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EXHIBIT 3.1
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES D CONVERTIBLE PREFERRED STOCK
OF
eTOYS INC.
eToys Inc. (the "COMPANY"), a corporation organized and existing under
the General Corporation Law of the State of Delaware, does hereby certify that,
pursuant to authority conferred upon the Board of Directors of the Company by
the Certificate of Incorporation, as amended, of the Company, and pursuant to
Section 151 of the General Corporation Law of the State of Delaware, the Board
of Directors of the Company at a meeting duly held, adopted resolutions (i)
authorizing a series of the Company's previously authorized preferred stock, par
value $0.0001 per share, and (ii) providing for the designations, preferences
and relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, of Ten Thousand (10,000) shares of Series D
Convertible Preferred Stock of the Company, as follows:
RESOLVED, that the Company is authorized to issue 10,000
shares of Series D Convertible Preferred Stock (the "PREFERRED
SHARES"), par value $0.0001 per share, which shall have the following
powers, designations, preferences and other special rights:
(1) DIVIDENDS. The holders of the Preferred Shares shall be entitled to
receive dividends ("DIVIDENDS") at a rate of 7.0% per annum, which shall be
cumulative, accrue daily from the Issuance Date (as defined below) and be due
and payable on the following dates: (i) the date which is 180 days after the
Issuance Date, (ii) the date which is 365 days after the Issuance Date and (iii)
thereafter, on each date which is 90 days after the last date on which Dividends
were due and payable (without taking into account adjustments for Business Days
(as defined below) as described in the following sentence) (each, a "DIVIDEND
DATE"). If a Dividend Date is not a Business Day, then the Dividend shall be due
and payable on the Business Day immediately following the Dividend Date.
Dividends shall be payable in cash, or, at the option of the Company, in shares
of Common Stock (as defined below) ("DIVIDEND SHARES"), provided that the
Dividends which accrued during any period shall be payable as Dividend Shares
only if the Company provides written notice ("DIVIDEND ELECTION NOTICE") to each
holder of Preferred Shares at least ten (10) days prior to the Dividend Date.
Dividends to be paid in shares of Common Stock for each
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Preferred Share shall be paid in a number of fully paid and nonassessable shares
(rounded to the nearest whole share in accordance with Section 2(b)) of Common
Stock equal to the quotient of (a) the Additional Amount (as defined below)
divided by (b) the Dividend Conversion Price (as defined below) on the
applicable Dividend Date. Notwithstanding the foregoing, the Company shall not
be entitled to pay Dividends in shares of Common Stock and shall be required to
pay such Dividends in cash if (a) any event constituting a Triggering Event (as
defined in Section 3(b)), or an event that with the passage of time and without
being cured would constitute a Triggering Event, has occurred and is continuing
on the Dividend Date or the date which is 10 days prior to the Dividend Date,
unless otherwise consented to in writing by the holder of Preferred Shares
entitled to receive such Dividend or (b) the Registration Statement (as defined
in the Registration Rights Agreement) is not effective and available for the
resale of all of the Registrable Securities (as defined in the Registration
Rights Agreement), including, without limitation, the Dividend Shares, on the
Dividend Date or the date which is 10 days prior to the Dividend Date. Any
accrued and unpaid Dividends which are not paid within five (5) Business Days of
such accrued and unpaid Dividends' Dividend Date shall bear interest at the rate
of 18.0% per annum (or if lower, the maximum amount allowed by applicable law)
from such Dividend Date until the same is paid in full (the "DEFAULT INTEREST").
(2) CONVERSION OF PREFERRED SHARES. Preferred Shares shall be
convertible into shares of the Company's common stock, par value $0.0001 per
share (the "COMMON STOCK"), on the terms and conditions set forth in this
Section 2.
(a) CERTAIN DEFINED TERMS. For purposes of this Certificate of
Designations, the following terms shall have the following meanings:
(i) "ADDITIONAL AMOUNT" means, on a per share basis, the sum of
(A) unpaid Default Interest through the date of determination plus (B) the
result of the following formula: (0.07)(N/365)($10,000).
(ii) "APPROVED STOCK PLAN" means any employee benefit plan which
has been approved by the Board of Directors of the Company, pursuant to which
the Company's securities may be issued to any employee, officer or director for
services provided to the Company.
(iii) "BUSINESS DAY" means any day other than Saturday, Sunday or
other day on which commercial banks in The City of New York are authorized or
required by law to remain closed.
(iv) "CLOSING BID PRICE" means, for any security as of any date,
the last closing bid price for such security on the Principal Market (as defined
below) as reported by Bloomberg Financial Markets ("BLOOMBERG"), or if the
Principal Market begins to operate on an extended hours basis, and does not
designate the closing bid price, then the last bid price at 4:00 p.m., New York
City Time, as reported by Bloomberg, or if the foregoing do not apply, the last
closing bid price of such security in the over-the-counter market on the
electronic bulletin board
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for such security as reported by Bloomberg, or, if no last closing bid price is
reported for such security by Bloomberg, the last closing trade price of such
security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the closing bid prices
of any market makers for such security as reported in the "pink sheets" by the
National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated
for such security on such date on any of the foregoing bases, the Closing Bid
Price of such security on such date shall be the fair market value as mutually
determined by the Company and the holders of a majority of the Preferred Shares
then outstanding. If the Company and the holders of Preferred Shares are unable
to agree upon the fair market value of the Common Stock, then such dispute shall
be resolved pursuant to Section 2(d)(iii) below. All such determinations shall
be appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period.
(v) "CLOSING SALE PRICE" means, for any security as of any
date, the last closing trade price for such security on the Principal Market as
reported by Bloomberg, or if the Principal Market begins to operate on an
extended hours basis, and does not designate the closing trade price, then the
last trade price at 4:00 p.m., New York City Time, as reported by Bloomberg, or
if the foregoing do not apply, the last closing trade price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no last closing trade price is reported for
such security by Bloomberg, the last closing ask price of such security as
reported by Bloomberg, or, if no last closing ask price is reported for such
security by Bloomberg, the average of the highest bid price and the lowest ask
price of any market makers for such security as reported in the "pink sheets" by
the National Quotation Bureau, Inc. If the Closing Sale Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Sale Price of such security on such date shall be the fair market value
as mutually determined by the Company and the holders of a majority of the
Preferred Shares then outstanding. If the Company and the holders of Preferred
Shares are unable to agree upon the fair market value of the Common Stock, then
such dispute shall be resolved pursuant to Section 2(d)(iii) below. All such
determinations to be appropriately adjusted for any stock dividend, stock split
or other similar transaction during such period.
(vi) "COMMON STOCK DEEMED OUTSTANDING" means, at any given
time, the number of shares of Common Stock actually outstanding at such time,
plus the number of shares of Common Stock deemed to be outstanding pursuant to
Sections 2(f)(i)(A) and 2(f)(i)(B) hereof regardless of whether the Options or
Convertible Securities are actually exercisable at such time, but excluding any
shares of Common Stock owned or held by or for the account of the Company or
issuable upon conversion of the Preferred Shares or exercise of the Warrants (as
defined below).
(vii) "CONVERSION AMOUNT" means the sum of (1) the Additional
Amount (as defined above), and (2) $10,000.
(viii) "CONVERSION PERCENTAGE" means 100% on the Issuance Date;
provided that the Conversion Percentage then in effect shall be permanently
adjusted on the first
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day of every calendar month following the Issuance Date by decreasing the
Conversion Percentage then in effect by one percentage point (for example,
assuming that the Issuance Date was June 11, 2000, then on July 1, 2000 the
Conversion Percentage would be reduced from 100% to 99%, and on August 1, 2000
the Conversion Percentage would be reduced from 99% to 98% and so forth);
provided, further, that, except as provided below, the Conversion Percentage
shall never be less than 85%; and provided further, that solely during a Merger
Conversion Period (as defined in Section 8(b)), the Conversion Percentage shall
equal 80%, which Conversion Percentage upon the end of such Merger Conversion
Period shall be calculated as if such Merger Conversion Period never occurred.
(ix) "CONVERSION PRICE" means, as of any Conversion Date (as
defined below) or other date of determination, the product of (A) the Conversion
Percentage multiplied by (B) the lowest Closing Bid Price during the five (5)
consecutive trading days ending on and including such Conversion Date or other
date of determination; provided that in no event shall the Conversion Price
exceed the Fixed Conversion Price (as defined below), each in effect as of such
date and subject to adjustment as provided herein.
(x) "CONVERTIBLE SECURITIES" means any stock or securities (other
than Options) directly or indirectly convertible into or exchangeable or
exercisable for Common Stock.
(xi) "DIVIDEND CONVERSION PRICE" means, with respect to any
Dividend Date, that price which shall be computed as the product of (A) 95%
multiplied by (B) the arithmetic average of the Closing Sale Prices of the
Common Stock on each of the five (5) consecutive trading days immediately
preceding such Dividend Date.
(xii) "EXCLUDED SECURITIES" means (A) options to purchase shares
of Common Stock granted to consultants, provided (I) such options are approved
by the Board of Directors of the Company or an appropriately designated
committee of the Board of Directors, (II) the total number of options granted to
consultants during any 12-month period does not exceed 5% of the number of all
options granted pursuant to all Approved Stock Plans during the same period and
(III) the exercise price of such options is not less than the market price of
the Common Stock on the date of issuance of such options; (B) up to 250,000
shares of Common Stock to be issued as part of the consideration for the
acquisition of eParties, Inc., a Delaware corporation, or certain of its assets;
(C) the issuance of either shares of Common Stock or warrants to purchase Common
Stock at a purchase price or exercise price, respectively, not less than the
market price of the Common Stock on the date of issuance, in connection with any
strategic marketing, vendor, lease or similar arrangement (the primary purpose
of which is not to raise equity capital), provided that the number of shares of
Common Stock or shares subject to warrants which the Company may issue pursuant
to this subclause (C) during any calendar year shall not exceed 500,000 shares
of Common Stock (subject to adjustment for stock splits, stock dividends, stock
combinations and other similar transactions), provided that the Company shall be
permitted to carry forward any such shares not used pursuant to this subclause
(C) during the prior calendar year in subsequent calendar years; (D) the
issuance of up to 2,000,000 (subject to adjustment for stock splits, stock
dividends,
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stock combinations and other similar transactions) shares of Common Stock per
calendar year by the Company as consideration for mergers or consolidations or
the acquisition of businesses, products, licenses, or other assets of other
Persons or entities, provided that the Company shall be permitted to carry
forward any such shares not used pursuant to this subclause (D) during the prior
calendar year in subsequent calendar years; and (E) the issuance on or before
January 30, 2001, for a total consideration not to exceed $75 million, of (x)
Common Stock which (i) is issued for a consideration per share at a discount, if
any, which does not exceed 20% of market price of the Common Stock on the date
of issuance and (ii) is not issued concurrent with or in connection with any
other equity security or component, including, without limitation, rights to
receive additional equity securities, provided, however, that such issuance may
include the issuance of warrants which will be subject to the provisions of
Section 2(f)(i) hereof and which will not be subject to any adjustment, reset,
variable pricing or antidilution provisions, other than adjustments for events
described in Sections 2(f)(ii) and 4(a) hereof and (y) convertible preferred
stock with a stated value of not more than $75 million which (I) is convertible
at a fixed price which is not less than the market price of the Common Stock on
the date of issuance of such convertible preferred stock and which is not
subject to any adjustment, reset, variable pricing or antidilution provisions,
other than adjustments for events described in Sections 2(f)(ii) and 4(a)
hereof, (II) does not have any dividend, interest or accretion component in
excess of 7.0% per annum, (III) does not permit any conversions or redemptions
by the holder of such convertible preferred stock prior to January 31, 2001, and
(IV) is not issued concurrent with or in connection with any other equity
security or component, including, without limitation, rights to receive
additional equity securities, provided, however, that such issuance may include
the issuance of warrants which will be subject to the provisions of Section
2(f)(i) hereof and which warrants will not be subject to any adjustment, reset,
variable pricing or antidilution provisions, other than adjustments for events
described in Sections 2(f)(ii) and 4(a) hereof.
(xiii) "FIXED CONVERSION PRICE" means, with respect to any
Preferred Share, as of any Conversion Date or other date of determination,
$25.00, subject to adjustment as provided herein.
