
If any Purchaser or any of its Affiliates or any officer, director,
partner, controlling person, employee or agent of a Purchaser or any of its
Affiliates (a “Related Person”)
becomes involved in any capacity in any Proceeding brought by or against any
Person in connection with or as a result of the transactions contemplated by
the Transaction Documents, 

 

26

 

the Company
will indemnify and hold harmless such Purchaser or Related Person for its
reasonable legal and other expenses, not to exceed the cost of more than one
law firm, but including the costs of any investigation, preparation and travel,
and for any Losses incurred in connection therewith, as such expenses or Losses
are incurred, except if such Losses result from the gross negligence or willful
misconduct of such Purchaser.  In
addition, the Company shall indemnify and hold harmless each Purchaser and
Related Person from and against any and all Losses, as incurred, arising out of
or relating to any breach by the Company of any of the representations,
warranties or covenants made by the Company in this Agreement or any other
Transaction Document, or any allegation by a third party that, if true, would
constitute such a breach.  The conduct
of any Proceedings for which indemnification is available under this paragraph
shall be governed by Section 5(c) of the Registration Rights Agreements.  The indemnification obligations of the
Company under this paragraph shall be in addition to any liability that the
Company may otherwise have and shall be binding upon and inure to the benefit
of any successors, assigns, heirs and personal representatives of the
Purchasers and any such Related Persons. 
The Company also agrees that neither the Purchasers nor any Related
Persons shall have any liability to the Company or any Person asserting claims
on behalf of or in right of the Company in connection with or as a result of
the transactions contemplated by the Transaction Documents, except to the
extent that any losses, claims, damages, liabilities or expenses incurred by
the Company result from the gross negligence or willful misconduct of the
applicable Purchaser or Related Person in connection with such
transactions.  If the Company breaches
its obligations under any Transaction Document, then, in addition to any other
liabilities the Company may have under any Transaction Document or applicable
law, the Company shall pay or reimburse the Purchasers on demand for all costs
of collection and enforcement (including reasonable attorneys fees and
expenses, not to exceed the cost of more than one law firm).  Without limiting the generality of the
foregoing, the Company specifically agrees to reimburse the Purchasers on
demand for all costs of enforcing the indemnification obligations in this
paragraph.

 

4.11                           Default Rate. 
If the Company fails to make any cash payment required by any
Transaction Document in full when due, then the Company shall pay interest
thereon at a rate of 12% per annum (or such lesser maximum rate that is permitted
to be paid under applicable law) from the date such payment was due until such
amount, plus all such interest thereon, is paid in full.

 

4.12                           Rights of Shareholders.  Each time the Company delivers a notice or
other communication to holders of the Common Stock it will contemporaneously
deliver a copy of such notice or communication to the Purchasers only for so
long as they own any Securities.  The
Company acknowledges and agrees that, for so long as a Purchaser holds any
Securities (whether or not such Purchaser holds shares of Common Stock), (a)
the officers and directors of the Company will owe the same duties (fiduciary
and otherwise) to such Purchaser as are owed to a holder of Common Stock and
(b) such Purchaser will be entitled to all rights and remedies with respect to
such duties as are available to a holder of Common Stock under the corporate
law of the Company’s jurisdiction of incorporation.

 

4.13                           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
any shareholders rights plan or similar plan or arrangement in effect or
hereafter adopted by the Company, or that any 

 

27

 

Purchaser
could be deemed to trigger the provisions of any such plan or arrangement,
solely by virtue of receiving Underlying Shares under the Transaction Documents
or under any other agreement between the Company and the Purchasers.

 

4.14                           Certain Trading Limitations.  For so long as a Purchaser hold the Shares
originally purchased by it under this Agreement, such Purchaser agrees that it
will not enter into any Short Sales. 
For purposes of this Section 4.14, a “Short Sale” by a Purchaser means a
sale of Common Stock that is marked as a short sale and that is executed at a
time when such Purchaser has no equivalent offsetting long position in the
Common Stock.  For purposes of
determining whether a Purchaser has an equivalent offsetting long position in
the Common Stock, all Common Stock and all Common Stock that would be issuable
upon conversion or exercise in full of all Securities and Options then held by
such Purchaser (whether or not such Securities and Options were then fully
convertible or exercisable, and giving effect to any conversion or exercise
price adjustments scheduled to take effect in the future) shall be deemed to be
held long by such Purchaser.

 

4.15                           Indebtedness. 
So long as any shares of Series B Preferred Stock are outstanding:

 

(a)    The
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, incur or guarantee, assume or suffer to exist any Debt,
other than Permitted Debt.

 

(b)   The
Company shall not, and the Company shall not permit any of its Subsidiaries to,
directly or indirectly, allow or suffer to exist any Lien, other than Permitted
Liens or Liens incurred in connection with Permitted Debt (other than Permitted
Subordinated Debt).

 

(c)    The Company shall not, and the
Company shall not permit any of its Subsidiaries to, directly or indirectly,
redeem, defease, repurchase, repay or make any payments in respect of, by the
payment of cash or cash equivalents (in whole or in part, whether by way of
open market purchases, tender offers, private transactions or otherwise), all or
any portion of any Permitted Subordinated Debt, whether by
way of payment in respect of principal of (or premium, if any) or interest on,
such Debt if at the time such payment is due or is otherwise made or, after
giving effect to such payment, an event constituting, or that with the passage
of time and without being cured would constitute, a Triggering Event has
occurred and is continuing.

 

4.16                           Subordination.

 

So long as any shares of Series B Preferred Stock
are outstanding:

 

(a)     Notwithstanding anything to
the contrary contained in this Agreement or any other Transaction Document, the
Company agrees that all Debt, other than Permitted Debt referred to in clauses
(ii) through (iv) of the definition thereof, of the Company is subordinate in
right of payment to the prior payment in full of all payments entitled to a
holder of the Shares, whether with respect to dividends or upon liquidation,
redemption, dissolution or otherwise. 
Each Purchaser has acquired the Securities hereunder in reliance upon
the covenants and provisions contained in this Section 4.16.

