CERTIFICATE OF DETERMINATION
OF RIGHTS AND PREFERENCES OF THE
SERIES A-1 CONVERTIBLE PREFERRED STOCK AND
SERIES A-2 CONVERTIBLE PREFERRED STOCK
OF
ZAPWORLD.COM
The undersigned, JOHN DABELS and OONAGH DUGGAN, hereby certify that:
1. They are the duly elected and acting President and Secretary,
respectively of Zapworld.com, a California corporation (the "Company").
2. The Company is authorized to issue ten million (10,000,000) shares of
Preferred Stock.
3. Under authority given by the Company's Articles of Incorporation, the
Board of Directors has duly adopted the following recitals and resolutions.
4. The authorized number of shares of Series A-1 Convertible Preferred
Stock (the "Series A-1 Preferred Stock") is 3,330, none of which is presently
outstanding, and the authorized number of shares of Series A-2 Convertible
Preferred Stock (the "Series A-2 Preferred Stock") is 2,220, none of which is
presently outstanding:
WHEREAS, the Articles of Incorporation of the Company, as amended,
authorized the Company to issue up to ten million (10,000,000) shares of
Preferred Stock in one or more series, and authorize the Board of Directors of
the Company to fix the number of shares constituting any such series, to
determine the designation thereof, and to determine the rights, preferences,
privileges and restrictions granted to or imposed on such series; and
WHEREAS, the Company has not issued any shares of Preferred Stock and the
Board of Directors desires to designate a series of Preferred Stock, to fix the
number of shares constituting the series, and to determine the rights,
preferences, privileges and restrictions relating to this series;
RESOLVED, that the Board of Directors hereby designates three thousand
three hundred thirty (3,330) shares of Preferred Stock as Series A-1 Convertible
Preferred Stock, $1,000 Par Value and two thousand two hundred twenty (2,220)
shares of Preferred Stock as Series A-2 Convertible Preferred Stock, $1,000 Par
Value (collectively the "Preferred Stock"), with the rights, preferences,
privileges and restrictions set forth below.
I. CERTAIN DEFINITIONS
For purposes of this Certificate of Determination, the following terms
shall have the following meanings:
A. "Series A-2 Closing Date" means the date of the closing of the purchase
and sale of the Series A-2 Preferred Stock.
B. "Buy-In Adjustment Amount" means the amount equal to the excess, if any,
of (i) the Converting Holder's total purchase price (including brokerage
commissions, if any) for the Covering Shares (as defined below) over (ii) the
net proceeds (after brokerage commissions, if any) received by the Converting
Holder (as defined below) from the sale of the Sold Shares. By way of
illustration and not in limitation of the foregoing, if the Converting Holder
purchases shares of Common Stock having a total purchase price (including
brokerage commissions) of $11,000 to cover a Buy-In (as defined below) with
respect to shares of Common Stock it sold for net proceeds of $10,000, the
Buy-In Adjustment Amount which the Company will be required to pay to the
Converting Holder will be $1,000
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C. "Cap Amount" means, if the Cap Regulations (as defined below) limit the
number of shares of Common Stock which the Company may issue to Holders of
Preferred Stock on conversion of Preferred Stock, the maximum number of shares
of Common Stock, determined as of the date of the Series A-1 Closing Date, which
the Company may so issue to the Holders under the Cap Regulations.
D. "Closing Bid Price" means the closing bid price of the Common Stock (in
U.S. Dollars) on the Principal Trading Market as reported by Bloomberg LP or if
that service is not then reporting the relevant information regarding the Common
Stock, a comparable reporting service of national reputation selected by the
Holders of the Preferred Stock and reasonably acceptable to the Company. If the
Closing Bid Price cannot be calculated for such security on the relevant date on
the foregoing basis, the Closing Bid Price of such security on such date shall
be the fair market value as reasonably determined by an investment banking firm
selected by Holders of a majority of the then outstanding shares of Preferred
Stock and reasonably acceptable to the Company, with the costs of such appraisal
to be borne by the Company. The manner of determining the Closing Bid Price of
the Common Stock set forth in the foregoing definition shall apply with respect
to any other security in respect of which a determination as to closing bid
price must be made hereunder.
E. "Closing Date" means the Series A-1 Closing Date or the Series A-2
Closing Date, as the case may be.
F. "Common Stock" means the Company's common stock, no par value per share.
G. "Conversion Price" means, with respect to any relevant date, the lesser
of (i) the Fixed Conversion Price or (ii) the Variable Conversion Price, which
is in effect as of such date.
H. "Effective Date" shall mean the date the relevant Registration Statement
for the shares of Common Stock issuable on conversion of the Preferred Stock is
declared effective by the Securities and Exchange Commission.
I. "Fixed Conversion Price" means (i) with respect to the Series A-1
Preferred Stock, $4.50 per share, and (ii) with respect to the Series A-2
Preferred Stock, 110% of the Closing Bid Price of the Common Stock on the
trading day immediately preceding the Series A-1 Closing Date, each of which
amounts shall be subject to the adjustment as provided herein.
J. "Holder" means a person or entity holding shares of the Preferred Stock.
K. "Series A-1 Closing Date" means the date of the closing of the purchase
and sale of the Series A-1 Preferred Stock.
L. "Junior Securities" means (i) any class or series of capital stock of
the Company authorized prior to the filing of this Certificate of Determination
that, by its terms, ranks junior to the Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary and (ii) all classes or series of capital stock of the
Company authorized after the filing of this Certificate of Determination, unless
consented to as provided herein in each instance, each of which shall rank
junior to the Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Company, whether voluntary or involuntary.
M. "Liquidation Preference" means, with respect to a share of Preferred
Stock, an amount equal to the Stated Value thereof, plus the accrued and unpaid
dividends thereon through the date of final distribution.
N. "Maturity Date" means, with respect to (i) the Series A-1 Preferred
Stock, the date which is thirty-six (36) months after the Series A-1 Closing
Date, and (ii) the Series A-2 Preferred Stock, the date which is thirty-six (36)
months after the Series A-2 Closing Date.