(xiv) "ISSUANCE DATE" means, with respect to each Preferred
Share, the date of issuance of the applicable Preferred Share.
(xv) "MATURITY DATE" means the date which is three (3) years
after the Issuance Date, unless extended pursuant to Section 2(d)(vii).
(xvi) "N" means the number of days from, but excluding, the last
Dividend Date with respect to which dividends, along with any Default Interest,
have been paid by the Company on the applicable Preferred Share, or the Issuance
Date if no Dividend Date has occurred, through and including the Conversion
Date, the Maturity Date or other date of determination for such Preferred Share,
as the case may be, for which such determination is being made.
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(xvii) "OPTIONS" means any rights, warrants or options to
subscribe for or purchase Common Stock or Convertible Securities.
(xviii) "PERSON" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
(xix) "PRINCIPAL MARKET" means the Nasdaq National Market, or if
the Common Stock is not traded on the Nasdaq National Market, then the principal
securities exchange or trading market for the Common Stock.
(xx) "REDEMPTION PERCENTAGE" means 100% on the Issuance Date;
provided that the Redemption Percentage then in effect shall be permanently
adjusted on the first day of every calendar month following the Issuance Date by
increasing the Redemption Percentage then in effect by one percentage point,
provided, further, that the Redemption Percentage shall never be greater than
124%.
(xxi) "REGISTRATION RIGHTS AGREEMENT" means that certain
registration rights agreement between the Company and the initial holders of the
Preferred Shares relating to the filing of a registration statement covering the
resale of the shares of Common Stock issuable upon conversion of the Preferred
Shares and exercise of the Warrants, as such agreement may be amended from time
to time as provided in such agreement.
(xxii) "SECURITIES PURCHASE AGREEMENT" means that certain
securities purchase agreement between the Company and the initial holders of the
Preferred Shares, as such agreement may be amended from time to time as provided
in such agreement.
(xxiii) "STATED VALUE" means $10,000.
(xxiv) "WARRANTS" means the warrants to purchase shares of Common
Stock issued by the Company pursuant to the Securities Purchase Agreement, as
such warrants may be amended from time to time as provided in such warrants.
(b) HOLDER'S CONVERSION RIGHT; MANDATORY REDEMPTION OR CONVERSION. Subject
to the provisions of Sections 5 and 9, at any time or times on or after the
Issuance Date, any holder of Preferred Shares shall be entitled to convert any
whole or fractional number of Preferred Shares into fully paid and nonassessable
shares of Common Stock in accordance with Section 2(d) at the Conversion Rate
(as defined below). If any Preferred Shares remain outstanding on the Maturity
Date, then, pursuant to Section 2(d)(vii), all such Preferred Shares shall be
converted at the Conversion Rate as of such date in accordance with Section 2(d)
or redeemed by the Company. The Company shall not issue any fraction of a share
of Common Stock upon any conversion. All shares of Common Stock (including
fractions thereof) issuable upon conversion of more than one Preferred Share by
a holder thereof shall be aggregated for purposes of determining whether the
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conversion would result in the issuance of a fraction of a share of Common
Stock. If, after the aforementioned aggregation, the issuance would result in
the issuance of a fraction of a share of Common Stock, the Company shall round
such fraction of a share of Common Stock up or down to the nearest whole share.
(c) CONVERSION. The number of shares of Common Stock issuable upon
conversion of each Preferred Share pursuant to Section 2(b) shall be determined
according to the following formula (the "CONVERSION RATE"):
CONVERSION AMOUNT
Conversion Price
(d) MECHANICS OF CONVERSION. The conversion of Preferred Shares shall be
conducted in the following manner:
(i) HOLDER'S DELIVERY REQUIREMENTS. To convert Preferred Shares into
shares of Common Stock on any date (the "CONVERSION DATE"), the holder thereof
shall (A) transmit by facsimile (or otherwise deliver), for receipt on or prior
to 11:59 p.m., New York City Time, on such date, a copy of an executed notice of
conversion in the form attached hereto as Exhibit I (the "CONVERSION NOTICE") to
the Company and (B) if required by Section 2(d)(viii), surrender to a common
carrier for delivery to the Company as soon as practicable following such date
the original certificates representing the Preferred Shares being converted (the
"PREFERRED STOCK CERTIFICATES") (or an indemnification undertaking with respect
to such shares in the case of their loss, theft or destruction).
(ii) COMPANY'S RESPONSE. Upon receipt by the Company of a copy of
a Conversion Notice, the Company shall (1) as soon as practicable, but in no
event later than within one (1) Business Day, send, via facsimile, a
confirmation of receipt of such Conversion Notice to such holder and the
Company's designated transfer agent (the "TRANSFER AGENT"), which confirmation
shall constitute an instruction to the Transfer Agent to process such Conversion
Notice in accordance with the terms herein and (2) on or before the second (2nd)
Business Day following the date of receipt by the Company of such Conversion
Notice (the "SHARE DELIVERY DATE") (A) provided the Transfer Agent is
participating in The Depository Trust Company ("DTC") Fast Automated Securities
Transfer Program and provided that the holder is eligible to receive shares
through DTC, credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account with
DTC through its Deposit Withdrawal Agent Commission system or (B) issue and
deliver to the address as specified in the Conversion Notice, a certificate,
registered in the name of the holder or its designee, for the number of shares
of Common Stock to which the holder shall be entitled. If the number of
Preferred Shares represented by the Preferred Stock Certificate(s) submitted for
conversion, as may be required pursuant to Section 2(d)(viii), is greater than
the number of Preferred Shares being converted, then the Company shall, as soon
as practicable and in no event later than three Business Days after receipt of
the Preferred Stock Certificate(s) (the "PREFERRED STOCK DELIVERY DATE") and
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at its own expense, issue and deliver to the holder a new Preferred Stock
Certificate representing the number of Preferred Shares not converted.
(iii) DISPUTE RESOLUTION. In the case of a dispute as to the
determination of the Closing Bid Price, Closing Sale Price or the arithmetic
calculation of the Conversion Rate, the Company shall instruct the Transfer
Agent to issue to the holder the number of shares of Common Stock that is not
disputed and shall transmit an explanation of the disputed determinations or
arithmetic calculations to the holder via facsimile within one (1) Business Day
of receipt of such holder's Conversion Notice or other date of determination. If
such holder and the Company are unable to agree upon the determination of the
Closing Bid Price, the Closing Sale Price or arithmetic calculation of the
Conversion Rate within two (2) Business Days of such disputed determination or
arithmetic calculation being transmitted to the holder, then the Company shall
within one (1) Business Day submit via facsimile (A) the disputed determination
of the Closing Bid Price or Closing Sale Price to an independent, reputable
investment bank selected by the Company from the list of approved investment
banks agreed to by the Company and the holders of the Preferred Shares on or
prior to the Issuance Date or (B) the disputed arithmetic calculation of the
Conversion Rate to the Company's independent, outside accountant. The Company
shall cause the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the Company and the holder
of the results no later than two (2) Business Days from the time it receives the
disputed determinations or calculations. Such investment bank's or accountant's
determination or calculation, as the case may be, shall be binding upon all
parties absent manifest error.
(iv) RECORD HOLDER. The person or persons entitled to receive the
shares of Common Stock issuable upon a conversion of Preferred Shares shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on the Conversion Date.
(v) COMPANY'S FAILURE TO TIMELY CONVERT.
(A) CASH DAMAGES. If (I) within five (5) Business Days after the
Company's receipt of the facsimile copy of a Conversion Notice the Company shall
fail to issue and deliver a certificate to a holder or credit such holder's
balance account with DTC for the number of shares of Common Stock to which such
holder is entitled upon such holder's conversion of Preferred Shares or (II)
within five (5) Business Days of the Company's receipt of a Preferred Stock
Certificate the Company shall fail to issue and deliver a new Preferred Stock
Certificate representing the number of Preferred Shares to which such holder is
entitled pursuant to Section 2(d)(ii), then in addition to all other available
remedies which such holder may pursue hereunder and under the Securities
Purchase Agreement (including indemnification pursuant to Section 8 thereof),
the Company shall pay additional damages to such holder for each day after the
Share Delivery Date such conversion is not timely effected and/or each day after
the Preferred Stock Delivery Date such Preferred Stock Certificate is not
delivered in an amount equal to 0.5% of the product of (I) the sum of the number
of shares of Common Stock not issued to the holder on or prior to the Share
Delivery Date and to which such holder is entitled and, in the event the
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Company has failed to deliver a Preferred Stock Certificate to the holder on or
prior to the Preferred Stock Delivery Date, the number of shares of Common Stock
issuable upon conversion of the Preferred Shares represented by such Preferred
Stock Certificate as of the Preferred Stock Delivery Date and (II) the Closing
Bid Price of the Common Stock on the Share Delivery Date, in the case of the
failure to deliver Common Stock, or the Preferred Stock Delivery Date, in the
case of failure to deliver a Preferred Stock Certificate. If the Company fails
to pay the additional damages set forth in this Section 2(d)(v) within five
Business Days of the date incurred, then the holder entitled to such payments
shall have the right at any time, so long as the Company continues to fail to
make such payments, to require the Company, upon written notice, to immediately
issue, in lieu of such cash damages, the number of shares of Common Stock equal
to the quotient of (X) the aggregate amount of the damages payments described
herein divided by (Y) the Conversion Price in effect on such Conversion Date as
specified by the holder in the Conversion Notice. The foregoing notwithstanding,
the damages set forth in this Section 2(d)(v)(A) shall be stayed with respect to
the number of shares of Common Stock and, if applicable, the Preferred Stock
Certificate for which there is a good faith dispute being resolved pursuant to,
and within the time periods provided for in, Section 2(d)(iii), pending the
resolution of such dispute.
(B) VOID CONVERSION NOTICE; ADJUSTMENT OF FIXED CONVERSION
PRICE. If for any reason a holder has not received all of the shares of Common
Stock prior to the tenth (10th) Business Day after the Share Delivery Date with
respect to a conversion of Preferred Shares, then the holder, upon written
notice to the Company, may void its Conversion Notice with respect to, and
retain or have returned, as the case may be, any Preferred Shares that have not
been converted pursuant to such holder's Conversion Notice; provided that the
voiding of a holder's Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of such
notice pursuant to Section 2(d)(v)(A) or otherwise. Thereafter, the Fixed
Conversion Price of any Preferred Shares returned or retained by the holder for
failure to timely convert shall be adjusted to the lesser of (I) the Fixed
Conversion Price as in effect on the date on which the holder voided the
Conversion Notice and (II) the lowest Closing Bid Price during the period
beginning on the Conversion Date and ending on the date such holder voided the
Conversion Notice, subject to further adjustment as provided in this Certificate
of Designations.
(C) CONVERSION FAILURE. If for any reason a holder has not
received all of the shares of Common Stock prior to the tenth (10th) Business
Day after the Share Delivery Date with respect to a conversion of Preferred
Shares (a "CONVERSION FAILURE"), then the holder, upon written notice to the
Company, may require that the Company redeem all Preferred Shares held by such
holder, including the Preferred Shares previously submitted for conversion and
with respect to which the Company has not delivered shares of Common Stock, in
accordance with Section 3. The foregoing notwithstanding, a holder's right to
require redemption pursuant to this Section 2(d)(v)(C) shall be stayed with
respect to those shares of Common Stock for which there is a good faith dispute
being resolved pursuant to, and within the time periods provided for in, Section
2(d)(iii), pending resolution of such dispute.
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(vi) PRO RATA CONVERSION. Subject to Section 16, in the event the
Company receives a Conversion Notice from more than one holder of Preferred
Shares for the same Conversion Date and the Company can convert some, but not
all, of such Preferred Shares, the Company shall convert from each holder of
Preferred Shares electing to have Preferred Shares converted at such time a pro
rata amount of such holder's Preferred Shares submitted for conversion based on
the number of Preferred Shares submitted for conversion on such date by such
holder relative to the number of Preferred Shares submitted for conversion on
such date.
(vii) MANDATORY REDEMPTION OR CONVERSION AT MATURITY AT COMPANY'S
OPTION. If any Preferred Shares remain outstanding on the Maturity Date, then
all such Preferred Shares, at the Company's option, either (i) shall be
converted at the Conversion Rate as of such date without the holders of such
Preferred Shares being required to give a Conversion Notice on the Maturity Date
(a "MATURITY DATE MANDATORY CONVERSION"), or (ii) shall be redeemed as of such
date for an amount in cash per Preferred Share (the "MATURITY DATE REDEMPTION
PRICE") equal to the Conversion Amount (a "MATURITY DATE MANDATORY REDEMPTION").