 

28

 

(b)   The
Company agrees that it shall not issue any Permitted Subordinated Debt unless
the holders of such Permitted Subordinated Debt agree that (i) upon any payment
or distribution of assets of the Company upon any dissolution, winding up,
liquidation, arrangement, reorganization, adjustment, protection, relief or
composition of the Company or its debts, whether voluntary or involuntary, in
any bankruptcy, insolvency, arrangement, reorganization, receivership, relief
or other similar case or proceeding under any federal or state bankruptcy or
similar law or upon an assignment for the benefit of creditors or any other
marshalling of the assets and liabilities of the Company, in each case whether
total or partial (each, a “Distribution Event”), the holders of the
Series B Preferred Stock will first be paid, in full, all amounts due or to
become due on or in respect of the Series B Preferred Stock and any other
amounts owing under the Transaction Documents before such holder of Permitted
Subordinated Debt is entitled to receive any payment on the Debt owed to them
by the Company, (ii) if, notwithstanding the foregoing, such holder of
Permitted Subordinated Debt receives any payment or distribution of assets of
the Company of any kind or character in connection with any such Distribution
Event before each Purchaser is paid in full, then each such payment or
distribution will be held in trust and paid over or delivered forthwith by such
holder of Permitted Subordinated Debt to Mainfield Enterprise, Inc., as agent
for the ratable benefit of the holders of the Series B Preferred Stock, for
application to the payment of any amounts remaining unpaid to the Purchasers,
and (iii) such holder of Permitted Subordinated Debt shall not declare or join
in any declaration of any of the Debt to be due and payable or otherwise take
or cause to be taken any action against the company or any of their respective
assets (including commencing any legal or equitable action or filing or joining
in the filing of any insolvency petition) until the Purchasers will first be
paid, in full, all amounts due or to become due on or in respect of the
Securities.  Upon any payment or
distribution referred to in this Section 4.16(b), the Company shall be entitled
to rely upon any order or decree of a court of competent jurisdiction in which
such Distribution Event proceedings are pending; provided, however,
that such order or decree expressly gives effect to the provisions of this
Section 4.16.

 

4.17                           No Impairment. 
At all times after the date hereof, the Company will not take or permit
any action, or cause or permit any Subsidiary to take or permit any action that
has a material adverse effect on the rights of the Purchasers under this
Agreement or the Holders of Series B Preferred Stock under the Certificate of
Designations.

 

4.18                           Fundamental Changes.  In addition to any other rights provided by
law or set forth herein, from and after the date of this Agreement and for so
long as any shares of Series B Preferred Stock remain outstanding, the Company
shall not without first obtaining the approval (by vote or written consent, as
provided by law) of the holders of a majority of the shares of Series B
Preferred Stock then outstanding:

 

(a)    purchase,
redeem (other than pursuant to equity incentive agreements with employees
giving the Company the right to repurchase shares upon the termination of
services) or set aside any sums for the purchase or redemption of, or declare
or pay any dividend (including a dividend payable in stock of the Company) or
make any other distribution with respect to, any shares of capital stock or any
other securities that are convertible into or exercisable for such stock (other
than the Series B Preferred Stock), or any Permitted Subordinated Debt, or set
aside any monies for such a redemption, purchase or other acquisition;

 

29

 

(b)   change
the nature of the Company’s business to any business which is fundamentally
distinct and separate from the business currently conducted by the Company;

 

(c)    use
more than $25 million in the aggregate of its available cash on the date hereof
(taking into account the proceeds received from this transaction) for
acquisitions; or

 

(d)   cause
or permit any Subsidiary directly or indirectly to take any actions described
in clauses (a) through (c) above, other than issuing securities to the Company
or any wholly-owned Subsidiary.

 

4.19                           Voting Agreement.  Each Purchaser hereby agrees that for so
long as it holds Series B Preferred Stock, it shall vote its shares of Series B
Preferred Stock and Common Stock on all matters in which such Purchaser or its
Affiliates is entitled to vote and on which holders of Common Stock have the
right to vote, in the manner recommended by the Board of Directors of the
Company to all of its shareholders unless the Board of Directors of the Company
elects to permit the Purchasers to vote such shares in their own discretion.  This Section 4.19 shall not apply to
any of the matters set forth in the last sentence of Section 11 or Section
21(d) of the Certificate of Designations.

 

4.20                           Lock-up.  If the
Company has selected an underwriter in connection with a public offering of its
Common Stock, then each Purchaser that beneficially owns greater than 5% of the
outstanding Common Stock at such time shall agree to execute a lock-up letter
in customary form reasonably acceptable to such underwriter, provided that each
of the following conditions are satisfied (i) such underwriter requires each
other shareholder of the Company who owns greater than 5% of the outstanding
Common Stock to execute an identical lock-up letter and (ii) such lock-up
letter shall not contain restrictions for a period greater than 6 months
following such public offering.  For
such purposes, beneficial ownership shall be determined in accordance with
Section 13(d) of the Exchange Act and the rules and regulations promulgated thereunder.

 

ARTICLE V

CONDITIONS

 

5.1                                 Conditions Precedent to the
Obligations of the Purchasers. 
The obligation of each Purchaser to acquire the Initial Units and the
Unit Warrants at the Closing is subject to the satisfaction or waiver by such
Purchaser, at or before the Closing, of each of the following conditions:

 

(a)                                  Representations
and Warranties.  The representations
and warranties of the Company contained herein shall be true and correct as of
the date when made and as of the Closing as though made on and as of such date;

 

(b)                                 Performance.  The Company and each other Purchaser shall
have performed, satisfied and complied in all material respects with all
covenants, agreements and conditions required by the Transaction Documents to
be performed, satisfied or complied with by it at or prior to the Closing;

 

(c)                                  No
Injunction.  No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or 

 

30

 

governmental authority
of competent jurisdiction that prohibits the consummation of any of the
transactions contemplated by the Transaction Documents;

 

(d)                                 No
Suspensions of Trading in Common Stock; Listing.  The Common Stock (i) shall be designated for quotation or listed
on the Trading Market and (ii) shall not have been suspended by the Commission
or the Trading Market from trading on the Trading Market nor shall suspension
by the Commission or the Trading Market have been threatened either (A) in
writing by the Commission or the Trading Market or (B) by falling below the
minimum listing maintenance requirements of the Trading Market; and

 

(e)                                  Adverse
Changes.  Since the date of
execution of this Agreement, no event or series of events shall have occurred
that reasonably could be expected to have or result in a Material Adverse
Effect.