O. "Meeting Date" means the date which is the earlier of (x) seventy-five
(75) days after the date on which the Company has issued to Holders of Preferred
Stock, after the date of this Certificate of Determination, shares of Common
Stock which, in the aggregate equal or exceed ten percent (10%) of the
outstanding shares of Common Stock on the date hereof or (y) the date on which
the Company holds its next regular or special stockholders meeting.
P. "Pari Passu Securities" means any class or series of capital stock of
the Company hereafter created specifically ranking, by its terms, on parity with
the Preferred Stock as to distribution of assets upon liquidation,
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dissolution or winding up of the Company, whether voluntary or involuntary.
Q. "Principal Trading Market" means The Nasdaq/SmallCap Market, or if the
Common Stock is no longer listed on that market, the principal securities
exchange or trading market on which the Common Stock is listed or traded.
R. "Senior Securities" means each class or series of capital stock of the
Company authorized prior to the original filing of this Certificate of
Determination that, by its terms, is senior to the Preferred Stock as to
distribution of assets upon liquidation, dissolution or winding up of the
Company, whether voluntary or involuntary.
S. "Stated Value" for the Preferred Stock shall be $1,000.00 per share.
T. "Variable Conversion Price" means, with respect to a Conversion Date (as
defined below) which occurs (i) after the relevant Closing Date and on or before
the first year anniversary of such Closing Date, the amount equal to eighty-five
percent (85%) of the average of the three (3) lowest Closing Bid Prices over the
twenty-two (22) trading days prior to the Conversion Date, (ii) thereafter and
on or before the second year anniversary of the relevant Closing Date, the
amount equal to eighty percent (80%) of the average of the three (3) lowest
Closing Bid Prices over the twenty-two (22) trading days prior to the Conversion
Date, and (iii) thereafter and on or before the day prior to the Maturity Date,
the amount equal to seventy percent (70%) of the average of the three (3) lowest
Closing Bid Prices over the forty-five (45) days prior to the Conversion Date.
II. DIVIDENDS
A. Generally. The Holders of the Preferred Stock shall be entitled to
receive a dividend which shall accumulate at a rate of 6% of the stated value
per annum. Except as described below, the dividend shall be payable upon June 30
of each year or on a Conversion Date (each, a "Dividend Payment Date"). The
dividend shall accrue on a daily basis and shall be payable in cash or in Common
Stock at the Company's option. Such dividends shall be payable in preference to
dividends on any Common Stock or stock of any class ranking, as to dividend
rights, junior to the Preferred Stock, and shall be junior as to payment of
dividends to the Senior Securities. Dividends shall be fully cumulative and
shall accrue (whether or not declared and whether or not there shall be funds
legally available for the payment of dividends) daily (based on a 365-day year),
without interest, and shall be payable on the Dividend Payment Date unless such
payment would be in violation of the California Corporations Code.
B. Dividend on Conversion Date. Upon conversion of shares of the Preferred
Stock, the Holder of those shares shall receive a payment equal to the prorated
amount of the unpaid dividend which accrued through the Conversion Date.
C. Dividends Paid In Common Stock. If paid in Common Stock, the number of
shares of Common Stock to be received shall be determined by dividing the dollar
amount of the dividend by the Conversion Price on the Dividend Payment Date. If
the dividend is to be paid in Common Stock, said Common Stock shall be delivered
to the Holder, or per Holder's instructions, (i) if being issued in connection
with a conversion, at the same time as the Conversion Certificates pursuant to
Paragraph B(1) of Article III of this Certificate of Determination, and (ii)
with respect to all other instances, within three (3) business days after the
Dividend Payment Date (such third business date, a "Delivery Date"). The
certificates representing the dividends so paid are referred to as "Conversion
Certificates."
D. Dividends Paid In Cash. If the dividend is to be paid in cash, the
Company shall make such payment on the Dividend Payment Date. If the dividend is
not paid on the Dividend Payment Date, the dividend must be paid in Common Stock
in accordance with the provisions of this Certificate of Determination, unless
the Holder consents otherwise in each specific instance.
III. CONVERSION
A. Conversion at the Option of the Holder. Subject to the limitations on
conversions contained in Paragraph C of this Article III, each Holder of shares
of Preferred Stock may, at any time and from time to time convert (an "Optional
Conversion") each of its shares of Preferred Stock into a number of fully paid
and non-assessable shares of Common Stock determined in accordance with the
following formula:
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Stated Value of Shares to Be Converted
-------------------------------------------
Conversion Price
B. Mechanics of Conversion. Conversion shall be effectuated by faxing a
Notice of Conversion in the form attached hereto as Exhibit A ("Notice of
Conversion") to the Company as provided in this Paragraph. The Notice of
Conversion shall be executed by the Holder of one or more shares of Preferred
Stock and shall evidence such Holder's intention to convert all or a portion of
such shares. The date of conversion (the "Conversion Date") shall be deemed to
be the date on which the Holder faxes or otherwise delivers a conversion notice
to the Company so that it is received by the Company on or before such specified
date, provided that, the Holder shall deliver to the Company the certificate or
certificates representing the shares being converted (the "Converted Shares") no
later than five (5) business days thereafter.
1. Delivery of Common Stock Upon Conversion. Certificates representing the
Common Stock issuable on conversion of the Preferred Stock (the "Conversion
Certificates") will be delivered to the Converting Holder at the address
specified in the Notice of Conversion (which may be the Converting Holder's
address for notices or a different address), via express courier, by electronic
transfer or otherwise, within three (3) business days (such third business day,
a "Delivery Date") after the later of (i) the date on which the Notice of
Conversion is delivered to the Company as contemplated in this Paragraph or the
Maturity Date, or (ii) the date on which the Converted Shares are delivered to
the Company.
2. Taxes. The Company shall pay any and all taxes which may be imposed
upon the Company with respect to the issuance and delivery of the shares of
Common Stock upon the conversion of the Preferred Stock other than transfer
taxes due upon conversion, if such Holder has transferred to another party the
Preferred Stock or the right to receive Common Stock upon the Holder's
conversion thereof or any or income taxes due on the part of the Holder. The
Company shall have the right to withhold any taxes as required by the United
States federal or state tax laws.