The Company shall be deemed to have elected a Maturity Date Mandatory Redemption
unless it delivers written notice to each holder of Preferred Shares at least 20
Business Days prior to the Maturity Date of its election to effect a Maturity
Date Mandatory Conversion. If the Company elects a Maturity Date Mandatory
Redemption, then on the Maturity Date the Company shall pay to each holder of
Preferred Shares outstanding on the Maturity Date, by wire transfer of
immediately available funds, an amount per Preferred Share equal to the Maturity
Date Redemption Price. If the Company elects a Maturity Date Mandatory
Redemption and fails to redeem all of the Preferred Shares outstanding on the
Maturity Date by payment of the Maturity Date Redemption Price, then in addition
to any remedy such holder of Preferred Shares may have under this Certificate of
Designations, the Securities Purchase Agreement and the Registration Rights
Agreement, (X) the applicable Maturity Date Redemption Price payable in respect
of such unredeemed Preferred Shares shall bear interest at the rate of 1.5% per
month (or if lower, the maximum amount allowed by applicable law), prorated for
partial months, until paid in full, and (Y) any holder of Preferred Shares shall
have the option to require the Company to convert any or all of such holder's
Preferred Shares that the Company elected to redeem under this Section 2(d)(vii)
and for which the Maturity Date Redemption Price (together with any interest
thereon) has not been paid into shares of Common Stock equal to the number which
results from dividing the Maturity Date Redemption Price (together with any
interest thereon) which has not been paid by the Conversion Price in effect on
the Maturity Date. Promptly following the Maturity Date, all holders of
Preferred Shares shall surrender all Preferred Stock Certificates, duly endorsed
for cancellation, to the Company or the Transfer Agent. If the Company has
elected a Maturity Date Mandatory Conversion or has failed to pay the Maturity
Date Redemption Price in a timely manner as described above, then the Maturity
Date shall be extended for any Preferred Shares for as long as (A) the
conversion of such Preferred Shares would violate the provisions of Section 5,
(B) a Triggering Event shall have occurred and be continuing, or (C) an event
shall have occurred and be continuing which with the passage of time and the
failure to cure would result in a Triggering Event.
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(viii) BOOK-ENTRY. Notwithstanding anything to the contrary set forth
herein, upon conversion of Preferred Shares in accordance with the terms hereof,
the holder thereof shall not be required to physically surrender the certificate
representing the Preferred Shares to the Company unless the full number of
Preferred Shares represented by the certificate are being converted. The holder
and the Company shall maintain records showing the number of Preferred Shares so
converted and the dates of such conversions or shall use such other method,
reasonably satisfactory to the holder and the Company, so as not to require
physical surrender of the certificate representing the Preferred Shares upon
each such conversion. In the event of any dispute or discrepancy, such records
of the Company establishing the number of Preferred Shares to which the record
holder is entitled shall be controlling and determinative in the absence of
manifest error. Notwithstanding the foregoing, if Preferred Shares represented
by a certificate are converted as aforesaid, the holder may not transfer the
certificate representing the Preferred Shares unless the holder first physically
surrenders the certificate representing the Preferred Shares to the Company,
whereupon the Company will forthwith issue and deliver upon the order of the
holder a new certificate of like tenor, registered as the holder may request,
representing in the aggregate the remaining number of Preferred Shares
represented by such certificate. The holder and any assignee, by acceptance of a
certificate, acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of any Preferred Shares, the number of Preferred
Shares represented by such certificate may be less than the number of Preferred
Shares stated on the face thereof. Each certificate for Preferred Shares shall
bear the following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE
TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS RELATING TO
THE PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE,
INCLUDING SECTION 2(d)(viii) THEREOF. THE NUMBER OF PREFERRED
SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS THAN THE
NUMBER OF PREFERRED SHARES STATED ON THE FACE HEREOF PURSUANT
TO SECTION 2(d)(viii) OF THE CERTIFICATE OF DESIGNATIONS
RELATING TO THE PREFERRED SHARES REPRESENTED BY THIS
CERTIFICATE.
(e) TAXES. The Company shall pay any and all documentary, stamp,
transfer and other similar taxes that may be payable with respect to the
issuance and delivery of Common Stock upon the conversion of Preferred Shares.
(f) ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price will be
subject to adjustment from time to time as provided in this Section 2(f).
(i) ADJUSTMENT OF FIXED CONVERSION PRICE UPON ISSUANCE OF COMMON
STOCK. If and whenever on or after the date of issuance of the Preferred Shares,
the Company issues or sells, or in accordance with this Section 2(f) is deemed
to have issued or sold, any shares
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of Common Stock (including the issuance or sale of shares of Common Stock owned
or held by or for the account of the Company, but excluding (A) the Excluded
Securities and (B) shares of Common Stock deemed to have been issued by the
Company in connection with an Approved Stock Plan or upon conversion of the
Preferred Shares or exercise of the Warrants) for a consideration per share less
than a price (the "APPLICABLE PRICE") equal to the Fixed Conversion Price in
effect immediately prior to such time, then immediately after such issue or
sale, the Fixed Conversion Price then in effect shall be reduced to an amount
equal to the product of (x) the Fixed Conversion Price in effect immediately
prior to such issue or sale and (y) the quotient of (1) the sum of (I) the
product of the Applicable Price and the number of shares of Common Stock Deemed
Outstanding immediately prior to such issue or sale and (II) the consideration,
if any, received by the Company upon such issue or sale, divided by (2) the
product of (I) the Applicable Price multiplied by (II) the number of shares of
Common Stock Deemed Outstanding immediately after such issue or sale; provided,
however, that the Fixed Conversion Price shall not be reduced pursuant to this
Section 2(f)(i) at any time that the amount of such reduction would be an amount
less than 2% of the Fixed Conversion Price immediately preceding such reduction,
but any such amount shall be carried forward and a reduction in the Fixed
Conversion Price pursuant to this Section 2(f)(i) shall be made when those
amounts which have been carried forward pursuant to this proviso together with
the most recent reduction pursuant to this Section 2(f)(i) shall aggregate 2% or
more of the Fixed Conversion Price immediately preceding the last such
reduction. For purposes of determining the adjusted Fixed Conversion Price under
this Section 2(f)(i), the following shall be applicable:
(A) ISSUANCE OF OPTIONS. If the Company in any manner grants or
sells any Options and the lowest price per share for which one share of Common
Stock is issuable upon the exercise of any such Option or upon conversion,
exchange or exercise of any Convertible Securities issuable upon exercise of
such Option is less than the Applicable Price, then such share of Common Stock
shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per
share. For purposes of this Section 2(f)(i)(A), the "lowest price per share for
which one share of Common Stock is issuable upon the exercise of any such Option
or upon conversion, exchange or exercise of any Convertible Securities issuable
upon exercise of such Option" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon granting or sale of the Option, upon exercise of
the Option and upon conversion, exchange or exercise of any Convertible Security
issuable upon exercise of such Option. No further adjustment of the Fixed
Conversion Price shall be made upon the actual issuance of such Common Stock or
of such Convertible Securities upon the exercise of such Options or upon the
actual issuance of such Common Stock upon conversion, exchange or exercise of
such Convertible Securities.
(B) ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any
manner issues or sells any Convertible Securities and the lowest price per share
for which one share of Common Stock is issuable upon such conversion, exchange
or exercise thereof is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the issuance of sale of such Convertible
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Securities for such price per share. For the purposes of this Section
2(f)(i)(B), the "lowest price per share for which one share of Common Stock is
issuable upon such conversion, exchange or exercise" shall be equal to the sum
of the lowest amounts of consideration (if any) received or receivable by the
Company with respect to any one share of Common Stock upon the issuance or sale
of the Convertible Security and upon the conversion, exchange or exercise of
such Convertible Security. No further adjustment of the Fixed Conversion Price
shall be made upon the actual issuance of such Common Stock upon conversion,
exchange or exercise of such Convertible Securities, and if any such issue or
sale of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Fixed Conversion Price had been or are to be made
pursuant to other provisions of this Section 2(f)(i), no further adjustment of
the Fixed Conversion Price shall be made by reason of such issue or sale.
(C) CHANGE IN OPTION PRICE OR RATE OF CONVERSION. If the purchase
or exercise price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion, exchange or exercise of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable or exercisable for Common Stock changes at any time, the Fixed
Conversion Price in effect at the time of such change shall be adjusted to the
Fixed Conversion Price which would have been in effect at such time had such
Options or Convertible Securities provided for such changed purchase price,
additional consideration or changed conversion rate, as the case may be, at the
time initially granted, issued or sold. For purposes of this Section 2(f)(i)(C),
if the terms of any Option or Convertible Security that was outstanding as of
the date of issuance of the Preferred Shares are changed in the manner described
in the immediately preceding sentence, then such Option or Convertible Security
and the Common Stock deemed issuable upon exercise, conversion or exchange
thereof shall be deemed to have been issued as of the date of such change. No
adjustment shall be made if such adjustment would result in an increase of the
Fixed Conversion Price then in effect.
(D) CALCULATION OF CONSIDERATION RECEIVED. In case any Option is
issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the Options
will be deemed to have been issued for a consideration of $0.01. If any Common
Stock, Options or Convertible Securities are issued or sold or deemed to have
been issued or sold for cash, the consideration received therefor will be deemed
to be the gross amount received by the Company therefor, less expenses in excess
of 5% of the gross amount received. If any Common Stock, Options or Convertible
Securities are issued or sold for a consideration other than cash, the amount of
the consideration other than cash received by the Company will be the fair value
of such consideration, except where such consideration consists of marketable
securities, in which case the amount of consideration received by the Company
will be the arithmetic average of the Closing Bid Prices of such securities
during the 10 consecutive trading days ending on the date of receipt of such
securities. If any Common Stock, Options or Convertible Securities are issued to
the owners of the non-surviving entity in connection with any merger in which
the Company is the surviving entity, the amount of consideration therefor will
be
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deemed to be the fair value of such portion of the net assets and business of
the non-surviving entity as is attributable to such Common Stock, Options or
Convertible Securities, as the case may be. The fair value of any consideration
other than cash or securities will be determined jointly by the Company and the
holders of a majority of the Preferred Shares then outstanding. If such parties
are unable to reach agreement within 10 days after the occurrence of an event
requiring valuation (the "VALUATION EVENT"), the fair value of such
consideration will be determined within five Business Days after the tenth
(10th) day following the Valuation Event by an independent, reputable appraiser
selected by the Company from the list of approved appraisers agreed to by the
Company and the holders of the Preferred Shares on or prior to the Issuance
Date. The determination of such appraiser shall be deemed binding upon all
parties absent manifest error and the fees and expenses of such appraiser shall
be borne by the Company.
(E) RECORD DATE. If the Company takes a record of the holders of
Common Stock for the purpose of entitling them (1) to receive a dividend or
other distribution payable in Common Stock, Options or Convertible Securities or
(2) to subscribe for or purchase Common Stock, Options or Convertible
Securities, then such record date will be deemed to be the date of the issue or
sale of the shares of Common Stock deemed to have been issued or sold upon the
declaration of such dividend or the making of such other distribution or the
date of the granting of such right of subscription or purchase, as the case may
be. If after the occurrence of such record date the transaction or event for
which such record date was set is abandoned or terminated, then any adjustments
resulting from this Section 2(f)(i)(E) as it relates to such terminated or
abandoned transaction or event shall be reversed as if such record date had
never occurred.
(ii) ADJUSTMENT OF FIXED CONVERSION PRICE UPON SUBDIVISION OR
COMBINATION OF COMMON STOCK. If the Company at any time subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the Fixed
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Company at any time combines (by combination,
reverse stock split or otherwise) one or more classes of its outstanding shares
of Common Stock into a smaller number of shares, the Fixed Conversion Price in
effect immediately prior to such combination will be proportionately increased.