 

5.2                                 Conditions Precedent to the Obligations
of the Company.  The obligation of
the Company to sell the Initial Units and the Unit Warrants at the Closing is
subject to the satisfaction or waiver by the Company, at or before the Closing,
of each of the following conditions:

 

(a)                                  Representations
and Warranties.  The representations
and warranties of the Purchasers contained herein shall be true and correct in
all material respects as of the date when made and as of the Closing Date as
though made on and as of such date;

 

(b)                                 Performance.  The Purchasers shall have performed,
satisfied and complied in all material respects with all covenants, agreements
and conditions required by the Transaction Documents to be performed, satisfied
or complied with by the Purchasers at or prior to the Closing; and

 

(c)                                  No
Injunction.  No statute, rule,
regulation, executive order, decree, ruling or injunction shall have been
enacted, entered, promulgated or endorsed by any court or governmental
authority of competent jurisdiction that prohibits the consummation of any of
the transactions contemplated by the Transaction Documents.

 

ARTICLE VI

MISCELLANEOUS

 

6.1                                 Termination. 
This Agreement may be terminated by either the Purchaser or the Company,
by written notice to the other party, if the Closing has not been consummated
by the fifth Trading 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).

 

6.2                                 Fees and Expenses.  At the Closing, the Company shall pay to Mainfield Enterprises,
Inc., an aggregate of $75,000 for their legal fees and expenses incurred in
connection with the preparation and negotiation of the Transaction Documents,
of which amount $25,000 has been previously paid by the Company to Proskauer
Rose LLP.  In lieu of the foregoing
payments, Mainfield Enterprises, Inc. may retain the amount of such payments
instead of delivering such amounts to the Company at the Closing.  Except as expressly set forth in the
Transaction Documents to the contrary, each party shall pay the fees and
expenses of its 

 

31

 

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.

 

6.3                                 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.  At or after the Closing, and
without further consideration, the Company will execute and deliver to the
Purchasers such further documents as may be reasonably requested in order to
give practical effect to the intention of the parties under the Transaction
Documents.  Notwithstanding anything to
the contrary herein, Securities may be assigned to any Person in connection
with a bona fide margin account or other loan or financing arrangement secured
by such Securities.

 

6.4                                 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 (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile number specified in
this Section prior to 5:30 p.m. (New York City time) on a Trading Day, (ii) 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 Agreement later than 5:30 p.m. (New York City time) on any date and earlier
than 11:59 p.m. (New York City time) on such date, (iii) the Trading Day
following the date of mailing, if sent by nationally recognized overnight
courier service, or (iv) upon actual receipt by the party to whom such notice
is required to be given.  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.

 

6.5                                 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 each of the Purchasers 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.

 

6.6                                 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 the parties to
express their mutual intent, and no rules of strict construction will be applied
against any party.

 

6.7                                 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 the Purchasers. Any Purchaser may assign its rights under this
Agreement and the Registration 

 

32

 

Rights
Agreement to any Person to whom such Purchaser assigns or transfers any
Securities in accordance with Section 4.1.

 

6.8                                 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 that each Related Person is an intended third party
beneficiary of Section 4.10 and may enforce the provisions of such
Section directly against the Company.

 

6.9                                 Governing Law; Venue; Waiver Of Jury
Trail.  ALL QUESTIONS CONCERNING
THE CONSTRUCTION, VALIDITY, ENFORCEMENT AND INTERPRETATION OF THIS AGREEMENT
SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW YORK.  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 THE JURISDICTION OF ANY SUCH COURT, THAT
SUCH SUIT, ACTION OR PROCEEDING IS IMPROPER. 
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 COMPANY HEREBY
WAIVES ALL RIGHTS TO A TRIAL BY JURY.

 

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

 

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

 

33

 

6.12                           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.

 

6.13                           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.

 

6.14                           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 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.

 

6.15                           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.

 

6.16                           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.

 

6.17                           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. 

 

34

 

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 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.

 

6.18                           Independent Nature of Purchasers.  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.  The decision of each
Purchaser to purchase Securities pursuant to this Agreement has been made by
such Purchaser independently of any other Purchaser and independently of any
information, materials, statements or opinions as to the business, affairs,
operations, assets, properties, liabilities, results of operations, condition
(financial or otherwise) or prospects of the Company or of the Subsidiary which
may have been made or given by any other Purchaser or by any agent or employee
of any other Purchaser, and no Purchaser or any of its agents or employees
shall have any liability to any other Purchaser (or any other person) relating
to or arising from any such information, materials, statements or
opinions.  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
acknowledges that no other Purchaser has acted as agent for such Purchaser in
connection with making its investment hereunder and that no other Purchaser
will be acting as agent of such Purchaser in connection with monitoring its
investment hereunder.  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.

 

6.19                           Adjustments in Share Numbers and
Prices.  In the event of any
stock split, subdivision, dividend or distribution payable in shares of Common
Stock (or other securities or rights convertible into, or entitling the holder
thereof to receive directly or indirectly shares of Common Stock), combination
or other similar recapitalization or event occurring after the date hereof,
each reference in any Transaction Document to a number of shares or a price per
share shall be amended to appropriately account for such event.

 

35

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGES FOLLOW]

 

36

 

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.

 

	
   

  	
  ARENA PHARMACEUTICALS, INC.

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jack Lief

  	
   

  
	
   

  	
  Name:

  	
  Jack Lief

  	
   

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
  6166 Nancy Ridge Drive

  
	
   

  	
  San Diego, CA  92121

  
	
   

  	
  Facsimile No.: 858-677-0065

  
	
   

  	
  Attn:  General Counsel

  
	
   

  
	
  With a copy to:

  
	
   

  
	
  Milbank, Tweed, Hadley & McCloy LLP

  
	
  One Chase Manhattan Plaza

  
	
  New York, NY 10005

  
	
  Facsimile No.: 212-822-5680

  
	
  Telephone No.: 212-530-5680

  
	
  Attn: 
  Robert S. Reder, Esq.