3. No Fractional Shares. If any conversion of Preferred Stock would result
in the issuance of a fractional share of Common Stock, such fractional share
shall be disregarded and the number of shares of Common Stock issuable upon
conversion of the Preferred Stock shall be rounded up or down to the nearest
whole share, it being understood that .5 of one share shall be rounded up to the
next highest share.
4. Conversion Disputes. In the case of any dispute with respect to a
conversion, the Company shall promptly issue such number of shares of Common
Stock as are not disputed in accordance with Paragraph A of Article III above.
If such dispute involves the calculation of the Conversion Price, the Company
shall first discuss such discrepancy with the Converting Holder. If the Company
and the Converting Holder are unable to agree upon the Conversion Price
calculation, the Company shall promptly submit the disputed calculations to
independent auditors, which shall be one of the top six nationally recognized
accounting firms selected by the Holder (unless the Holders and the Company
mutually agree to a different firm). The auditors, at the expense of the party
or parties in error (as determined by the auditors), shall audit the
calculations and notify the Company and the Holder of the results within five
(5) business days following the date it receives the disputed calculations. The
auditor's calculation shall be deemed conclusive, absent manifest error. The
Company shall then issue the appropriate number of shares of Common Stock in
accordance with Paragraph A of Article III above.
5. Delay in Delivering Conversion Certificates. The Company understands
that a delay in the delivery of the Conversion Certificates beyond the Delivery
Date could result in economic loss to a Holder. As compensation to a Holder for
such loss, the Company agrees if there is a delay in the delivery of the
Conversion Certificates (as adjusted in accordance with this provision) so that
such Conversion Certificates are not received within two (2) business days after
the Delivery Date, to pay late payments to such Holder for late delivery of
Conversion Certificates in accordance with the following schedule (where "No.
Business Days Late" is defined as the number of business days beyond two (2)
business days after the Delivery Date):
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No. Business Days Late Late Payment For Each $10,000 of Liquidation
Preference or Dividend Amount Being Converted
-------------------------- ---------------------------------------------
1 $100
2 $200
3 $300
4 $400
5 $500
6 $600
7 $700
8 $800
9 $900
10 $1,000
>10 $1,000 +$200 for each Business Day
Late beyond 10 days
The Company shall pay any payments incurred under this Paragraph in immediately
available funds upon demand. For purposes of this Paragraph B(5) of Article III,
in connection with a Automatic Conversion (as defined below), the term "Delivery
Date" shall refer to the earlier of (i) the Delivery Date determined in relation
to a Notice of Conversion actually submitted by the Holder to the Company or
(ii) the third business date after written notice from the Holder that the
delivery of shares to the Holder in connection with a Automatic Conversion has
not been accomplished. Nothing herein shall limit the Holder's right to pursue
actual damages for the Company's failure to issue and deliver the Conversion
Certificates to the Holder within a reasonable time. Furthermore, in addition to
any other remedies which may be available to a Holder, in the event that the
Company fails for any reason to effect delivery of such Conversion Certificates
within two (2) business days after the Delivery Date, the Converting Holder will
be entitled to revoke the relevant Notice of Conversion by delivering a notice
to such effect to the Company whereupon the Company and the Converting Holder
shall each be restored to their respective positions immediately prior to
delivery of such Notice of Conversion; provided, however, that any payments
contemplated by this Paragraph B(5) of this Article III which have accrued
through the date of such revocation notice shall remain due and owing to the
Converting Holder notwithstanding such revocation.
6. Buy-In. If, by the relevant Delivery Date, the Company fails for any
reason to deliver the Conversion Certificates and after such Delivery Date, the
Holder of the Preferred Stock being converted (a "Converting Holder") purchases,
in an arm's-length open market transaction or otherwise, shares of Common Stock
(the "Covering Shares") in order to make delivery in satisfaction of a sale of
Common Stock by the Converting Holder (the "Sold Shares"), which delivery such
Converting Holder anticipated to make using the shares to be issued upon such
conversion (a "Buy-In"), the Converting Holder shall have the right, to require
the Company to pay to the Converting Holder, in addition to and not in lieu of
the amounts due under Paragraph B(5) of this Article III, the Buy-In Adjustment
Amount. The Company shall pay the Buy-In Adjustment Amount to the Converting
Holder in immediately available funds immediately upon demand by the Converting
Holder.
7. DWAC Certificate Delivery. In lieu of delivering physical certificates
representing the Common Stock issuable upon conversion, provided the Company's
transfer agent is participating in the Depository Trust Company ("DTC") Fast
Automated Securities Transfer program, upon request of a Converting Holder and
his/her compliance with the provisions contained in this paragraph, so long as
the certificates therefor do not bear a legend and the Converting Holder thereof
is not obligated to return such certificate for the placement of a legend
thereon, the Company shall use its best efforts to cause its transfer agent to
electronically transmit the Common Stock issuable
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upon conversion to the Converting Holder by crediting the account of Converting
Holder's prime broker with DTC through its Deposit Withdrawal Agent Commission
system.
8. Conversion Obligations and Default.
a. Until such time as a court of competent jurisdiction shall have
issued a binding injunction prohibiting the Company from issuing shares of
Common Stock to the Holder on the Holder's conversion of shares of the
Preferred Stock, the Company will timely honor all such conversions
effected by the Holder in accordance with the terms of this Certificate of
Determination, subject only to the limitations as to manner of exercise
provided herein and to the provisions of Paragraphs E(1) and (2) of this
Article III. In furtherance of the foregoing, and not in limitation
thereof, if at any time, a Holder shall elect to convert a share of the
Preferred Stock, the Company may not refuse to effect such conversion,
unless a binding injunction from a court of competent jurisdiction, issued
on notice to the Holder of the hearing with respect to the issuance of such
injunction, restraining or enjoining conversion of all of the shares of
Preferred Stock shall have been sought and obtained and the Company shall
have posted a bond in favor of the Holder in the amount of one hundred
thirty-five percent (135%) of the Stated Value of the shares of Preferred
Stock held by the Holder which are subject to such injunction. The bond
referred to in the immediately preceding sentence shall remain in effect at
least until thirty (30) days after the completion of the proceedings
relating to the dispute between the Holder and the Company with respect to
such conversion or right to effectuate conversions. The proceeds of such
bond shall be payable to the Holder to offset any amounts owed to the
Holder as reflected in any judgment obtained by the Holder in its favor in
connection with such dispute.