(iii) HOLDER'S RIGHT OF ALTERNATIVE CONVERSION PRICE FOLLOWING
ISSUANCE OF CONVERTIBLE SECURITIES. If the Company in any manner issues or sells
Convertible Securities or Options that are convertible into or exchangeable or
exercisable for Common Stock at a price which varies or may vary with the market
price of the Common Stock, including by way of one or more reset(s) to a fixed
price (each of the formulations for such variable price being herein referred to
as, a "VARIABLE PRICE"), and such Variable Price is not calculated using the
same formula used to calculate the Conversion Price in effect immediately prior
to the time of such issue or sale, the Company shall provide written notice
thereof via facsimile and overnight courier to each holder of the Preferred
Shares ("VARIABLE NOTICE") on the date of issuance of such Convertible
Securities or Options. If a holder of the Preferred Shares then outstanding
provides written notice to the Company via facsimile and overnight courier (the
"VARIABLE PRICE ELECTION
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NOTICE") within 10 Business Days of receiving a Variable Notice that such holder
desires to replace the Conversion Price then in effect with the Variable Price
described in such Variable Notice, then, from and after the date of the
Company's receipt of the Variable Price Election Notice, the Conversion Price
will automatically be replaced with the Variable Price for the Preferred Shares
held by such holder. In the event that a holder of Preferred Shares delivers a
Conversion Notice after the Company's issuance of Convertible Securities with a
Variable Price but before such holder's receipt of the Company's Variable
Notice, then such holder shall have the option by written notice to the Company
to rescind such Conversion Notice or to have the Conversion Price be equal to
such Variable Price for the conversion effected by such Conversion Notice.
(iv) ADJUSTMENT OF THE FIXED CONVERSION PRICE UPON MAJOR CORPORATE
EVENT ANNOUNCEMENT. In the event (A) the Company makes a public announcement
that it intends to consolidate or merge with or into another Person or engage in
a business combination involving the issuance or exchange of more than 50% of
the Company's outstanding Common Stock, (B) the Company makes a public
announcement that it intends to sell or transfer all or substantially all of the
Company's assets, (C) any Person (including the Company) publicly announces a
purchase, tender or exchange offer for more than 50% of the Company's
outstanding Common Stock, or (D) any Person (including the Company) makes a
public announcement of a pending, proposed or intended event which would
constitute a change of control as defined by Section 13.4(b) of the Indenture
for the 6.25% Convertible Subordinated Notes due 2004, dated as of December 6,
1999, by and between eToys and U.S. Bank Trust National Association, as debt
trustee (the "ETOYS INDENTURE") (the transactions described in clauses (A), (B),
(C) and (D) above are hereinafter referred to as "MAJOR CORPORATE EVENTS" and
the date of the announcement referred to in clause (A), (B), (C) or (D) is
hereinafter referred to as the "ANNOUNCEMENT DATE"), then the Fixed Conversion
Price shall, effective upon the Announcement Date and continuing through and
including the Adjusted Conversion Price Termination Date (as defined below), be
equal to the Conversion Price which would have been applicable for a conversion
by the holder on the Announcement Date. From and after the Adjusted Conversion
Price Termination Date, the Conversion Price shall be determined as set forth in
Section 2. For purposes hereof, "ADJUSTED CONVERSION PRICE TERMINATION DATE"
shall mean, with respect to any proposed Major Corporate Event for which a
public announcement as contemplated by this Section 2(f)(iv) has been made, the
date upon which the Company or other Person (in the case of clause (C) or (D)
above) consummates or publicly announces the termination or abandonment of the
proposed Major Corporate Event which was the subject of the previous public
announcement.
(v) OTHER EVENTS. If any event occurs of the type contemplated by the
provisions of this Section 2(f) (as determined in good faith by the board of
directors of the Company) but not expressly provided for by such provisions
(including, without limitation, the granting of stock appreciation rights,
phantom stock rights or other rights with equity features), then the Company's
Board of Directors will make an appropriate adjustment in the Conversion Price
so as to protect the rights of the holders of the Preferred Shares; provided
that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 2(f).
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(vi) NOTICES.
(A) Immediately upon any adjustment of the Conversion Price
pursuant to this Section 2(f), the Company will give written notice thereof to
each holder of Preferred Shares, setting forth in reasonable detail, and
certifying, the calculation of such adjustment.
(B) The Company will give written notice to each holder of
Preferred Shares at least ten (10) Business Days prior to the date on which the
Company closes its books or takes a record (I) with respect to any dividend or
distribution upon the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock or (III) for determining rights to
vote with respect to any Organic Change (as defined in Section 4(a)),
dissolution or liquidation, provided that such information shall be made known
to the public prior to or in conjunction with such notice being provided to such
holder.
(C) The Company will also give written notice to each holder of
Preferred Shares at least ten (10) Business Days prior to the date on which any
Organic Change, dissolution or liquidation will take place, provided that such
information shall be made known to the public prior to or in conjunction with
such notice being provided to such holder.
(3) REDEMPTION AT OPTION OF HOLDERS.
(a) REDEMPTION OPTION UPON TRIGGERING EVENT. In addition to
all other rights of the holders of Preferred Shares contained herein, after a
Triggering Event (as defined below), each holder of Preferred Shares shall have
the right, at such holder's option, to require the Company to redeem all or a
portion of such holder's Preferred Shares at a price per Preferred Share equal
to the greater of (i) the sum of (y) 125% of the Stated Value plus (z) the
Additional Amount and (ii) the product of (A) the Conversion Rate in effect at
such time as such holder delivers a Notice of Redemption at Option of Buyer (as
defined below) and (B) the Closing Sale Price of the Common Stock on the trading
day immediately preceding such Triggering Event on which the Principal Market is
open for trading or, if no Closing Sale Price is reported by the Principal
Market on such trading day, then the most recently reported Closing Sale Price
(the "REDEMPTION PRICE").
(b) "TRIGGERING EVENT". A "TRIGGERING EVENT" shall be deemed to have
occurred at such time as any of the following events:
(i) the failure of the applicable Registration Statement to be
declared effective by the Securities and Exchange Commission (the "SEC") on or
prior to the date that is 150 days after the Issuance Date;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights Agreement,
except for days during any Allowable
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Grace Period (as defined in the Registration Rights Agreement), the
effectiveness of the Registration Statement lapses for any reason (including,
without limitation, the issuance of a stop order) or is unavailable to the
holder of the Preferred Shares for sale of all of the Registrable Securities (as
defined in the Registration Rights Agreement) in accordance with the terms of
the Registration Rights Agreement, and such lapse or unavailability continues
for a period of 10 consecutive trading days or for more than an aggregate of 20
trading days in any 365-day period (other than days during an Allowable Grace
Period);
(iii) the suspension from trading or failure of the Common Stock
to be listed on the Nasdaq National Market or The New York Stock Exchange, Inc.
for a period of five (5) consecutive trading days or for more than an aggregate
of 10 trading days in any 365-day period;
(iv) the Company's notice or the Transfer Agent's notice, at the
Company's direction, to any holder of Preferred Shares, including by way of
public announcement, at any time, of its intention not to comply with a request
for conversion of any Preferred Shares into shares of Common Stock that is
tendered in accordance with the provisions of this Certificate of Designations;
provided, however, that this Triggering Event will not be applicable if the
Company is unable to issue shares upon receipt of a Conversion Notice pursuant
to the requirements of Section 5 or Section 16 and the Company or its Transfer
Agent, at the Company's direction, has provided a notice to that effect to such
holder;
(v) a Conversion Failure (as defined in Section 2(d)(v)(C));
(vi) upon the Company's receipt of a Conversion Notice, provided
that such notice is received on or after the earlier of (A) the occurrence of
the next annual meeting of the stockholders of the Company at which the Company
fails to receive Stockholder Approval (as defined in the Securities Purchase
Agreement) and (B) September 30, 2000, the Company shall not be obligated to
issue shares of Common Stock upon such conversion due to the provisions of
Section 16; or
(vii) unless otherwise provided for under Sections 3(b)(i)
through 3(b)(vi) above, the Company breaches any representation, warranty,
covenant or other term or condition of the Securities Purchase Agreement (except
for a breach of Sections 4(e), 9(j) or 9(k) of the Securities Purchase
Agreement), the Registration Rights Agreement (except for a breach of Sections
3(d), 3(r), 8(b) or 11(i) of the Registration Rights Agreement), the Warrants,
this Certificate of Designations or any other agreement, document, certificate
or other instrument delivered in connection with the transactions contemplated
thereby and hereby, except to the extent that such breach would not have a
Material Adverse Effect (as defined in Section 3(a) of the Securities Purchase
Agreement) and except, in the case of a breach of a covenant which is curable,
only if such breach continues for a period of at least 10 Business Days. For the
purpose of clarification, any provision which requires action to be taken within
a specific period of time or prior to a given date shall be considered a
covenant which, solely for purposes of determining the
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applicability of this Section 3(b)(vii), is curable and the 10 Business Day
period referred to in the preceding sentence of this Section 3(b)(vii) shall
commence if such action has not taken place at the end of such specified period
of time or on such date during or by which such action was required to be taken.
(c) MECHANICS OF REDEMPTION AT OPTION OF BUYER. Within one (1)
Business Day after the occurrence of a Triggering Event, the Company shall
deliver written notice thereof via facsimile and overnight courier ("NOTICE OF
TRIGGERING EVENT") to each holder of Preferred Shares. At any time after the
earlier of a holder's receipt of a Notice of Triggering Event and such holder
becoming aware of a Triggering Event, any holder of Preferred Shares then
outstanding may require the Company to redeem up to all of such holder's
Preferred Shares by delivering written notice thereof via facsimile and
overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER") to the Company,
which Notice of Redemption at Option of Buyer shall indicate the number of
Preferred Shares that such holder is electing to redeem.
(d) PAYMENT OF REDEMPTION PRICE. Upon the Company's receipt of a
Notice(s) of Redemption at Option of Buyer from any holder of Preferred Shares,
the Company shall immediately notify each holder of Preferred Shares by
facsimile of the Company's receipt of such notice(s). The Company shall deliver
the applicable Redemption Price to a holder which delivers a Notice of
Redemption at Option of Buyer within five Business Days after the Company's
receipt of a Notice of Redemption at Option of Buyer; provided that, if required
by Section 2(d)(viii), a holder's Preferred Stock Certificates shall have been
delivered to the Transfer Agent. If the Company is unable to redeem all of the
Preferred Shares submitted for redemption, the Company shall (i) redeem a pro
rata amount from each holder of Preferred Shares based on the number of
Preferred Shares submitted for redemption by such holder relative to the total
number of Preferred Shares submitted for redemption by all holders of Preferred
Shares and (ii) in addition to any remedy such holder of Preferred Shares may
have under this Certificate of Designations and the Securities Purchase
Agreement, pay to each holder interest at the rate of 1.5% per month (or if
lower, the maximum amount allowed by applicable law) (prorated for partial
months) in respect of each unredeemed Preferred Share until paid in full.
(e) VOID REDEMPTION. In the event that the Company does not pay the
Redemption Price within the time period set forth in Section 3(d), at any time
thereafter and until the Company pays such unpaid applicable Redemption Price in
full, a holder of Preferred Shares shall have the option (the "VOID OPTIONAL
REDEMPTION OPTION") to, in lieu of redemption, require the Company to promptly
return to such holder any or all of the Preferred Shares that were submitted for
redemption by such holder under this Section 3 and for which the applicable
Redemption Price (together with any interest thereon) has not been paid, by
sending written notice thereof to the Company via facsimile (the "VOID OPTIONAL
REDEMPTION NOTICE"). Upon the Company's receipt of such Void Optional Redemption
Notice, (i) the Notice of Redemption at Option of Buyer shall be null and void
with respect to those Preferred Shares subject to the Void Optional Redemption
Notice, (ii) the Company shall immediately return any Preferred Shares subject
to the Void Optional Redemption Notice, and (iii) the Fixed Conversion Price of
such
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returned Preferred Shares shall be adjusted to the lesser of (A) the Fixed
Conversion Price as in effect on the date on which the Void Optional Redemption
Notice is delivered to the Company and (B) the lowest Closing Bid Price of the
Common Stock during the period beginning on the date on which the Notice of
Redemption at Option of Buyer is delivered to the Company and ending on the date
on which the Void Optional Redemption Notice is delivered to the Company.