  

 

 

[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK

SIGNATURE PAGE FOR PURCHASERS FOLLOWS

 

37

 

	
   

  	
  MAINFIELD ENTERPRISES, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Aui Vigder

  	
   

  
	
   

  	
  Name:

  	
  Aui Vigder

  	
   

  
	
   

  	
  Title:

  	
  Authorized Signatory

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
  Mainfield Enterprises, Inc.

  
	
   

  	
  c/o Sage Capital Growth, Inc.

  
	
   

  	
  660 Madison Avenue

  
	
   

  	
  New York, NY 10022

  
	
   

  	
  Telephone No.: (212) 651-9000

  
	
   

  	
  Facsimile No.: (212) 651-9010

  
	
   

  	
  Attn: Eldad Gal

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  With a copy to

  
	
   

  	
  Proskauer Rose LLP

  
	
   

  	
  1585 Broadway

  
	
   

  	
  New York, New York 10036-8299

  
	
   

  	
  Facsimile No.: (212) 969-2900

  
	
   

  	
  Telephone No.: (212) 969-3000

  
	
   

  	
  Attn: 
  Adam J. Kansler, Esq.

  

 

38

 

	
   

  	
  SMITHFIELD FIDUCIARY LLC

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Adam J. Chill

  	
   

  
	
   

  	
  Name: Adam J. Chill

  
	
   

  	
  Title: Authorized Signatory

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Address for Notice:

  
	
   

  	
   

  
	
   

  	
  c/o Highbridge Capital Management, LLC

  
	
   

  	
  9 West 57th Street, 27th floor

  
	
   

  	
  New York, NY 10019

  
	
   

  	
  Facsimile No.:  (212) 287-4720

  
	
   

  	
  Telephone No.: (212) 751-0755

  
	
   

  	
  Attn:  Ari J. Storch / Adam J.
  Chill

  

 

39

 

TABLE OF CONTENTS

 

	
  ARTICLE
  I DEFINITIONS

  
	
  1.1

  	
  Definitions.

  
	
  ARTICLE II PURCHASE AND SALE

  
	
  2.1

  	
  Sale and Issuance of Series B Preferred
  Stock at Closing.

  
	
  2.2

  	
  Closing.

  
	
  2.3

  	
  Closing Deliveries.

  
	
  ARTICLE III REPRESENTATIONS AND WARRANTIES

  
	
  3.1

  	
  Representations and Warranties of the
  Company.

  
	
  3.2

  	
  Representations and Warranties of the
  Purchasers.

  
	
  ARTICLE IV OTHER AGREEMENTS OF THE PARTIES

  
	
  4.1

  	
  Transfer Restrictions.

  
	
  4.2

  	
  Acknowledgment of Dilution.

  
	
  4.3

  	
  Furnishing of Information.

  
	
  4.4

  	
  Integration.

  
	
  4.5

  	
  Reservation and Listing of Securities.

  
	
  4.6

  	
  Conversion and Exercise Procedures.

  
	
  4.7

  	
  Subsequent Placements.

  
	
  4.8

  	
  Securities Laws Disclosure; Publicity.

  
	
  4.9

  	
  Use of Proceeds.

  
	
  4.10

  	
  Reimbursement.

  
	
  4.11

  	
  Default Rate.

  
	
  4.12

  	
  Rights of Shareholders.

  
	
  4.13

  	
  Shareholders Rights Plan.

  
	
  4.14

  	
  Certain Trading Limitations.

  
	
  4.15

  	
  Indebtedness.

  
	
  4.16

  	
  Subordination.

  
	
  4.17

  	
  No Impairment.

  
	
  4.18

  	
  Fundamental Changes.

  
	
  4.19

  	
  Voting Agreement.

  
	
  ARTICLE
  V CONDITIONS

  
	
  5.1

  	
  Conditions Precedent to the Obligations of
  the Purchasers.

  
	
  5.2

  	
  Conditions Precedent to the Obligations of the Company.

  
	
  ARTICLE VI MISCELLANEOUS

  
	
  6.1

  	
  Termination.

  
	
  6.2

  	
  Fees and Expenses.

  
	
  6.3

  	
  Entire Agreement.

  
	
  6.4

  	
  Notices.

  
	
  6.5

  	
  Amendments; Waivers.

  
	
  6.6

  	
  Construction.

  
	
  6.7

  	
  Successors and Assigns.

  
	
  6.8

  	
  No Third-Party Beneficiaries.

  

 

 

	
  6.9

  	
  Governing Law; Venue; Waiver Of Jury Trail.

  
	
  6.10

  	
  Survival.

  
	
  6.11

  	
  Execution.

  
	
  6.12

  	
  Severability.

  
	
  6.13

  	
  Rescission and Withdrawal Right.

  
	
  6.14

  	
  Replacement of Securities.

  
	
  6.15

  	
  Remedies.

  
	
  6.16

  	
  Payment Set Aside.

  
	
  6.17

  	
  Usury.

  
	
  6.18

  	
  Independent Nature of Purchasers.

  
	
  6.19

  	
  Adjustments in Share Numbers and Prices.

  

 

 

Exhibits:

 

	
  A

  	
   

  	
  Form of Certificate of Designations (See Exhibit 3.1 to this Form
  8-K)

  
	
  B

  	
   

  	
  Registration Rights Agreement (See Exhibit 10.2 to this Form 8-K)

  
	
  C

  	
   

  	
  Form of Warrant (See Exhibit 10.3 to this Form 8-K)

  
	
  D

  	
   

  	
  Transfer Agent Instructions

  
	
  E-1

  	
   

  	
  Opinion of Company Counsel

  
	
  E-2

  	
   

  	
  Opinion of General Counsel

  
	
  F

  	
   

  	
  Form of Unit Warrant (See Exhibit 10.4 to this Form 8-K)

  

 

Schedules:

 

	
  A

  	
   

  	
  Purchasers

  
	
  3.1(a)

  	
   

  	
  Subsidiaries

  
	
  3.1(g)

  	
   

  	
  Capitalization

  
	
  3.1(j)

  	
   

  	
  Absence of Litigation

  
	
  3.1(w)

  	
   

  	
  Registration Rights

  
	
  3.1(y)

  	
   

  	
  Indebtedness

  

 

 

Exhibit D

 

IRREVOCABLE TRANSFER AGENT INSTRUCTIONS

 