b. If, at any time:
(I) the Company challenges, disputes or denies the right of a
Holder of Preferred Stock to effect a conversion of the Preferred
Stock into Common Stock or otherwise dishonors or rejects any Notice
of Conversion delivered in accordance with the terms of this
Certificate of Determination (subject to the provisions of Paragraph
B(4) of this Article III with respect to certain disputes relating to
calculations of the number of shares to be issued and subject to the
provisions of Paragraph E of this Article V with respect to
Limitations on Conversions), or
(II) any third party who is not and has never been an affiliate
of such Holder commences any lawsuit or proceeding or otherwise
asserts any claim before any court or public or governmental
authority, which lawsuit, proceeding or claim seeks to challenge,
deny, enjoin, limit, modify, delay or dispute the right of such Holder
to effect the conversion of the Preferred Stock into Common Stock, and
the Company refuses to honor any such Notice of Conversion,
then such Holder shall have the right, by written notice to the
Company, to require the Company to redeem each share of Preferred Stock
for which a Notice of Conversion has been refused pursuant to clauses
(I) or (II) of this Paragraphs B(8) for cash, at an amount per share
equal to the Redemption Amount (as defined below), pursuant to the
provisions of Article V hereof. Such Redemption Amount shall be payable
to such Holder in cash within five (5) business days after the such
Holder gives the Company written notice that it is exercising its
rights under this paragraph.
9. Conversion in Bankruptcy. The Holder of any Preferred Stock Preferred
Stock shall be entitled to exercise its conversion privilege with respect to the
Preferred Stock notwithstanding the commencement of any case
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under 11 U.S.C.ss.101 et seq. (the "Bankruptcy Code"). In the event the Company
is a debtor under the Bankruptcy Code, the Company hereby waives, to the fullest
extent permitted, any rights to relief it may have under 11 U.S.C.ss.362 in
respect of such Holder's conversion privilege. The Company hereby waives, to the
fullest extent permitted, any rights to relief it may have under 11 U.S.C.ss.362
in respect of the conversion of the Preferred Stock. The Company agrees, without
cost or expense to such Holder, to take or to consent to any and all action
necessary to effectuate relief under 11 U.S.C.ss.362.
C. Automatic Conversion Upon Maturity. Any shares of Preferred Stock not
previously converted or redeemed as of the Maturity Date shall be deemed to be
automatically converted (an "Automatic Conversion") up to an amount contemplated
by Paragraphs E(1) or (2), as may be applicable, of this Article III (or from
time to time thereafter as such additional conversions may be made consistent
with said provisions), without further action of any kind (including, but not
necessarily limited to, the giving of a Notice of Conversion) by the Holder, as
of the Maturity Date at the Conversion Price applicable on the Maturity Date.
D. Intentionally Omitted.
E. Limitations on Conversions. The conversion of shares of Preferred Stock
shall be subject to the following limitations (each of which limitations shall
be applied independently):
1. Cap Regulations. If the Company is limited in the number of shares
of Common Stock it may issue by virtue of (i) the number of authorized
shares or (ii) the applicable rules and regulations of its Principal
Trading Market, including, but not necessarily limited to, Nasdaq Rule
4310(c)(25)(H)(i) or Rule 4460(i)(1), as may be applicable (collectively,
the "Cap Regulations") the Company will take all steps reasonably necessary
to be in a position to issue shares of Common Stock on conversion of the
Preferred Stock without violating the Cap Regulations. If at any time after
the date of this Certificate of Determination, the Company has issued
shares of Common Stock to Holders of Preferred Stock which, in the
aggregate, equal or exceed ten percent (10%) of the outstanding shares of
Common Stock on the date of this Certificate of Determination, the Company
shall immediately notify the Holders of Preferred Stock of such occurrence
and shall take immediate action (including, if necessary, seeking the
approval of its shareholders to authorize the listing or issuance of the
full number of shares of Common Stock which would be issuable upon the
conversion of the then outstanding shares of Preferred Stock but for the
Cap Amount) to eliminate any prohibitions under applicable law or the rules
or regulations of any stock exchange, inter-dealer quotation system or
other self-regulatory organization with jurisdiction over the Company or
any of its securities on the Company's ability to list or issue shares of
Common Stock in excess of the Cap Amount. If on the Meeting Date such
prohibitions have not been eliminated or if prior to such date there occurs
a Conversion Date as to which the Company can not honor in full the
conversion submitted on that date as result of the Cap Regulations, then,
after all such Preferred Stock which can be converted under the Cap Amount
have been converted, each Holder of then outstanding shares of Preferred
Stock (each such share, an "Unconverted Share") shall have the option,
exercisable in such Holder's sole and absolute discretion, to elect either
of the following remedies:
a. If permitted by the Cap Regulations, require the Company to
issue shares of Common Stock in accordance with such holder's notice
of conversion at a conversion purchase price equal to the average of
the closing price per share of Common Stock for any three (3) trading
days (which need not be consecutive, but subject to certain equitable
adjustments for certain events occurring during such period) during
the sixty (60) trading days immediately preceding the date of notice
of conversion; or
b. Require the Company to redeem each Unconverted Share for cash,
at an amount per share equal to the Redemption Amount, pursuant to the
provisions of Article V hereof, such Redemption Amount shall be paid
in cash by the Company to the Holder within five (5) business days
after the date the Holder notifies the Company in writing of the
Holder's election to pursue this remedy.