(f) DISPUTES; MISCELLANEOUS. In the event of a dispute as to the
determination of the arithmetic calculation of the Redemption Price, such
dispute shall be resolved pursuant to Section 2(d)(iii) above with the term
"Redemption Price" being substituted for the term "Conversion Rate". A holder's
delivery of a Void Optional Redemption Notice and exercise of its rights
following such notice shall not effect the Company's obligations to make any
payments which have accrued prior to the date of such notice. In the event of a
redemption pursuant to this Section 3 of less than all of the Preferred Shares
represented by a particular Preferred Stock Certificate, the Company shall
promptly cause to be issued and delivered to the holder of such Preferred Shares
a Preferred Stock Certificate representing the remaining Preferred Shares which
have not been redeemed, if necessary.
(4) OTHER RIGHTS OF HOLDERS.
(a) REORGANIZATION, RECLASSIFICATION, CONSOLIDATION, MERGER OR SALE.
Any recapitalization, reorganization, reclassification, consolidation, merger,
sale of all or substantially all of the Company's assets to another Person or
other transaction which is effected in such a way that holders of Common Stock
are entitled to receive (either directly or upon subsequent liquidation) stock,
securities or assets with respect to or in exchange for Common Stock is referred
to herein as "ORGANIC CHANGE." Prior to the consummation of any (i) sale of all
or substantially all of the Company's assets to an acquiring Person or (ii)
other Organic Change following which the Company is not a surviving entity, the
Company will secure from the Person purchasing such assets or the successor
resulting from such Organic Change (in each case, the "ACQUIRING ENTITY") a
written agreement (in form and substance reasonably satisfactory to the holders
of a majority of the Preferred Shares then outstanding) to deliver to each
holder of Preferred Shares in exchange for such shares, a security of the
Acquiring Entity evidenced by a written instrument substantially similar in form
and substance to the Preferred Shares (including, without limitation, having a
stated value and liquidation preference equal to the Stated Value and the
Liquidation Preference of the Preferred Shares held by such holder) and
reasonably satisfactory to the holders of a majority of the Preferred Shares
then outstanding. Prior to the consummation of any other Organic Change, the
Company shall make appropriate provision (in form and substance reasonably
satisfactory to the holders of a majority of the Preferred Shares then
outstanding) to insure that each of the holders of the Preferred Shares will
thereafter have the right to acquire and receive in lieu of or in addition to
(as the case may be) the shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's Preferred Shares
such shares of stock, securities or assets that would have been issued or
payable in such Organic Change with respect to or in exchange for the number of
shares of Common Stock which would have been acquirable and receivable upon the
conversion of such holder's Preferred Shares as of the date of such Organic
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Change (without taking into account any limitations or restrictions on the
convertibility of the Preferred Shares). Notwithstanding the foregoing, the
provisions of this Section 4(a) shall not apply to any Preferred Shares, which,
prior to or concurrent with the consummation of the Organic Change, have been
redeemed in accordance with Section 4(b) or 8(a), have been converted in
accordance with Section 8(b) or have been converted by the holder.
(b) OPTIONAL REDEMPTION UPON CHANGE OF CONTROL. In addition to the
rights of the holders of Preferred Shares under Section 4(a) and except with
respect to Preferred Shares as to which the Company has properly made a
Merger Conversion Election pursuant to Section 8(b), upon a Change of Control
(as defined below) of the Company each holder of Preferred Shares shall have
the right, at such holder's option, to require the Company to redeem all or a
portion of such holder's Preferred Shares at a price per Preferred Share
equal to (A) 125% of the Stated Value plus (B) the Additional Amount ("CHANGE
OF CONTROL REDEMPTION PRICE"). No sooner than 60 days nor later than 10 days
prior to the consummation of a Change of Control, but not prior to the public
announcement of such Change of Control, the Company shall deliver written
notice thereof via facsimile and overnight courier (a "NOTICE OF CHANGE OF
CONTROL") to each holder of Preferred Shares; provided, however, if such
potential Change of Control is the result of an unsolicited tender offer made
to the holders of more than 50% of the outstanding shares of Common Stock,
then such Notice of Change of Control shall be delivered within two (2)
Business Days of such tender offer being made. At any time during the period
beginning after receipt of a Notice of Change of Control (or, in the event a
Notice of Change of Control is not delivered at least 10 days prior to a
Change of Control, at any time on or after the date which is 10 days prior to
a Change of Control) and ending on the date of such Change of Control, any
holder of the Preferred Shares then outstanding may require the Company to
redeem all or a portion of the holder's Preferred Shares then outstanding by
delivering written notice thereof via facsimile and overnight courier (a
"NOTICE OF REDEMPTION UPON CHANGE OF CONTROL") to the Company, which Notice
of Redemption Upon Change of Control shall indicate (i) the number of
Preferred Shares that such holder is submitting for redemption, and (ii) the
applicable Change of Control Redemption Price, as calculated pursuant to this
Section 4(b). Upon the Company's receipt of a Notice(s) of Redemption Upon
Change of Control from any holder of Preferred Shares, the Company shall
promptly, but in no event later than two (2) Business Days following such
receipt, notify each holder of Preferred Shares by facsimile of the Company's
receipt of such Notice(s) of Redemption Upon Change of Control. The Company
shall deliver the applicable Change of Control Redemption Price
simultaneously with the consummation of the Change of Control; provided that,
if required by Section 2(d)(viii), a holder's Preferred Stock Certificates
shall have been so delivered to the Company. Payments provided for in this
Section 4(b) shall have priority to payments to other stockholders in
connection with a Change of Control. For purposes of this Section 4(b),
"CHANGE OF CONTROL" means (i) the consolidation, merger or other business
combination of the Company with or into another Person (other than (A) a
consolidation, merger or other business combination in which holders of the
Company's voting power immediately prior to the transaction continue after
the transaction to hold, directly or indirectly, the voting power of the
surviving entity or entities necessary to elect a majority of the members of
the board of directors (or their equivalent if other than a corporation) of
such entity or entities, or (B) pursuant to a migratory merger effected solely
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for the purpose of changing the jurisdiction of incorporation of the Company),
(ii) the sale or transfer of all or substantially all of the Company's assets,
(iii) a purchase, tender or exchange offer made to and accepted by the holders
of more than 50% of the outstanding shares of Common Stock, or (iv) the
occurrence of an event which constitutes a change of control as defined by
Section 13.4(b) of the eToys Indenture.
(c) FORCED DELISTING. If a redemption voided pursuant to Section 3(e)
was caused by a Triggering Event involving the Company's inability to issue
Conversion Shares because of the Exchange Cap (as defined in Section 16), and if
so directed in one or more Void Optional Redemption Notices by the holders of at
least two-thirds (2/3) of the Preferred Shares then outstanding, including
Preferred Shares submitted for redemption pursuant to Section 3 with respect to
which the applicable Redemption Price has not been paid the Company shall
promptly as practicable delist the Common Stock from the exchange or automated
quotation system on which the Common Stock is traded and have the Common Stock,
at such holders' option, traded on the electronic bulletin board or the "pink
sheets."
(d) PURCHASE RIGHTS. If at any time the Company grants, issues or
sells any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "PURCHASE RIGHTS"), then the holders of Preferred Shares will
be entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon complete
conversion of the Preferred Shares (without taking into account any limitations
or restrictions on the convertibility of the Preferred Shares) immediately
before the date on which a record is taken for the grant, issuance or sale of
such Purchase Rights, or, if no such record is taken, the date as of which the
record holders of Common Stock are to be determined for the grant, issue or sale
of such Purchase Rights.
(5) LIMITATION ON BENEFICIAL OWNERSHIP. The Company shall not effect any
conversion of Preferred Shares, and no holder of Preferred Shares shall have the
right to convert any Preferred Shares, to the extent that after giving effect to
such conversion, the beneficial owner of such shares (together with such
Person's affiliates) would have acquired, through conversion of Preferred Shares
or otherwise, beneficial ownership of a number of shares of Common Stock during
the 60- day period ending on and including the Conversion Date of such
conversion (the "60 DAY PERIOD"), that, when added to the number of shares of
Common Stock beneficially owned by such Person (together with such Person's
affiliates) at the beginning of the 60 Day Period, exceeds 9.99% of the number
of shares of Common Stock outstanding immediately after giving effect to such
conversion. For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by a Person and its affiliates shall include the
number of shares of Common Stock issuable upon conversion of the Preferred
Shares with respect to which the determination of such sentence is being made,
but shall exclude the number of shares of Common Stock which would be issuable
upon (A) conversion of the remaining, nonconverted Preferred Shares beneficially
owned by such Person or any of its affiliates and (B) exercise or conversion of
the unexercised or unconverted portion of any other securities of the Company
(including, without
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limitation, any warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by such Person
or any of its affiliates. Except as set forth in the preceding sentence, for
purposes of this Section 5, beneficial ownership shall be calculated in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended. For any reason at any time, upon the written or oral request of any
holder, the Company shall within two Business Days confirm orally and in writing
to any such holder the number of shares of Common Stock then outstanding. In any
case, the number of outstanding shares of Common Stock shall be determined after
giving effect to the conversion or exercise of securities of the Company,
including the Preferred Shares and exercise of the Warrants, by such holder or
its affiliates since the date as of which such number of outstanding shares of
Common Stock was reported.