Computershare Trust Company

350 Indiana Street, Suite 800

Golden, Colorado  80401

 

Ladies and Gentlemen:

Reference is
made to the Securities Purchase Agreements (the “Purchase Agreement”), dated as
of December 24, 2003, among Arena Pharmaceuticals, Inc., a Delaware corporation
(the “Company”) and the purchasers named therein (the “Holders”) pursuant to
which the Company is issuing the Company’s Series B-1 Convertible Preferred
Stock (“Series B-1 Preferred Stock”), $.0001 par value per share, Series B-2
Convertible Preferred Stock (“Series B-2 Preferred Stock”), $.0001 par value
per share (“Series B-2 Preferred Stock” and, together with the Series B-1
Preferred Stock, the “Shares”), and common stock purchase warrants (“Warrants”)
and unit warrants exercisable for additional units (“Unit Warrants”).  The shares of Common Stock issuable upon
conversion of the Shares and upon exercise of the Warrants (including the
Warrants issuable upon exercise of the Unit Warrants) and in satisfaction of
any other obligation of the Company to issue shares of Common Stock pursuant to
the Transaction Documents are herein referred to as the “Securities”.

The Company
has agreed with the Holders that it will instruct you to: (A) issue the
Securities free of all restrictive and other legends if, at the time of such
issue, (i) a registration statement covering the resale of such Securities has
been declared and is effective by the Commission under the Securities Act, (ii)
such Securities are eligible for sale under Rule 144(k) or (iii) of such legend
is not required under applicable requirements of the Securities Act (including
judicial interpretations and pronouncements issued by the Staff of the
Commission); or (B) reissue the Securities (if such shares were originally
issued with a restrictive legend) free of all restrictive and other legends (i)
upon the effectiveness of a  registration
statement covering the resale of the Securities or (ii) following any sale of
such Securities pursuant to Rule 144 or (iii) such Securities 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).

In furtherance
of this instruction, upon the effectiveness of the Registration Statement (as
defined in the Purchase Agreement) we have instructed our counsel to deliver to
you their opinion letter in the form attached hereto as Exhibit I to the effect that the
Registration Statement has been declared effective by the Commission and that
Securities are freely transferable by the Holders pursuant to such Registration
Statement and accordingly may be issued (or reissued, as applicable) and
delivered to the Holders free of all restrictive and other legends.

You need not
require further letters from us or our counsel to effect any future issuance or
reissuance of shares of Securities to the Holders as contemplated by the
Purchase

 

 

Agreement and
this letter.  This letter shall serve as
our standing irrevocable instructions with regard to this matter

Please be
advised that the Holders have relied upon this instruction letter as an
inducement to enter into the Purchase Agreement.  Please execute this letter in the space indicated to acknowledge
your agreement to act in accordance with these instructions.

	
   

  	
  Very truly yours,

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Arena Pharmaceuticals, Inc.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
  /s/ Jack Lief

  
	
   

  	
  Name:

  	
  Jack Lief

  
	
   

  	
  Title:

  	
  President and Chief Executive Officer

  
				

 

	
  ACKNOWLEDGED
  AND AGREED:

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  Computershare

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
   

  
	
  By:

  	
  /s/ Ian Yewer

  	
   

  
	
  Name:

  	
  Ian Yewer

  	
   

  
	
  Title:

  	
  President
  and Chief Operating Officer

  	
   

  
	
   

  	
   

  	
   

  
	
  By:

  	
  /s/ Zachary De Lisa

  	
   

  
	
  Name: 

  	
  Zachary De
  Lisa

  	
   

  
	
  Title:

  	
  Operations
  Manager

  	
   

  
					

 

 

Exhibit I

 

 

[Counsel’s Letterhead]

 

 

 

 

[Transfer Agent]

 

 

 

Re:          [                 ]

To Whom It May Concern:

We are writing on behalf of our client, Arena Pharmaceuticals, Inc., a
Delaware corporation (the “Company”), in connection with the Company’s recent
filing of a Registration Statement on Form S-3 (File No. ______) (the
“Registration Statement”) with the Securities and Exchange Commission (the
“SEC”) relating to ____ shares of the Company’s common stock, [0.0001] par
value per share (the “Registrable Securities”), issued or to be issued to the
selling stockholders (the “Selling Stockholders”) listed in the selling
stockholders table at pages __ of the final prospectus, a copy of which is
attached hereto as Exhibit A.

In connection with the foregoing, we advise you that the SEC has
entered an order declaring the Registration Statement effective under the
Securities Act of 1933, as amended (the “1933 Act”), on ___ __, 2003.  We have no knowledge that any stop order
suspending its effectiveness has been issued or that any proceedings for that
purpose are pending before, or threatened by, the SEC.

This letter shall serve as our opinion to you that the Common Stock are
freely transferable by the Holders pursuant to the Registration Statement.  You need not require further letters from us
to effect any future legend-free issuance or reissuance of shares of Common
Stock to the Holders as contemplated by the Company’s Irrevocable Transfer
Agent Instructions dated ____, 2003. 
This letter shall serve as our opinion with regard to this matter.

If you have any questions relating to the foregoing, please feel free
to call me at _________________.

 

Very truly yours,

 

 

Exhibit E-1

 

FORM OF COMPANY COUNSEL LEGAL OPINION

 

December 24, 2003

 

Mainfield Enterprises, Inc.

c/o Sage Capital Growth, Inc.

660 Madison Avenue

New York, NY  10022

 

Attention:  Eldad Gal

 

 

Ladies and Gentlemen:

 

We have acted as special counsel to Arena Pharmaceuticals, Inc., a
Delaware corporation (the “Company”), in connection with the execution and
delivery by the Company of the Securities Purchase Agreement dated as of  December 24, 2003 (the “Agreement”;
capitalized terms not otherwise defined herein are defined as set forth in the
Agreement), by and among the Company and the purchasers identified on the
signature pages thereto (the “Purchasers”).

 

In rendering the opinions expressed below, we have examined the
Transaction Documents (as defined below) and such other documents as we have
deemed necessary as a basis for the opinions expressed below.  In our examination, we have assumed the
genuineness of all signatures, the authenticity of all documents submitted to
us as originals and the conformity with the authentic original documents of all
documents submitted to us as copies. 
When relevant facts were not independently established, we have relied
upon certificates of government officials and of the Company and its officers and
upon representations and warranties made in or pursuant to the Transaction
Documents.