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A Holder of more than one Unconverted Share may elect one of the above
remedies with respect to some of such Unconverted Shares and the other
remedy with respect to other Unconverted Shares. The Redemption Amount
payable under the provisions of this Paragraph E(1) of this Article
III shall be payable within ten (10) days after the Redemption Date or
the Meeting Date, as the case may be. If prior to such date, the Cap
Regulations no longer apply to limit the Company's issuance of shares
of Common Stock in connection with the Preferred Stock, the remedies
contained clauses (a) and (b) of this Paragraph E(1) of this Article
III shall not be exercisable by a Holder.
2. No Ten Percent Holders. Notwithstanding any other provision hereof, in
no event (except (i) as specifically provided in this Certificate of
Determination as an exception to this provision, (ii) while there is outstanding
a tender offer for any or all of the shares of the Company's Common Stock, or
(iii) on at least seventy-five (75) days' advance written notice from the Holder
to the Company of the Holder's election to cancel this Section E(2) of Article
III) shall the Holder be entitled to convert any share of the Holder's Preferred
Stock, or shall the Company have the obligation to convert such share (and the
Company shall not have the right to pay dividends on shares of Preferred Stock
in shares of Common Stock or require an Automatic Conversion), to the extent
that, after such conversion or issuance of stock in payment of dividends, the
sum of (a) the number of shares of Common Stock beneficially owned by the Holder
and its affiliates, and (b) the number of shares of Common Stock issuable upon
the conversion of the shares of Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by the Holder and its affiliates of more than 9.99% of the outstanding
shares of Common Stock (after taking into account the shares to be issued to the
Holder upon such conversion). For purposes of the proviso to the immediately
preceding sentence, beneficial ownership shall be determined in accordance with
Section 13(d) of the Securities Exchange Act of 1934, as amended. If the Holder
transfers or assigns any shares of the Preferred Stock to a party who or which
would not be considered such an affiliate, such assignment shall be made subject
to the transferee's or assignee's specific agreement to be bound by the
provisions of this Paragraph D(2) of Article III as if such transferee or
assignee were the original Holder hereof. Nothing herein shall preclude the
Holder from disposing of a sufficient number of other shares of Common Stock
beneficially owned by the Holder so as to thereafter permit the continued
conversion of the shares of Preferred Stock.
IV. RESERVATION OF SHARES OF COMMON STOCK
A. Reserved Amount. Upon the initial issuance of the shares of Preferred
Stock, the Company shall reserve out of the authorized but unissued shares of
Common Stock for issuance upon conversion of the Preferred Stock such number of
shares equal to 200% of the number of shares which would be issuable if all of
the authorized shares of Preferred Stock were converted in their entirety on the
Series A-1 Closing Date based on the Conversion Price in effect on that date and
thereafter the number of authorized but unissued shares of Common Stock so
reserved (the "Reserved Amount") shall not be decreased, but may be increased
pursuant to Paragraph B of this Article IV, and shall at all times be sufficient
to provide for the conversion of the Preferred Stock outstanding at the then
current Conversion Price thereof. The Reserved Amount shall be allocated to the
holders of Preferred Stock as provided in Paragraph D of Article IX hereof.
B. Increases to Reserved Amount. If the Reserved Amount for any ten (10)
consecutive trading days (the last of such ten (10) trading days being the
"Authorization Trigger Date") shall be less than 150% of the number of shares of
Common Stock issuable upon conversion of the then outstanding shares of
Preferred Stock, the Company shall immediately notify the holders of Preferred
Stock of such occurrence and shall take immediate action (including, if
necessary, seeking shareholder approval to authorize the issuance of additional
shares of Common Stock) to increase the Reserved Amount to 200% of the number of
shares of Common Stock then issuable upon conversion of the outstanding
Preferred Stock. In the event the Company fails to so increase the Reserved
Amount within 90 days after an Authorization Trigger Date, each Holder of
Preferred Stock shall thereafter have the option, exercisable in whole or in
part at any time and from time to time by delivery of a Redemption Notice (as
defined below) to the Company, to require the Company to purchase for cash, at
an amount per share equal to the Redemption Amount, a portion of the holder's
Preferred Stock such that, after giving effect to such purchase, the holder's
allocated portion of
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the Reserved Amount equals or exceeds 200% of the total number of shares of
Common Stock issuable to such Holder upon conversion of its Preferred Stock. If
the Company fails to redeem any of such shares within five (5) business days
after its receipt of such Redemption Notice, then such Holder shall be entitled
to the remedies provided in Paragraph A(2) of Article V hereof.
C. Limitations on Redemption Right. Notwithstanding the provisions of
Paragraph B of this Article IV, the holders of Preferred Stock shall have no
right to require the Company to effect a redemption of their outstanding shares
of Preferred Stock as provided in Paragraph B of this Article IV so long as (i)
the Company has not, at any time, decreased the Reserved Amount below that
number of shares of Common Stock computed as set forth in Paragraphs A and B of
this Article IV; (ii) the Company shall have taken immediate action following
the applicable Authorization Trigger Date (including, if necessary, seeking
stockholder approval to authorize the issuance of additional shares of Common
Stock) to increase the Reserved Amount to 200% of the number of shares of Common
Stock then issuable upon conversion of the outstanding Preferred Stock; and
(iii) the Company continues to use its commercially reasonable good faith best
efforts (including the resolicitation of stockholder approval to authorize the
issuance of additional shares of Common Stock) to increase the Reserved Amount
to 200% of the number of shares of Common Stock then issuable upon conversion of
the outstanding Preferred Stock. The Company will be deemed to be using "its
commercially reasonable good faith best efforts" to increase the Reserved Amount
so long as it solicits stockholder approval to authorize the issuance of
additional shares of Common Stock not less than two (2) times during each twelve
month period following the applicable Authorization Trigger Date during which
any shares of Preferred Stock remain outstanding; provided that no such
limitation on the redemption rights set out in Paragraph B of this Article IV,
shall be effective if the Company fails to obtain stockholder approval after two
(2) attempts.
V. REDEMPTION
A. Redemption by Holder. In the event that any of the following occur
(individually, a "Redemption Event"):
1. Cap Regulations. The Company's inability to issue sufficient
shares of Common Stock upon conversion of Unconverted Shares in accordance
with Paragraph E(1) of Article III hereof.