(6) REDEMPTION AT THE COMPANY'S ELECTION. After the Issuance Date, the
Company shall have the right, in its sole discretion, to require that some or
all of the outstanding Preferred Shares be redeemed ("REDEMPTION AT COMPANY'S
ELECTION"), for consideration per Preferred Share equal to the product of (A)
the Redemption Percentage multiplied by (B) the Conversion Amount for such
Preferred Share (the "COMPANY'S ELECTION REDEMPTION PRICE"); provided that the
Conditions to Redemption at the Company's Election (as set forth below) are
satisfied as of the Company's Election Redemption Date (as defined below) or
waived by all the holders of the Preferred Shares then outstanding. The Company
may exercise its right to Redemption at Company's Election only by providing
each holder of Preferred Shares written notice ("NOTICE OF REDEMPTION AT
COMPANY'S ELECTION") at least 10 Business Days but not more than 20 Business
Days prior to the date of consummation of such redemption ("COMPANY'S ELECTION
REDEMPTION DATE"). The date on which each of such holders of the Preferred
Shares actually receives the Notice of Redemption at the Company's Election is
referred to herein as the "REDEMPTION AT COMPANY'S ELECTION NOTICE DATE". If the
Company elects to require redemption of some, but not all, of the Preferred
Shares then outstanding, the Company shall require redemption of an amount from
each holder of such Preferred Shares equal to the product of (I) the total
number of Preferred Shares which the Company has elected to redeem multiplied by
(II) a fraction, the numerator of which is the number of Preferred Shares
initially purchased by such holder and the denominator of which is the total
number of Preferred Shares purchased on the Issuance Date (such fraction with
respect to each holder being referred to as its "ALLOCATION PERCENTAGE", and
such amount with respect to each holder being referred to herein as its "PRO
RATA REDEMPTION AMOUNT"). In the event that any initial holder of the Preferred
Shares shall sell or otherwise transfer any of such holder's Preferred Shares,
the transferee shall be allocated a pro rata portion of such holder's Allocation
Percentage. The Company's Notice of Redemption at Company's Election shall
indicate (x) the aggregate number of Preferred Shares the Company has elected to
redeem from all holders of Preferred Shares, (y) the date selected by the
Company for the Company's Election Redemption Date, and (z) each holder's Pro
Rata Redemption Amount of the Preferred Shares selected for redemption. If the
Company has exercised its right of Redemption at Company's Election and the
conditions of this Section 6, including the Conditions to Redemption at
Company's Election, have been satisfied, then each holder's Pro Rata Redemption
Amount of the Preferred Shares selected for redemption which remain outstanding
on the Company's Election Redemption Date shall be
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redeemed as of the Company's Election Redemption Date by payment by the Company
to each such holder of Preferred Shares of the Company's Election Redemption
Price for each Preferred Share. If required by Section 2(d)(viii), all such
holders of the Preferred Shares being redeemed shall thereupon and within two
(2) Business Days after the Company's Election Redemption Date, or such earlier
date as the Company and each such holder of Preferred Shares mutually agree,
surrender all Preferred Shares being redeemed on such date to the Company. If
the Company fails to pay the full Company's Election Redemption Price on the
Company's Election Redemption Date with respect to a Preferred Share selected
for redemption, then the Redemption at Company's Election shall be null and void
with respect to such Preferred Share and the Holder shall be entitled to all the
rights of a holder of outstanding Preferred Shares. "CONDITIONS TO REDEMPTION AT
THE COMPANY'S ELECTION" means the following conditions: (i) on each day during
the period beginning on the Issuance Date and ending on and including the
Company's Election Redemption Date, the Company shall have delivered Conversion
Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise
of the Warrants to the holders on a timely basis as set forth in Section
2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants, respectively;
provided, however, that for purposes of this Section 6 only, the Company shall
be deemed to have satisfied the conditions set forth in this clause (i) if on
not more than two occasions prior to the Notice of Redemption at Company's
Election the Company has failed to meet the requirements set forth in Section
2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants by no more than three
days; (ii) on and after the date which is 150 days after the Issuance Date,
during the period beginning on the later of (A) the date on which the
Registration Statement is declared effective by the SEC and (B) the date which
is 20 days prior to the date of Notice of Redemption at Company's Election and
ending on and including the Company's Election Redemption Date, the Registration
Statement shall be effective and available for the sale of at least all of the
Registrable Securities required to be included in such Registration Statement
and there shall not have been any Grace Periods (as defined in the Registration
Rights Agreement); (iii) on each day during the period beginning 20 days prior
to the date of Notice of Redemption at Company's Election and ending on and
including the Company's Election Redemption Date, the Common Stock is designated
for quotation on the Nasdaq National Market or listed on The New York Stock
Exchange, Inc. and shall not have been suspended from trading on such market or
exchange (other than suspensions of not more than one day and occurring prior to
the date on which the Company gives its Notice of Redemption at Company's
Election due to business announcements by the Company) nor shall delisting or
suspension by such market or exchange been threatened or pending either (A) in
writing by such market or exchange or (B) by falling below the minimum listing
maintenance requirements of such market or exchange; (iv) during the period
beginning on and including the Issuance Date and ending on and including the
Company's Election Redemption Date, there shall not have occurred a Triggering
Event or an event that with the passage of time and without being cured would
constitute a Triggering Event; (v) during the period beginning on the Issuance
Date and ending on and including the Company's Election Redemption Date, there
shall not have occurred the public announcement of a pending, proposed or
intended Change of Control, unless such pending, proposed or intended Change of
Control has been terminated, abandoned or consummated and the Company has
publicly announced such termination, abandonment or consummation of such Change
of Control; (vi) on the earlier to occur of (A) the Stockholder Meeting Deadline
(as defined in the
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Securities Purchase Agreement) and (B) the date on which the Company holds its
next meeting of stockholders, the Company shall have received the Stockholder
Approval (as defined in Section 4(j) of the Securities Purchase Agreement);
(vii) the Company shall not have failed to timely make any payments within five
Business Days of when such payment is due, whether as interest or penalty
payments, pursuant to this Certificate of Designations, the Securities Purchase
Agreement, the Registration Rights Agreement or the Warrants, including, but not
limited to, Dividends, whether in shares of Common Stock or cash, Default
Interest and cash payments due under Sections 2(d)(v)(A), 4(b), 4(d), 6 and 8
hereof, Section 4(j) of the Securities Purchase Agreement, Section 2(f) of the
Registration Rights Agreement and Sections 2(d) and 13 of the Warrants.; and
(viii) on or after the date which is 150 days after the Issuance Date the
Registration Statement shall have been declared effective by the SEC on or
before the date which is 150 days after the Issuance Date. Notwithstanding the
above, but subject to Section 5 and Section 9, any holder of Preferred Shares
may convert any Preferred Shares (including Preferred Shares selected for
redemption) into Common Stock pursuant to Section 2 on or prior to the date
immediately preceding the Company's Election Redemption Date. If the Company
fails to timely pay any Company's Election Redemption Price in accordance with
this Section 6, then the Company shall not be permitted to submit another Notice
of Redemption at Company's Election without the prior written consent of the
holders of at least two-thirds (2/3) of the Preferred Shares then outstanding.
The Company may combine a Notice of Redemption at Company's Election with a
Company's Conversion Election Notice (as defined below) provided all the
information required by such notices is present in such combined notice.
(7) CONVERSION AT THE COMPANY'S ELECTION. On or after the later of (A) the
date on which the Registration Statement has been declared effective by the SEC
and (B) the date which is 30 days after the Issuance Date (the "FIRST CONVERSION
ELECTION DATE"), the Company shall have the right, in its sole discretion, to
require that some or all of the outstanding Preferred Shares be converted
("COMPANY'S CONVERSION ELECTION") at the applicable Conversion Rate subject to a
holder's right to reject a Company's Conversion Election Notice (as defined
below) given during a Company's Mandatory Conversion Period (an "ADDITIONAL
COMPANY'S CONVERSION ELECTION NOTICE") as set forth below and provided that the
Conditions to Conversion at the Company's Election (as set forth below) are
satisfied as of the Company's Election Conversion Date (as defined below) or
waived by all the holders of the Preferred Shares then outstanding. The Company
shall exercise its right to Company's Conversion Election by providing each
holder of Preferred Shares written notice ("COMPANY'S CONVERSION ELECTION
NOTICE") by facsimile and overnight courier on or after the First Conversion
Election Date. The date on which each of such holders of the Preferred Shares
actually receives the Company's Conversion Election Notice is referred to herein
as the "COMPANY'S CONVERSION ELECTION NOTICE DATE." If the Company elects to
require conversion of some, but not all, of such Preferred Shares then
outstanding, the Company shall require conversion of an amount from each holder
of such Preferred Shares equal to the product of (I) the total number of
Preferred Shares which the Company has elected to convert multiplied by (II)
such holder's Allocation Percentage (such amount with respect to each holder of
such Preferred Shares being referred to herein as its "PRO RATA CONVERSION
AMOUNT"). In the event that any initial holder of the Preferred Shares shall
sell or otherwise transfer any of such
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holder's Preferred Shares, the transferee shall be allocated a pro rata portion
of such holder's Allocation Percentage. The Company's Conversion Election Notice
shall indicate (x) the aggregate number of such Preferred Shares the Company has
selected for conversion, (y) the date selected by the Company for conversion
("COMPANY'S ELECTION CONVERSION DATE"), which date shall be not less than 20
Business Days or more than 60 Business Days after the Company's Conversion
Election Notice Date, and (z) each holder's Pro Rata Conversion Amount. Subject
to the satisfaction of all the conditions of this Section 7 except to the extent
restricted by Section 5, on the Company's Election Conversion Date each holder
of Preferred Shares selected for conversion will be deemed to have submitted a
Conversion Notice in accordance with Section 2(d)(i) for a number of Preferred
Shares equal to the result of (a) such holder's Pro Rata Conversion Amount,
minus (b) the number of such Preferred Shares converted by such holder during
the Company's Mandatory Conversion Period (as defined below); provided, however,
in no event shall any holder of Preferred Shares be required to convert a number
of Preferred Shares during any Company's Mandatory Conversion Period into a
number of shares of Common Stock in excess of such holder's pro rata portion
(determined in the same manner as the Pro Rata Conversion Amount above) of the
sum of the Applicable Volume (as defined below) on each of the trading days
during such Company's Mandatory Conversion Period, provided further, however, if
the Principal Market modifies the method by which it calculates or reports the
trading volume, then the calculation of the Applicable Volume will be modified
accordingly. "CONDITIONS TO CONVERSION AT THE COMPANY'S ELECTION" means the
following conditions: (i) on each day (other than days during an Allowable Grace
Period) during the period beginning on and including the date the Registration
Statement is declared effective by the SEC and ending on and including the later
of (A) the date on which the Registration Statement has been declared effective
by the SEC and (B) the date which is 20 days prior to the date of the Company's
Conversion Election Notice Date, the Registration Statement which includes the
Registrable Securities relating to the Preferred Shares selected for conversion
shall be effective and available for the sale of at least all the Registrable
Securities other than for a period prior to the Company's Conversion Election
Notice of five (5) consecutive trading days or 10 trading days in any 365 day
period; (ii) on each day during the period beginning on the later of (A) the
date on which the Registration Statement has been declared effective by the SEC
and (B) the date which is 20 days prior to the date of the Company's Conversion
Election Notice Date and ending on and including the Company's Election
Conversion Date, the Registration Statement shall be effective and available for
the sale of at least all of the Registrable Securities required to be included
in such Registration Statement and there shall not have been any Grace Periods;
(iii) on each day during the period beginning on the Issuance Date and ending on
and including the Company's Election Conversion Date, the Common Stock is
designated for quotation on the Nasdaq National Market or listed on The New York
Stock Exchange, Inc. and shall not have been suspended from trading on such
market or exchange (other than suspensions of not more than one day and
occurring prior to the Company's Conversion Election Notice Date due to business
announcements by the Company) nor shall delisting or suspension by such market
or exchange been threatened or pending either (A) in writing by such market or
exchange or (B) by falling below the minimum listing maintenance requirements of
such market or exchange; (iv) during the period beginning on the Issuance Date
and ending on and including the Company's Election Conversion Date, there shall
not have occurred (A) an event constituting a Triggering
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Event, (B) an event that with the passage of time and without being cured would
constitute a Triggering Event, or (C) the public announcement of a pending,
proposed or intended Change of Control, unless such pending, proposed or
intended Change of Control has been terminated, abandoned or consummated and the
Company has publicly announced such termination, abandonment or consummation of
such Change of Control; (v) the aggregate number of Preferred Shares selected
for conversion by the Company as reflected in the Company's Conversion Election
Notice is at least 100 or, if all the Preferred Shares which remain outstanding
is less than 100, then the aggregate number of Preferred Shares which are
outstanding; (vi) during the period beginning on the Issuance Date and ending on
and including the Company's Election Conversion Date, the Company shall have
delivered Conversion Shares upon conversion of the Preferred Shares and Warrant
Shares upon exercise of the Warrants to the holders on a timely basis as set
forth in Section 2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants,
respectively, provided, however, that for purposes of this Section 7 only, the
Company shall be deemed to have satisfied the conditions set forth in this
clause (vi) if on not more than two occasions prior to the Company's Conversion
Election Notice the Company has failed to meet the requirements set forth in
Section 2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants by no more
than three days; (vii) on the earlier to occur of (A) the Stockholder Meeting
Deadline and (B) the date on which the Company holds its next meeting of
stockholders, the Company shall have received the Stockholder Approval; (viii)
during the six consecutive days ending on and including the date which is
immediately prior to the Company's Conversion Election Notice Date, the Company
shall not have provided the holders of the Preferred Shares with a Company's
Conversion Election Notice; and (ix) the Company shall not have failed to timely
make any payments within 5 Business Days of when such payment is due, whether as
interest or penalty payments, pursuant to this Certificate of Designations, the
Securities Purchase Agreement, the Registration Rights Agreement or the
Warrants, including, but not limited to, Dividends, whether in shares of Common
Stock or cash, Default Interest and cash payments due under Sections 2(d)(v)(A),
4(b), 4(d), 6 and 8 hereof, Section 4(j) of the Securities Purchase Agreement,
Section 2(f) of the Registration Rights Agreement, and Sections 2(d) and 13 of
the Warrants. "COMPANY'S MANDATORY CONVERSION PERIOD" means, with respect to any
Company's Conversion Election, the period beginning on and including the
Company's Conversion Election Notice Date and ending on and including the
Company's Election Conversion Date. "APPLICABLE VOLUME" on any trading day shall
equal the quotient of (A) 20% of the trading volume of the Common Stock on the
Principal Market (as reported by Bloomberg) on such trading day divided by (B)
the number of the Company's Mandatory Conversion Periods which include the
trading day for which this determination is being made. Notwithstanding the
above, any holder of Preferred Shares may, subject to Sections 5, 9 and 16,
convert such shares (including Preferred Shares selected for conversion) into
Common Stock pursuant to Section 2(b) on or prior to the Company's Election
Conversion Date. At any time during a Company's Mandatory Conversion Period a
holder shall have the right to reject an Additional Company's Conversion
Election Notice by sending written notice (a "REJECTION NOTICE") informing the
Company of such rejection within one Business Day of Company's Conversion
Election Notice Date, provided that no holder shall have the right to reject a
Company's Conversion Election Notice which is delivered pursuant to and in
compliance with the provisions of Section 4(m) of the Securities Purchase
Agreement.