 

In rendering the opinions expressed below, we have assumed (other than
as to the Company) that all of the documents referred to in this opinion have
been duly authorized by, have been duly executed and delivered by, and
constitute legal, valid, binding and enforceable obligations of, all of the
parties to such documents, that all signatories to such documents have been
duly authorized and that all such parties are duly organized and validly
existing and have the power and authority (corporate or other) to execute,
deliver and perform such documents.

 

 

Based upon and subject to the foregoing and subject also to the
comments and qualifications set forth below, and having considered such
questions of law as we deemed necessary as a basis for the opinions expressed
below, we are of the opinion that:

 

1.             The Company has all requisite corporate power and
authority to execute, deliver and perform its obligations under the Agreement,
the Registration Rights Agreement, the Warrant, the Unit Warrant and each other
document or instrument executed by it or on its behalf on the date hereof in
connection therewith or pursuant thereto (collectively, the “Transaction
Documents”), to issue, sell and deliver the Securities pursuant to the
Transaction Documents and the Certificate of Designations, and to carry out and
perform its obligations under, and to consummate the transactions contemplated
by, the Transaction Documents and the Certificate of Designations.

2.             All corporate action on the part of the Company, its
directors and its stockholders necessary for the authorization, execution and
delivery by the Company of the Transaction Documents, the authorization,
issuance, sale and delivery of the Securities pursuant to the Transaction
Documents and the Certificate of Designations and the consummation by the
Company of the transactions contemplated by the Transaction Documents and the
Certificate of Designations has been duly taken.  The Transaction Documents have been duly and validly executed and
delivered by the Company and constitute the legal, valid and binding
obligations of the Company, enforceable against the Company in accordance with
their terms, except as may be limited by bankruptcy, conservatorship,
receivership, insolvency, reorganization, moratorium, fraudulent conveyance or
transfer or other similar laws relating to or affecting the rights of creditors
generally and except as the enforceability of such documents is subject to the
application of general principles of equity (regardless of whether considered
in a proceeding in equity or at law), including, without limitation, (a) the
possible unavailability of specific performance, injunctive relief or any other
equitable remedy and (b) concepts of materiality, reasonableness, good faith
and fair dealing.

3.             The Shares which are being issued on the date hereof to
the Purchasers pursuant to the Agreement have been duly authorized and validly
issued and are fully paid and nonassessable and free of preemptive or similar
rights under the General Corporation Law of the State of Delaware (the “DGCL”)
and the Fifth Amended and Restated Certificate of Incorporation of the Company
(the “Certificate of Incorporation”), and have been issued in compliance with
applicable securities laws, rules and regulations.  The Underlying Shares have been duly authorized and, when issued
in accordance with the terms of the respective Securities and Transaction
Documents, will be (x) validly issued, fully paid and nonassessable, (y) free
of preemptive or similar rights under the DGCL and the Certificate of
Incorporation and (z) issued in compliance with applicable securities laws,
rules and regulations.  The rights,
privileges and preferences of (i) the Shares are as stated in the Certificate
of Designations and the Certificate of Incorporation and (ii) the Common Stock
are as stated in the Certificate of Incorporation.

4.             Assuming the truth and correctness of the
representations and warranties of the Purchasers contained in the Agreement,
the Shares may be issued to the Purchasers in the manner contemplated by the
Agreement without registration under the Securities Act.

 

2

 

5.             The execution, delivery and performance by the Company
of, and the compliance by the Company with the terms of, the Transaction
Documents, the issuance, sale and delivery of the Securities pursuant to the
Transaction Documents and the Certificate of Designations, and the issuance and
delivery of the Underlying Shares in accordance with the terms of the
Securities to which they relate, do not conflict with or result in a violation
of (i) any provision of law, rule or regulation having applicability to the
Company or its Subsidiaries and customarily applicable, in our experience, to
transactions of this type or (ii) the Certificate of Incorporation or bylaws or
other similar organizational documents of the Company.

6.             No consent, license, permit, waiver, approval or
authorization of, or designation, declaration, registration or filing with, any
court, governmental or regulatory authority or self-regulatory organization
customarily applicable, in our experience, to transactions of this type is
required in connection with the valid execution, delivery and performance by
the Company of the Transaction Documents, or the offer, sale, issuance or
delivery of the Securities or the consummation of the transactions contemplated
thereby, except for (i) the filing of the Certificate of Designations in
accordance with the DGCL (which has been accomplished on or prior to the date
hereof), (ii) the 8-K Filing as required by Section 4.8 of the Agreement, (iii)
the filings required in connection with amendments to the Company’s Rights
Agreement dated as of October 30, 2002 with Computershare Trust Company, Inc.,
as Rights Agent, (iv) the filings and other actions required under the
Registration Rights Agreement and (v) any required notification of the NASDAQ
National Market.

We express no
opinion as to Section 6.9 of the Agreement or comparable provisions in the
other Transaction Documents and the Securities insofar as such provisions
relate to (i) the subject matter jurisdiction of any federal court of the
United States of America sitting in New York, New York to adjudicate any
controversy related to the Agreement or (ii) the waiver of inconvenient forum
with respect to proceedings in any federal court of the United States of
America sitting in New York, New York.

In rendering
the opinions expressed herein, we have assumed that (i) the Company will at all
times have sufficient authorized and unissued shares of Common Stock required
to be issued pursuant to the terms of the Securities and (ii) that no shares of
Common Stock will be issued upon conversion or exercise, or as a dividend or
upon redemption, of any Securities at an effective price lower than either the
Closing Price on the Trading Day immediately preceding the date hereof or the
book value per share of Common Stock on such day.

We express no
opinion as to the enforceability of provisions in any of the Transaction
Documents to the effect that terms may not be waived or modified except in
writing under limited circumstances. 
Moreover, we express no opinion as to the enforceability of Section 4.10
of the Agreement and Section 5 of the Registration Rights Agreement (and any
similar provisions in any of the other Transaction Documents) insofar as they
may be limited by (i) laws rendering unenforceable indemnification contrary to
federal or state securities laws and the public policy underlying such laws and
(ii) laws limiting the enforceability of provisions exculpating or exempting a
party, or requiring indemnification of a party for, liability for its own
action or inaction, to the extent the action or inaction involves gross
negligence, recklessness, willful misconduct or unlawful conduct.