2. Conversion Default. The Company's inability to deliver Conversion
Certificates under Paragraph B of Article III hereof.
then, upon the occurrence of any such Redemption Event, each Holder of shares of
Preferred Stock shall thereafter have the option, exercisable in whole or in
part at any time and from time to time by delivery of a notice requesting the
redemption of all or part of such Holder's shares of Preferred Stock (a
"Redemption Notice") to the Company while such Redemption Event continues, to
require the Company to purchase for cash any or all of the then outstanding
shares of Preferred Stock held by such Holder for an amount per share equal to
the Redemption Amount in effect at the time of the redemption hereunder.
B. Definition of Redemption Amount. The "Redemption Amount" with respect to
a share of Preferred Stock being redeemed (a "Redeemed Share") means an amount
payable in cash, equal to:
V
---- x M
CP
where:
"V" means the outstanding stated value plus accrued dividends
through the date of payment of the Redemption Amount for the Redeemed
Share (the "Redemption Payment Date");
"CP" means the Conversion Price in effect on the Redemption Date
(as defined below)
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"Redemption Date" means the date contemplated by a specific
provision of this Certificate of Determination or, if no such date is
specified, the date of redemption specified in the notice from the
Holder electing redemption of a Redeemed Share; and
"M" means the average of the closing prices for any five (5)
trading days (which need not be consecutive) selected by the Holder of
the Unconverted Share being redeemed. during the period beginning on
the Redemption Date and ending on the Redemption Payment Date.
C. Redemption Defaults. If the Company fails to pay any Holder the
Redemption Amount with respect to any share of Preferred Stock within
twenty-five (25) business days after its receipt of Redemption Notice, then the
Holder of Preferred Stock delivering such Redemption Notice shall be entitled to
interest on the Redemption Amount at a per annum rate equal to the lower of 15%
and the highest interest rate permitted by applicable law from the date on which
the Company receives the Redemption Notice until the date of payment of the
Redemption Amount hereunder. In the event the Company is not able to redeem all
of the shares of Preferred Stock subject to Redemption Notices delivered prior
to the date upon which such redemption is to be effected, the Company shall
redeem shares of Preferred Stock from each Holder pro rata, based on the total
number of shares of Preferred Stock outstanding at the time of redemption
included by such Holder in all Redemption Notices delivered prior to the date
upon which such redemption is to be effected relative to the total number of
shares of Preferred Stock outstanding at the time of redemption included in all
of the Redemption Notices delivered prior to the date upon which such redemption
is to be effected.
VI. LIQUIDATION PREFERENCE
A. Liquidation Event. If the Company shall commence a voluntary case under
the U.S. Federal bankruptcy laws or any other applicable bankruptcy, insolvency
or similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Company or
of any substantial part of its property, or make an assignment for the benefit
of its creditors, or admit in writing its inability to pay its debts generally
as they become due, or if a decree or order for relief in respect of the Company
shall be entered by a court having jurisdiction in the premises in an
involuntary case under the U.S. Federal bankruptcy laws or any other applicable
bankruptcy, insolvency or similar law resulting in the appointment of a
receiver, liquidator, assignee, custodian, trustee, sequestrator (or other
similar official) of the Company or of any substantial part of its property, or
ordering the winding up or liquidation of its affairs, and any such decree or
order shall be unstayed and in effect for a period of 60 consecutive days and,
on account of any such event, the Company shall liquidate, dissolve or wind up,
or if the Company shall otherwise liquidate, dissolve or wind up, including, but
not limited to, the sale or transfer of all or substantially all of the
Company's assets in one transaction or in a series of related transactions (a
"Liquidation Event"), no distribution shall be made to the holders of any shares
of capital stock of the Company (other than Senior Securities and Pari Passu
Securities) upon liquidation, dissolution or winding up unless prior thereto the
holders of shares of Preferred Stock shall have received the Liquidation
Preference with respect to each share. If, upon the occurrence of a Liquidation
Event, the assets and funds available for distribution among the holders of the
Preferred Stock and holders of Pari Passu Securities shall be insufficient to
permit the payment to such holders of the preferential amounts payable thereon,
then the entire assets and funds of the Company legally available for
distribution to the Preferred Stock and the Pari Passu Securities shall be
distributed ratably among such shares in proportion to the ratio that the
Liquidation Preference payable on each such share bears to the aggregate
Liquidation Preference payable on all such shares.
B. Exclusions. The purchase or redemption by the Company of stock of any
class, in any manner permitted by law, shall not, for the purposes hereof, be
regarded as a liquidation, dissolution or winding up of the Company. Neither the
consolidation or merger of the Company with or into any other entity nor the
sale or transfer by the Company of less than substantially all of its assets
shall, for the purposes hereof, be deemed to be a liquidation, dissolution or
winding up of the Company.
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VII. ADJUSTMENTS TO THE CONVERSION PRICE
A. Sale. The Conversion Price shall be subject to adjustment from time to
time as follows: If, for as long as any shares of Preferred Stock remain
outstanding, the Company enters into a merger (other than where the Company is
the surviving entity) or consolidation with another corporation or other entity
or a sale or transfer of all or substantially all of the assets of the Company
to another person (collectively, a "Sale"), the Company will require, in the
agreements reflecting such transaction, that the surviving entity expressly
assume the obligations of the Company hereunder. Notwithstanding the foregoing,
if the Company enters into a Sale and the holders of the Common Stock are
entitled to receive stock, securities or property in respect of or in exchange
for Common Stock, then as a condition of such Sale, the Company and any such
successor, purchaser or transferee will agree that the Preferred Stock may
thereafter be converted on the terms and subject to the conditions set forth
above into the kind and amount of stock, securities or property receivable upon
such merger, consolidation, sale or transfer by a Holder of the number of shares
of Common Stock into which then outstanding shares of Preferred Stock might have
been converted immediately before such merger, consolidation, sale or transfer,
subject to adjustments which shall be as nearly equivalent as may be
practicable. In the event of any such proposed Sale, the Holder hereof shall
have the right to convert by delivering a Notice of Conversion to the Company
within 15 days of receipt of notice of such Sale from the Company.