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(8) REDEMPTION OR CONVERSION AT THE COMPANY'S ELECTION UPON MERGER
TRANSACTION.
(a) REDEMPTION AT THE COMPANY'S ELECTION UPON MERGER TRANSACTION. At
any time or times on or after the date the Company publicly discloses a pending,
proposed or intended Merger Transaction (as defined below), the Company shall
have the right, in its sole discretion, to require that all, but not less than
all, of the outstanding Preferred Shares be redeemed ("MERGER REDEMPTION
ELECTION") at a price per Preferred Share equal to (A) 125% of the Stated Value
plus (B) the Additional Amount (the "MERGER REDEMPTION PRICE"); provided that
the Conditions to Merger Redemption Election (as set forth below) are satisfied
or waived by all the holders of the Preferred Shares then outstanding. The
Company shall exercise its right to make a Merger Redemption Election by
providing each holder of Preferred Shares written notice ("NOTICE OF MERGER
REDEMPTION") by facsimile or overnight courier, after the public disclosure of a
proposed, pending or intended Merger Transaction and at least ten (10) trading
days prior to the date of consummation of the Merger Transaction ("MERGER
ELECTION REDEMPTION DATE"). The Notice of Merger Redemption shall indicate the
anticipated Merger Election Redemption Date. If the Company has exercised its
right of Merger Redemption Election and the conditions to such Merger Redemption
Election have been satisfied then all Preferred Shares outstanding at the time
of the consummation of the Merger Transaction shall be redeemed as of the Merger
Election Redemption Date by payment by or on behalf of the Company to each
holder of Preferred Shares of the Merger Redemption Price for each Preferred
Share concurrent with the closing of the Merger Transaction. All holders of
Preferred Shares shall thereupon and within two (2) Business Days after the
Merger Election Redemption Date, or such earlier date as the Company and each
holder of Preferred Shares mutually agree, surrender all outstanding Preferred
Stock Certificates, duly endorsed for cancellation, to the Company. If the
Company fails to pay the full Merger Redemption Price with respect to any
Preferred Shares concurrently with the closing of the Merger Transaction, then
the Merger Redemption Election shall be null and void with respect to such
Preferred Shares and the holder of such Preferred Shares shall be entitled to
all the rights of a holder of outstanding Preferred Shares set forth in this
Certificate of Designations. "CONDITIONS TO MERGER REDEMPTION ELECTION" means
the following conditions: (i) on each day during the period beginning on the
date the Company delivers its Notice of Merger Redemption to each holder of the
Preferred Shares and ending on and including the date immediately preceding the
Merger Election Redemption Date, no Grace Period (as defined in Section 3(f) of
the Registration Rights Agreement) shall be in effect and the Registration
Statement shall have been effective and available for the sale of all of the
Registrable Securities on each such date; (ii) during the period beginning on
the Issuance Date and ending on and including the date immediately preceding the
Merger Election Redemption Date, the Company shall have delivered Conversion
Shares upon conversion of the Preferred Shares and Warrant Shares upon exercise
of the Warrants to the Buyers on a timely basis as set forth in Section 2(d)(ii)
hereof and Sections 2(a) and 2(b) of the Warrants, respectively; provided,
however, that for purposes of this Section 8(a) only, the Company shall be
deemed to have satisfied the conditions set forth in this clause (ii) if on not
more than two occasions prior to the Notice of Merger Redemption the Company has
failed to meet the requirements set forth in Section 2(d)(ii) hereof and
Sections 2(a) and 2(b) of the Warrants by no more than three days;(iii) on the
earlier to occur of (A) the Stockholder Meeting Deadline and (B) the date on
which the Company holds
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its next meeting of stockholders, the Company shall have received the
Stockholder Approval; and (iv) the Company shall not have failed to timely make
any payments within 5 Business Days of when such payment is due, whether as
interest or penalty payments, pursuant to this Certificate of Designations, the
Securities Purchase Agreement, the Registration Rights Agreement or the
Warrants, including, but not limited to, Dividends, whether in shares of Common
Stock or cash, Default Interest and cash payments due under Sections 2(d)(v)(A),
4(b), 4(d), 6 and 8 hereof, Section 4(j) of the Securities Purchase Agreement,
Section 2(f) of the Registration Rights Agreement, and Sections 2(d) and 13 of
the Warrants. Notwithstanding the above, any holder of Preferred Shares may
convert such shares (including Preferred Shares selected for redemption) into
Common Stock pursuant to Section 2(b) on or prior to the date immediately
preceding the Merger Election Redemption Date. For purposes of this Section 8,
"MERGER TRANSACTION" means the consolidation, merger or other business
combination of the Company with or into another Person (other than (A) a
consolidation, merger or other business combination in which holders of the
Company's voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company).
(b) CONVERSION AT THE COMPANY'S ELECTION UPON MERGER TRANSACTION. At
any time or times on or after the date the Company publicly discloses a pending,
proposed or intended Merger Transaction, the Company shall have the right, in
its sole discretion, to require that all, but not less than all, of the
outstanding Preferred Shares be converted ("MERGER CONVERSION ELECTION") at the
applicable Conversion Rate; provided that the Conditions to Merger Conversion
Election (as set forth below) are satisfied or waived by all the holders of the
Preferred Shares then outstanding. The Company shall exercise its right to make
a Merger Conversion Election by providing each holder of Preferred Shares
written notice ("NOTICE OF MERGER CONVERSION") by facsimile or overnight
courier, after the public disclosure of a proposed, pending or intended Merger
Transaction and at least 30 trading days prior to the date of consummation of
the Merger Transaction ("MERGER ELECTION CONVERSION DATE"). The Notice of Merger
Conversion shall indicate the anticipated Merger Election Conversion Date. If
the Company has exercised its right of Merger Conversion Election and the
conditions of this Section 8(b) have been satisfied, except to the extent
restricted by Section 5, on the Merger Election Conversion Date each holder of
Preferred Shares selected for conversion will be deemed to have submitted a
Conversion Notice in accordance with Section 2(d)(i) for a number of Preferred
Shares equal to the lesser of (I) all the Preferred Shares held by such holder
which remain outstanding on such date, and (II) the maximum number of Preferred
Shares which such holder could convert on the Merger Election Conversion Date
taking into account the restrictions in Section 5; provided, however, in no
event shall any holder of Preferred Shares be required to convert a number of
Preferred Shares, during the period beginning on and including the date such
holder receives the Notice of Merger Conversion and ending on and including the
date immediately preceding the date of the public announcement of the
termination, abandonment or consummation of such Merger Transaction, into a
number of shares of Common Stock in excess of such holder's Allocation
Percentage (as defined
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in Section 6) of 20% of the aggregate trading volume of the Common Stock on the
Principal Market (as reported by Bloomberg) during such period (the "VOLUME
LIMITATIONS"); provided further, however, if the Principal Market modifies the
method by which it calculates or reports trading volume, then such percentage
will be modified accordingly. All holders of Preferred Shares shall within two
(2) Business Days after the Merger Election Conversion Date, or such earlier
date as the Company and each holder of Preferred Shares mutually agree,
surrender all Preferred Stock Certificates representing the Preferred Shares
converted on the Merger Election Conversion Date, duly endorsed for
cancellation, to the Company. If the Company fails to provide Conversion Shares
with respect to any Preferred Shares in accordance with Section 2(d), then the
Merger Conversion Election shall be null and void with respect to such Preferred
Shares and the holder of such Preferred Shares shall be entitled to all the
rights of a holder of outstanding Preferred Shares set forth in this Certificate
of Designations. "CONDITIONS TO MERGER CONVERSION ELECTION" means the following
conditions: (i) on each day (other than days during an Allowable Grace Period)
during the period beginning on and including the date the Registration Statement
is declared effective by the SEC and ending on and including the date which is
20 days prior to the date of the Notice of Merger Conversion, the Registration
Statement which includes the Registrable Securities relating to the Preferred
Shares selected for conversion shall be effective and available for the sale of
at least all the Registrable Securities other than for a period, prior to the
Notice of Merger Conversion, of five (5) consecutive trading days or 10 trading
days in any 365 day period; (ii) on each day during the period beginning on the
date which is 20 days prior to the date of the Notice of Merger Conversion and
ending on and including the date immediately preceding the Merger Election
Conversion Date, the Registration Statement shall be effective and available for
the sale of at least all of the Registrable Securities required to be included
in such Registration Statement and there shall not have been any Grace Periods;
(iii) on each day during the period beginning on the Issuance Date and ending on
and including the date immediately preceding the Merger Election Conversion
Date, the Common Stock is designated for quotation on the Nasdaq National Market
or listed on The New York Stock Exchange, Inc. and shall not have been suspended
from trading on such market or exchange (other than suspensions of not more than
one day and occurring prior to the date on which the Company gives a Notice of
Merger Conversion due to business announcements by the Company) nor shall
delisting or suspension by such market or exchange have been threatened or
pending either (A) in writing by such market or exchange or (B) by falling below
the minimum listing maintenance requirements of such market or exchange; (iv)
during the period beginning on the Issuance Date and ending on and including the
date immediately preceding the Merger Election Conversion Date, there shall not
have occurred (A) an event constituting a Triggering Event or (B) an event that
with the passage of time and without being cured would constitute a Triggering
Event; (v) during the period beginning on the Issuance Date and ending on and
including the Merger Election Conversion Date, the Company shall have delivered
Conversion Shares upon conversion of the Preferred Shares and Warrant Shares
upon exercise of the Warrants to the holders on a timely basis as set forth in
Section 2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants,
respectively; provided, however, that for purposes of this Section 8(b) only,
the Company shall be deemed to have satisfied the conditions set forth in this
clause (v) if on not more than two occasions prior to the Notice of Merger
Conversion the Company has failed to meet the requirements set forth in Section
2(d)(ii) hereof and Sections 2(a)
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and 2(b) of the Warrants by no more than three days; (vi) the Company shall have
received the Stockholder Approval prior to the Notice of Merger Conversion; and
(vii) the Company shall not have failed to timely make any payments within 5
Business Days of when such payment is due, whether as interest or penalty
payments, pursuant to this Certificate of Designations, the Securities Purchase
Agreement, the Registration Rights Agreement or the Warrants, including, but not
limited to, Dividends, whether in shares of Common Stock or cash, Default
Interest and cash payments due under Sections 2(d)(v)(A), 4(b), 4(d), 6 and 8
hereof, Section 4(j) of the Securities Purchase Agreement, Section 2(f) of the
Registration Rights Agreement, and Sections 2(d) and 13 of the Warrants.
Notwithstanding the above, any holder of Preferred Shares may convert such
shares (including Preferred Shares selected for conversion) into Common Stock
pursuant to Section 2(b) on or prior to the date immediately preceding the
Merger Election Conversion Date. "MERGER CONVERSION PERIOD" means, with respect
to any Merger Conversion Election, the period beginning on and including the
date the Notice of Merger Conversion is delivered and ending on and including
the Merger Election Conversion Date.
(c) MANDATORY REDEMPTION UPON MERGER TRANSACTION. If pursuant to the
terms of Section 8(b) the Company has delivered a Notice of Merger Conversion
and on the Merger Election Conversion Date a holder of Preferred Shares is not
able or required to convert all the Preferred Shares (due to Section 5 or the
Volume Limitations) held by such holder on the Merger Election Conversion Date
(such Preferred Shares which such holder is not able or required to convert on
the Merger Election Conversion Date due to Section 5 or the Volume Limitations
are referred to as the "EXCESS PREFERRED SHARES"), then concurrent with the
closing of the Merger Transaction the Company shall redeem the Excess Preferred
Shares by payment by or on behalf of the Company to such holder of Preferred
Shares of the Merger Redemption Price for each Excess Preferred Share. Such
redemption and the related remedies and obligations shall otherwise be the same
as if such Excess Preferred Shares were being redeemed in accordance with
Section 8(a).