 

3

 

The foregoing
opinions are limited to matters involving the laws of the State of New York,
the DGCL and the federal laws of the United States of America, and we do not
express any opinion as to the laws of any other jurisdiction.

At the request
of our client, this opinion is being provided to you pursuant to Section 2.3(v)
of the Agreement in or capacity as special counsel to the Company, and may not
be relied upon by any other Person or for any purpose other than in connection
with the transactions contemplated by the Agreement without our prior written
consent.

 

Very truly
yours,

 

 

RSR/MLW

 

4

 

Exhibit E-2

FORM
OF GENERAL COUNSEL LEGAL OPINION

 

Mainfield
Enterprises, Inc.

 

Ladies and
Gentlemen:

 

I
am the General Counsel of Arena Pharmaceuticals, Inc., a Delaware corporation
(the “Company”), and am delivering this opinion in connection with the
execution and delivery by the Company of the Securities Purchase Agreement
dated as of December 24, 2003 (the “Agreement”), by and among the Company and
the purchasers identified on the signature pages thereto (the
“Purchasers”).  This opinion is given to
you pursuant to Section 2.3(a)(v) of the Agreement.  (Capitalized terms not otherwise defined herein are defined as
set forth in the Agreement.)

In
rendering the opinions express below, I have examined the Agreement and
Schedules thereto and such other documents as I have deemed necessary as a
basis for the opinions expressed below. 
In my examination, I have assumed the authenticity of all documents
submitted to me as originals and the conformity with the authentic document of
any copy submitted to me.  When relevant
facts were not independently established, I have relied upon certificates of
government officials and the Company and its officers other than me, and upon
representations and warranties made in the Agreement and Schedules.

 Based upon and subject to the foregoing and
subject also to the comments and qualifications set forth below, I give you my
opinion as follows:

1.             The Company is a corporation duly
incorporated, validly existing and in good standing under the laws of the State
of Delaware.  The Company has all requisite
corporate power and authority, and all material governmental licenses,
authorizations, consents and approvals, required to own and operate its
properties and assets and to carry on its business as now conducted and as
proposed to be conducted (all as described in the Company’s Annual Report on
Form 10-K for its fiscal ended December 31, 2003).  The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to qualify could have a
Material Adverse Effect.

2.             Based solely on a certificate from
the Company’s Vice President, Finance, after giving effect to the transactions
contemplated by the Agreement, and immediately after the Closing, the
authorized capital stock of the Company will consist of: an aggregate of
67,500,000 shares of Common Stock, of which 25,609,394 shares will be issued
and outstanding, 11,244,044 shares will be reserved for issuance upon
conversion

 

 

of securities issued in the transaction contemplated by the Agreement,
1,976,963 shares will be reserved for issuance upon conversion of issued and
outstanding options, warrants and other derivative securities (excluding shares
reserved for issuance upon conversion of securities issued in the transaction
and under the Company’s Rights Agreement dated as of October 30, 2002, as
amended), 2,339,436 shares will be reserved for issuance to employees,
officers, consultants and directors under the Company’s 1998, 2000 and 2002
Equity Compensation Plans (excluding shares reserved for issued and outstanding
options under such plans) and 820,345 shares will be reserved for issuance
under the Company’s 2001 Employee Stock Purchase Plan, and 7,500,000 shares of
Preferred Stock, of which 350,000 is designated Series A Junior Participating
Preferred Stock, 3,500 is designated Series B-1 Convertible Preferred Stock and
1,150 is designated Series B-2 Convertible Preferred Stock.  The foregoing does not give effect to any
cancellations of options or restricted stock in connection with the December
12, 2003 reduction in force at the Company, nor any cancellation of restricted
stock in connection with the November 11, 2003 deferred compensation plan
established by the Company for executive officers.  All presently issued and outstanding shares of Common Stock have
been duly authorized and validly issued and are fully paid and nonassessable
(except for 747,500 shares of restricted stock) and free of any preemptive or
similar rights in the Certificate of Incorporation.  To my knowledge, except for rights described in Schedule 3.1(g)
of the Agreement, there are no other options, warrants, conversion privileges
or other rights presently outstanding to purchase or otherwise acquire from the
Company any capital stock or other securities of the Company, or any other
agreements to issue any such securities or rights.

3.             The Company meets the eligibility
requirements for the use of Form S-3 for the registration of the Securities.

4.             To my knowledge, the Company has
filed all reports (the “SEC Documents”) required to be filed by it under
Sections 13(a) and 15(d) of the Exchange Act of 1934, as amended (the “Exchange
Act”).  To my knowledge, as of their
respective filing dates, the SEC Documents complied in all material respects as
to form with the requirements of the Exchange Act and the rules and regulations
of the SEC promulgated thereunder.

5.             The execution, delivery and
performance by the Company of, and the compliance by the Company with the terms
of, the Transaction Documents, the issuance, sale and delivery of the
Securities pursuant to the Agreement, and the issuance and delivery of
Conversion Stock do not (a) conflict with, result in a breach of or constitute
a default (or an event which with notice or lapse of time or both would become
a default) under, or result in or permit the termination or modification of,
any agreement, instrument, order, writ, judgment or decree known to me to which
the Company is a party or is subject or (b) to my knowledge, result in the
creation or imposition of any lien, claim or encumbrance on any of the
Company’s assets or properties except to the extent provided by the terms of
Transaction Documents.

6.             To
my knowledge, there is no claim, action, suit, proceeding, arbitration,
investigation or inquiry, pending or threatened, before any court or
governmental or administrative body or agency, or any private arbitration
tribunal, against the Company or any of its officers, directors or employees
(in connection with the discharge of their duties as officers, directors and
employees), or affecting any of its properties or assets.

 

2

 

7.             The Company is not an Investment
Company within the meaning of the Investment Company Act of 1940, as amended.

I
express no opinion as to any matters governed by any laws other than the law of
the State of California and the Federal laws of the United States of America.