B. Spin Off. The Company agrees that for as long as shares of Preferred
Stock remain outstanding, the Company will not, without the consent of the
Holders of a majority of the Preferred Stock, spin off or otherwise divest
itself of a part of its business or operations or dispose all or of a part of
its assets in a transaction (the "Spin Off") in which the Company does not
receive just compensation for such business, operations or assets, but causes
securities of another entity (the "Spin Off Securities") to be issued to
security holders of the Company. If, for any reason, prior to the Conversion
Date or the date of payment of the Redemption Amount hereunder, the Company
consummates a Spin Off, then the Company shall cause (i) to be reserved Spin Off
Securities equal to the number thereof which would have been issued to the
Holder had all of the holder's shares of Preferred Stock outstanding on the
record date (the "Record Date") for determining the amount and number of Spin
Off Securities to be issued to security holders of the Company (the "Outstanding
Preferred Stock") been converted as of the close of business on the trading day
immediately before the Record Date (the "Reserved Spin Off Shares"), and (ii) to
be issued to the Holder on the conversion of all or any of the Outstanding
Preferred Stock, such amount of the Reserved Spin Off Shares equal to (x) the
Reserved Spin Off Shares multiplied by (y) a fraction, of which (a) the
numerator is the principal amount of the Outstanding Preferred Stock then being
converted, and (b) the denominator is the principal amount of the Outstanding
Preferred Stock.
C. Stock Splits, etc. If, at any time while any shares of Preferred Stock
remain outstanding, the Company effectuates a stock split or reverse stock split
of its Common Stock or issues a dividend on its Common Stock consisting of
shares of Common Stock, the Conversion Price and any other amounts calculated as
contemplated by this Certificate of Determination shall be equitably adjusted to
reflect such action. By way of illustration, and not in limitation, of the
foregoing (i) if the Company effectuates a 2:1 split of its Common Stock,
thereafter, with respect to any conversion for which the Company issues the
shares after the record date of such split, any market price from a date prior
to such split which was used in any of the calculation of the Conversion Price
shall be deemed to be one-half of what it had been calculated to be immediately
prior to such split; (ii) if the Company effectuates a 1:10 reverse split of its
Common Stock, thereafter, with respect to any conversion for which the Company
issues the shares after the record date of such reverse split, any market price
from a date prior to such split which was used in any of the calculation of the
Conversion Price shall be deemed to be ten times what it had been calculated to
be immediately prior to such split; and (iii) if the Company declares a stock
dividend of one share of Common Stock for every 10 shares outstanding,
thereafter, with respect to any conversion for which the Company issues the
shares after the record date of such dividend, any market price from a date
prior to such record date which was used in any of the calculation of the
Conversion Price shall be deemed to be such amount multiplied by a fraction, of
which the numerator is the number of shares (10 in the example) for which a
dividend share will be issued and the denominator is such number
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<PAGE>
of shares plus the dividend share(s) issuable or issued thereon (11 in the
example).
D. Certain Defaults. Except to the extent specifically provided in
Paragraph E of this Article VII, the Company has committed to each Holder of
Preferred Stock that, during the period from the date of this Certificate of
Determination until hundred eighty (180) days after the most recent Effective
Date, without the prior written consent of such Holder, the Company will not
enter into
(x) any subsequent or further offer or sale of Common Stock or
securities convertible into Common Stock (collectively, "New Common
Stock"), or
(y) any subsequent offer or contract for an equity line or similar
arrangement which contemplates the issuance of New Common Stock
with any third party. In the event the Company breaches the provisions of this
Paragraph D of this Article VII, the Conversion Price shall be amended to be
equal to (i) 90% of (ii) the amount determined in accordance with the provisions
of this Certificate of Determination without regard to this provision.
E. Right of First Refusal. (i) Subject to the provisions of this Paragraph
E, the Company may during the period commencing on the Effective Date and
continuing through and including the date which is one hundred eighty (180) days
after the Effective Date offer to enter into any transaction (a "New
Transaction") for the sale of New Common Stock to a New Investor, but only if
(x) the average Closing Bid Price for the twenty (20) trading days ending on the
trading immediately before the New Transaction Notice (as defined below) is at
least $5.50 per share (adjusted for capital transactions occurring after the
Series A-1 Closing Date) and (y) the sale price per share of Common Stock or, if
a convertible security or other right to acquire shares, the conversion or
exercise price per share of Common Stock is at least $5.50 per share (adjusted
for capital transactions occurring after the Series A-1 Closing Date). Before
consummating the New Transaction with a New Investor, the Company shall give
written notice (a "New Transaction Notice") to the Holders summarizing all of
the terms of such offer (a "New Transaction Offer"). The Holders shall have the
right (the "Right of First Refusal"), exercisable by written notice given to the
Company by the close of business on the fifth business day after the Holders'
receipt of the New Transaction Offer (the "Right of First Refusal Expiration
Date"), to participate in all or any part of the New Transaction Offer on the
terms so specified.
(ii) If, and only if, the Holders do not exercise the Right of First
Refusal in full, the Company may consummate the remaining portion of the New
Transaction with any New Investor on the terms specified in the New Transaction
Offer within thirty (30) days of the Right of First Refusal Expiration Date.
(iii) If the terms of the New Transaction to be consummated with such other
party differ from the terms specified in the New Transaction Offer so that the
terms are more beneficial in any respect to the New Investor, the Company shall
give the Holders a New Transaction Offer relating to the terms of the New
Transaction, as so changed, and the Holders' Right of First Refusal and the
preceding terms of this Paragraph E shall apply with respect to such changed
terms.
(iv) In the event the New Transaction is consummated with such New
Investor at any time prior to the expiration of one hundred eighty (180) days
after the Effective Date on terms providing for a sale price equal to or
computed based on, or a determination of a conversion price (howsoever defined
or computed) based on, a lower percentage of the then current market price
(howsoever defined or computed) than provided in this Certificate of
Determination for determining the Conversion Price, the terms of any unissued or
unconverted share of Preferred Stock shall be modified to reduce the relevant
Conversion Price to be equal to that provided in the New Transaction as so
consummated.