Whenever
a statement set forth herein is qualified to “my knowledge” or limited to
matters “known to me”, it is intended to indicate that no information that
would give me current actual knowledge of the inaccuracy of such statement has
come to my attention.

The
opinions expressed herein speak only as of the date hereof, and I do not have,
nor do I assume, any obligation to advise you of any changes in any facts or
applicable laws after the date hereof which may affect my opinions.

The
opinions expressed herein are rendered solely for your benefit and may not be
relied upon for any purpose other than the transactions contemplated by the
Agreement or by any other person, nor may copies be furnished to any other
person without my prior written consent.

Very truly yours,

 

 

3

 

Schedule
A

 

	
  Purchaser

  	
   

  	
  Initial
  Units

  	
   

  	
  Additional
  Units

  	
   

  	
  Initial
  Units–Initial Shares

  	
   

  	
  Initial
  Units –Initial Warrant

  Shares

  	
   

  	
  Additional

  Units –Initial

  Shares

  	
   

  	
  Additional

  Units –Additional

  Warrant

  Shares

  	
   

  	
  Purchase

  Price

  	
   

  
	
  Mainfield Enterprises, Inc.

  	
   

  	
  2,000

  	
   

  	
  657

  	
   

  	
  2,000

  	
   

  	
  849,257

  	
   

  	
  657

  	
   

  	
  257,087

  	
   

  	
  $20,000,000

  	
   

  
	
  Smithfield Fiduciary LLC

  	
   

  	
  1,500

  	
   

  	
  493

  	
   

  	
  1,500

  	
   

  	
  636,943

  	
   

  	
  493

  	
   

  	
  192,912

  	
   

  	
  $15,000,000

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  TOTAL

  	
   

  	
  3,500

  	
   

  	
  1,150

  	
   

  	
  3,500

  	
   

  	
  1,486,200

  	
   

  	
  1,150

  	
   

  	
  450,000

  	
   

  	
  $35,000,000

  	
   

  

 

 

 

Schedule 3.1(a)

 

Interest Owned

 

1)             BRL
Screening, Inc., which is a wholly owned subsidiary of Arena Pharmaceuticals,
Inc.

 

2)             ChemNavigator,
Inc.  Arena Pharmaceuticals, Inc. owns
2,625,000 shares of Series A Preferred Stock.

 

3)             TaiGen
Biotechnology Co., Ltd.  Arena
Pharmaceuticals owns 11,550,000 Shares of Series A Preferred Stock.

 

4)             Aressa
Pharmaceuticals, Inc.  Arena
Pharmaceuticals owns 2,500,000 Shares of Series A Preferred Stock.

 

Significant
Subsidiaries

 

None.

 

 

Schedule 3.1(g)

 

Capitalization as of December 22, 2003

 

	
  Common Shares Authorized

  	
   

  	
  67,500,000

  	
   

  
	
  Preferred Shares Authorized

  	
   

  	
  7,500,000

  	
   

  
	
  Series A Junior Participating Preferred
  Stock

  	
   

  	
  350,000

  	
   

  

 

	
  Name of Beneficial Holder

  	
   

  	
  Shares
  Owned

  	
   

  	
  Percentage
  of Total

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  BVF Inc.

  	
   

  	
  4,658,412

  	
   

  	
  18.2

  	
  %

  
	
  Perry Capital, LLC

  	
   

  	
  2,806,154

  	
   

  	
  11.0

  	
  %

  
	
  Dimensional Fund Advisors Inc

  	
   

  	
  1,650,007

  	
   

  	
  6.4

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Other Common Shares Outstanding

  	
   

  	
  16,494,821

  	
   

  	
  64.4

  	
  %

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total Common Shares Outstanding

  	
   

  	
  25,609,394

  	
   

  	
  100.0

  	
  %

  

 

All presently
issued and outstanding shares of Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable (except for 747,500 shares
of restricted stock).

 

	
   

  	
  Shares Reserved for Issuance

  	
   

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Name of Plan(s)

  	
   

  	
  # of
  Shares Reserved

  	
   

  	
  Description

  	
   

  
	
  1998, 2000
  and 2002 Company Equity Compensation Plans

  	
   

  	
  1,976,963

  	
   

  	
  Reserved for issuance upon conversion of issued and outstanding
  options

  	
   

  
	
  1998, 2000
  and 2002 Company Equity Compensation Plans

  	
   

  	
  2,339,436

  	
   

  	
  Reserved for issuance to employees, officers, consultants, and
  directors

  	
   

  
	
  2001 Company
  2001 Employee Stock

  Purchase Plan

  	
   

  	
  820,345

  	
   

  	
  Reserved for issuance to employees

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Total Shares
  Reserved for Issuance

  	
   

  	
  5,136,744

  	
   

  	
   

  	
   

  

 

The foregoing does not give effect to any cancellations of options or
restricted stock in connection with the December 12, 2003 reduction in force by
the Company, nor any cancellation of restricted stock in connection with the
November 11, 2003 deferred compensation plan established.

 

 

Schedule 3.1(i)

 

Material Changes

 

The Company
has announced that it anticipates closing a $13 Million sale and lease-back of
certain facilities that it currently owns.

 

 

Schedule 3.1(j)

 

Litigation

None. 

 

Schedule 3.1(s)

 

Certain Fees

 

In connection
with the transactions contemplated by this securities purchase agreement, Arena
Pharmaceuticals, Inc. will pay Reedland Capital Partners, an Institutional
Division of Financial West Group, Six Hundred Thousand Dollars ($600,000.00) and forty-five thousand
(45,000) shares of Arena Common Stock.

 

 

Schedule 3.1(w)

 

Registration Rights

 

In connection with the
transactions contemplated by this securities purchase agreement, Arena
Pharmaceuticals, Inc. has agreed to include the forty-five thousand (45,000)
shares it will issue to Reedland Capital Partners, an Institutional
Division of Financial West Group,
(the “Reedland Shares”) in each Registration Statement (and prospectus) filed
by the Company on behalf of the investors under this securities purchase
agreement; provided, that in any event, that Arena shall register for resale
the Reedland Shares pursuant to an effective registration statement not later
than one (1) year following the closing of the purchase of the securities under
this securities purchase agreement.

 

 

Schedule 3.1(y)

 

Indebtedness

 

None.

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