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F. Notice of Adjustments. Upon the occurrence of each adjustment or
readjustment of the Initial Conversion Price pursuant to this Article VII, the
Company, at its expense, shall promptly compute such adjustment or readjustment
and prepare and furnish to each Holder of Preferred Stock a certificate setting
forth such adjustment or readjustment and showing in detail the facts upon which
such adjustment or readjustment is based. The Company shall, upon the written
request at any time of any Holder of Preferred Stock, furnish to such Holder a
like certificate setting forth (i) such adjustment or readjustment, (ii) the
Initial Conversion Price at the time in effect and (iii) the number of shares of
Common Stock and the amount, if any, of other securities or property which at
the time would be received upon conversion of a share of Preferred Stock.
VIII. VOTING RIGHTS
A. Generally. The holders of the Preferred Stock have no right to vote in
any matter whatsoever except as otherwise required by the California
Corporations Code.
B. Class Voting. To the extent that under the California Corporations Code
the vote of the holders of the Preferred Stock, voting separately as a class or
series, as applicable, is required to authorize a given action of the Company,
the affirmative vote or consent of the holders of at least a majority of the
then outstanding shares of the Preferred Stock represented at a duly held
meeting at which a quorum is present or by written consent of the holders of at
least a majority of the then outstanding shares of Preferred Stock (except as
otherwise may be required under the California Corporations Code, a "Required
Interest") shall constitute the approval of such action by the class. To the
extent that under the California Corporations Code Holders of the Preferred
Stock are entitled to vote on a matter with holders of Common Stock, voting
together as one class, each share of Preferred Stock shall be entitled to a
number of votes equal to the number of shares of Common Stock into which it is
then convertible (subject to the limitations contained in Article III Paragraph
E) using the record date for the taking of such vote of shareholders as the date
as of which the Conversion Price is calculated.
IX. MISCELLANEOUS
A. Rank. The Preferred Stock shall rank (i) prior to the Company's Common
Stock; (ii) prior to any Junior Securities; (iii) junior to any Senior
Securities; and (iv) pari passu with any Pari Passu Securities; provided,
however, that no additional Senior or Pari Passu Securities shall be created
without the written consent of a Required Interest.
B. Cancellation or Redemption of Preferred Stock. If any shares of
Preferred Stock are converted pursuant to Article III, or redeemed pursuant to
Article V. the shares so converted or redeemed shall be canceled, shall return
to the status of authorized, but unissued preferred stock of no series, and
shall not be issuable by the Company as Preferred Stock.
C. Lost or Stolen Certificates. Upon receipt by the Company of (i) evidence
of the loss, theft, destruction or mutilation of any Preferred Stock
certificate(s) and (ii) (y) in the case of loss, theft or destruction, of
indemnity (without any bond or other security) reasonably satisfactory to the
Company, or (z) in the case of mutilation, upon surrender and cancellation of
the Preferred Stock certificate(s), the Company shall execute and deliver new
Preferred Stock certificate(s) of like tenor and date. However, the Company
shall not be obligated to reissue such lost or stolen Preferred Stock
certificate(s) if the Holder contemporaneously requests the Company to convert
such Preferred Stock.
D. Allocation of Cap Amount and Reserved Amount. The initial Cap Amount and
Reserved Amount shall be allocated pro rata among the holders of Preferred Stock
based on the number of shares of Preferred Stock issued to each Holder. Each
increase to the Cap Amount and the Reserved Amount shall be allocated pro rata
among the holders of Preferred Stock based on the number of shares of Preferred
Stock held by each Holder at the time of the increase in the Cap Amount or
Reserved Amount. In the event a Holder shall sell or otherwise transfer any of
such holder's shares of Preferred Stock, each transferee shall be allocated a
pro rata portion of such transferor's Cap Amount and Reserved Amount. Any
portion of the Cap Amount or Reserved Amount which remains allocated to any
person or entity which does not hold any Preferred Stock shall be allocated to
the remaining holders of shares of
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Preferred Stock, pro rata based on the number of shares of Preferred Stock then
held by such holders.
E. Payment of Cash; Defaults. Whenever the Company is required to make any
cash payment to a Holder under this Certificate of Determination (upon
redemption or otherwise), such cash payment shall be made to the Holder on the
date specified herein or, if not so specified, within 5 business days after
delivery by such Holder of a notice specifying that the Holder elects to receive
such payment in cash and the method (e.g., by check, wire transfer) in which
such payment should be made. If such payment is not delivered within the
relevant time period, such Holder shall thereafter be entitled to interest on
the unpaid amount at a per annum rate equal to the lower of 15% and the highest
interest rate permitted by applicable law until such amount is paid in full to
the Holder.
F. Status as Stockholder. Upon submission of a Notice of Conversion by a
Holder of Preferred Stock, (i) the shares covered thereby (other than the
shares, if any, which cannot be issued because their listing or issuance would
exceed such holder's allocated portion of the Reserved Amount or Cap Amount)
shall be deemed converted into shares of Common Stock and (ii) the holder's
rights as a Holder of such converted shares of Preferred Stock shall cease and
terminate, excepting only the right to receive certificates for such shares of
Common Stock and to any remedies provided herein or otherwise available at law
or in equity to such Holder because of a failure by the Company to comply with
the terms of this Certificate of Determination.
G. Amendments. This Certificate of Determination may only be amended with
the written consent of the holders of eighty-five (85%) percent of the
outstanding Preferred Stock and the vote or action of any other party or class
entitled to vote or act thereon.
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The undersigned declare under penalty of perjury under the laws of the
State of California that the matters set out in the foregoing Certificate are
true of his or her knowledge.
Executed at San Francisco, California on June 27, 2000.
/s/ John Dabels /s/ Oonagh Duggan
------------------------------- --------------------------------
John Dabels Oonagh Duggan
President Secretary
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