(9) RESTRICTIONS ON CONVERSIONS. The right of a holder of Preferred Shares
to convert Preferred Shares pursuant to Section 2(b) shall be limited as set
forth below. Subject to the exceptions described below, without the prior
consent of the Company, no holder of Preferred Shares shall be entitled to
convert any Preferred Shares during the period beginning on the Issuance Date
and ending on and including January 30, 2001. Notwithstanding the foregoing, the
conversion restrictions set forth in this Section 9 shall not apply: (i) with
respect to each holder of Preferred Shares, to the number of Preferred Shares
equal to the aggregate of all such holder's Pro Rata Conversion Amounts set
forth in each Company's Election Conversion Notice received by such holder on or
prior to the date of determination; (ii) during a Merger Conversion Period;
(iii) on or after any date on which the Common Stock is not quoted on the Nasdaq
National Market or listed on The New York Stock Exchange, Inc. or has been
suspended from trading on such market or exchange (other than suspensions of not
more than one day due to business announcements by the Company) or on which
delisting or suspension by such market or exchange has been threatened or is
pending either (I) in writing by such market or exchange or (II) by falling
below the minimum listing maintenance requirements of such market or exchange;
(iv) on or after
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any date on which there shall have occurred a Triggering Event or an event that
with the passage of time and without being cured would constitute a Triggering
Event; (v) on or after any date on which a Change of Control shall have been
consummated or there has been a public announcement of a pending, proposed or
intended Change of Control; (vi) on or after any date on which the Company
issues or sells or is deemed to have issued or sold any Convertible Securities
or Options that are convertible into or exercisable or exchangeable for shares
of Common Stock at a conversion or exercise price which varies or may vary with
the market price of the Common Stock, including by way of one or more reset(s)
to a fixed price, provided that in order for this clause (vi) to be applicable
to any holder (A) such holder shall have exercised its rights to apply such
variable conversion price to such holder's Preferred Shares in accordance with
Section 2(f)(iii) or (B) the Company shall have failed to meet any of the
following requirements: (w) the Company has received Stockholder Approval, (x)
the consideration received by the Company for the issuance of the Convertible
Security is not more than $75 million, (y) the Convertible Security is not a
debenture or other convertible debt instrument or capital stock of the Company
that ranks senior or pari passu to the Preferred Shares, and (z) the Convertible
Security can not convert into shares of Common Stock prior to January 31, 2001;
(vii) on or after any date on which the Company fails to pay the Company's
Election Redemption Price for any Preferred Shares in a timely manner in
accordance with a Redemption at Company's Election pursuant to Section 6; (viii)
at any time after the first date which is at least 90 days after the Issuance
Date on which the Closing Sale Price of the Common Stock is less than $3.00 per
share (subject to adjustment for stock splits, stock dividends, stock
combinations and other similar transactions) for any 10 trading days during the
15 consecutive trading days immediately preceding such date of determination;
(ix) at any time after the first date which is at least 90 days after the
Issuance Date on which the Closing Sale Price of the Common Stock is less than
$2.30 per share (subject to adjustment for stock splits, stock dividends, stock
combinations and other similar transactions) for any 3 consecutive trading days
immediately preceding such date of determination; (x) with respect to any
conversion of Preferred Shares at a price equal to the Fixed Conversion Price
then in effect;(xi) at any time on or after the earlier to occur of (A) the
Stockholder Meeting Deadline and (B) the date on which the Company holds its
next meeting of stockholders, if the Company fails to receive the Stockholder
Approval on or before such date; or (xii) on or after the first date on which
the Company fails to comply in any respect with its obligations under Section
4(m) of the Securities Purchase Agreement.
(10) RESERVATION OF SHARES. The Company shall initially reserve 200% of the
number of shares of Common Stock for which the Preferred Shares are convertible
on the Issuance Date (without regard to any limitations on conversion), provided
that, so long as any of the Preferred Shares are outstanding, the Company shall
take all action necessary to reserve and keep available out of its authorized
and unissued Common Stock, solely for the purpose of effecting the conversions
of the Preferred Shares, such number of shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all of the Preferred
Shares then outstanding; provided that the number of shares of Common Stock so
reserved shall at no time be less than 150% of the number of shares of Common
Stock for which the Preferred Shares are at any time convertible (without regard
to any limitations on conversions). The initial number of shares of Common Stock
reserved for conversions of the Preferred Shares and each increase in the number
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of shares so reserved shall be allocated pro rata among the holders of the
Preferred Shares based on the number of Preferred Shares held by each holder at
the time of issuance of the Preferred Shares or increase in the number of
reserved shares, as the case may be. In the event a holder shall sell or
otherwise transfer any of such holder's Preferred Shares, each transferee shall
be allocated a pro rata portion of the number of reserved shares of Common Stock
reserved for such transferor. Any shares of Common Stock reserved and allocated
to any Person which ceases to hold any Preferred Shares shall be allocated to
the remaining holders of Preferred Shares, pro rata based on the number of
Preferred Shares then held by such holders.
(11) VOTING RIGHTS. Holders of Preferred Shares shall have no voting
rights, except as required by law, including but not limited to the Delaware
General Corporation Law, and as expressly provided in this Certificate of
Designations.
(12) LIQUIDATION, DISSOLUTION, WINDING-UP. In the event of any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of the Preferred Shares shall be entitled to receive in cash out of the assets
of the Company, whether from capital or from earnings available for distribution
to its stockholders (the "LIQUIDATION FUNDS"), before any amount shall be paid
to the holders of any of the capital stock of the Company of any class junior in
rank to the Preferred Shares in respect of the preferences as to distributions
and payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the sum of (i) the Stated Value and (ii) the
Additional Amount for such Preferred Share; provided that, if the Liquidation
Funds are insufficient to pay the full amount due to the holders of Preferred
Shares and holders of shares of other classes or series of preferred stock of
the Company that are of equal rank with the Preferred Shares as to payments of
Liquidation Funds (the "PARI PASSU SHARES"), then each holder of Preferred
Shares and Pari Passu Shares shall receive a percentage of the Liquidation Funds
equal to the full amount of Liquidation Funds payable to such holder as a
liquidation preference, in accordance with their respective Certificate of
Designations, Preferences and Rights, as a percentage of the full amount of
Liquidation Funds payable to all holders of Preferred Shares and Pari Passu
Shares. 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 Person, 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.
(13) PREFERRED RANK. All shares of Common Stock shall be of junior rank to
all Preferred Shares with respect to the preferences as to distributions and
payments upon the liquidation, dissolution and winding up of the Company. The
rights of the shares of Common Stock shall be subject to the preferences and
relative rights of the Preferred Shares. Without the prior express written
consent of the holders of not less than two-thirds (2/3) of the then outstanding
Preferred Shares, the Company shall not hereafter authorize or issue additional
or other capital stock that is of senior or equal rank to the Preferred Shares
in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company. Without the prior
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express written consent of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares, the Company shall not hereafter authorize or
make any amendment to the Company's Certificate of Incorporation or bylaws, or
file any resolution of the board of directors of the Company with the Secretary
of State of the State of Delaware or enter into any agreement containing any
provisions, which would adversely affect or otherwise impair the rights or
relative priority of the holders of the Preferred Shares relative to the holders
of the Common Stock or the holders of any other class of capital stock. In the
event of the merger or consolidation of the Company with or into another Person,
the Preferred Shares shall maintain their relative powers, designations and
preferences provided for herein and no merger shall have a result inconsistent
therewith.
(14) PARTICIPATION. Subject to the rights of the holders, if any, of the
Pari Passu Shares, the holders of the Preferred Shares shall, as holders of
Preferred Shares, be entitled to such dividends paid and distributions made to
the holders of Common Stock to the same extent as if such holders of Preferred
Shares had converted the Preferred Shares into Common Stock (without regard to
any limitations on conversion herein or elsewhere) and had held such shares of
Common Stock on the record date for such dividends and distributions. Payments
under the preceding sentence shall be made concurrently with the dividend or
distribution to the holders of Common Stock.
(15) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS. Until all of the
Preferred Shares have been converted or redeemed as provided herein, the Company
shall not, directly or indirectly, redeem, or declare or pay any cash dividend
or distribution on, its capital stock (other than the Preferred Shares and other
than the redemption or repurchase by the Company of shares of Common Stock from
officers of the Company upon the termination of such officer's employment with
the Company pursuant to the terms of written employment agreements in effect on
the Issuance Date, subject to amendments after the Issuance Date which do not
increase the aggregate redemption amount under all such employment agreements as
of the Issuance Date) without the prior express written consent of the holders
of not less than two-thirds (2/3) of the then outstanding Preferred Shares.
(16) LIMITATION ON NUMBER OF CONVERSION SHARES. Notwithstanding anything to
the contrary contained herein, the Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Preferred Shares if the issuance
of such shares of Common Stock would exceed that number of shares of Common
Stock which the Company may issue upon conversion of the Preferred Shares
without breaching the Company's obligations under the rules or regulations of
the Principal Market, or the market or exchange where the Common Stock is then
traded (the "EXCHANGE CAP"), except that such limitation shall not apply in the
event that the Company (a) obtains the approval of its stockholders as required
by the applicable rules of the Principal Market (or any successor rule or
regulation) for issuances of Common Stock in excess of such amount, (b) obtains
a written opinion from outside counsel to the Company that such approval is not
required, which opinion shall be reasonably satisfactory to the holders of a
majority of the Preferred Shares then outstanding or (c) the required number of
the holders of the Preferred Shares have exercised their rights pursuant to
Section 4(c) to have the Company remove the
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Common Stock from the Principal Market. Until such approval or written opinion
is obtained or such action has been taken by the required number of holders of
Preferred Shares, no purchaser of Preferred Shares pursuant to the Securities
Purchase Agreement (the "PURCHASERS") shall be issued, upon conversion of
Preferred Shares, shares of Common Stock in an amount greater than the product
of (i) the Exchange Cap amount multiplied by (ii) a fraction, the numerator of
which is the number of Preferred Shares issued to such Purchaser pursuant to the
Securities Purchase Agreement and the denominator of which is the aggregate
amount of all the Preferred Shares issued to the Purchasers pursuant to the
Securities Purchase Agreement (the "CAP ALLOCATION AMOUNT"). In the event that
any Purchaser shall sell or otherwise transfer any of such Purchaser's Preferred
Shares, the transferee shall be allocated a pro rata portion of such Purchaser's
Cap Allocation Amount. In the event that any holder of Preferred Shares shall
convert all of such holder's Preferred Shares into a number of shares of Common
Stock which, in the aggregate, is less than such holder's Cap Allocation Amount,
then the difference between such holder's Cap Allocation Amount and the number
of shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares on a pro rata basis in proportion to the number of Preferred Shares then
held by each such holder.
(17) VOTE TO CHANGE THE TERMS OF OR ISSUE ADDITIONAL PREFERRED SHARES. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than two-thirds (2/3) of
the then outstanding Preferred Shares, shall be required for (a) any change to
this Certificate of Designations or the Company's Certificate of Incorporation
which would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares and (b) the issuance of Preferred
Shares other than pursuant to the Securities Purchase Agreement.
(18) LOST OR STOLEN CERTIFICATES. Upon receipt by the Company of evidence
reasonably satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of an indemnification
undertaking by the holder to the Company in customary form and, 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; provided, however, the Company shall not
be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares into
Common Stock.
(19) REMEDIES, CHARACTERIZATIONS, OTHER OBLIGATIONS, BREACHES AND
INJUNCTIVE RELIEF. The remedies provided in this Certificate of Designations
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief). No remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy.
Nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as
expressly provided herein. Amounts set forth or provided for herein with respect
to payments, conversion
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and the like (and the computation thereof) shall be the amounts to be received
by the holder thereof and shall not, except as expressly provided herein, be
subject to any other obligation of the Company (or the performance thereof). The
Company acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the holders of the Preferred Shares and that the remedy at
law for any such breach may be inadequate. The Company therefore agrees that, in
the event of any such breach or threatened breach, the holders of the Preferred
Shares shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
(20) SPECIFIC SHALL NOT LIMIT GENERAL; CONSTRUCTION. No specific provision
contained in this Certificate of Designations shall limit or modify any more
general provision contained herein. This Certificate of Designations shall be
deemed to be jointly drafted by the Company and all Buyers and shall not be
construed against any person as the drafter hereof.
(21) FAILURE OR INDULGENCE NOT WAIVER. No failure or delay on the part of a
holder of Preferred Shares in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
(22) NOTICE. Whenever notice is required to be given under this Certificate
of Designations, unless otherwise provided herein, such notice shall be given in
accordance with Section 9(f) of the Securities Purchase Agreement.
(23) TRANSFER OF PREFERRED SHARES. A holder of Preferred Shares may assign
or transfer some or all of the Preferred Shares held by such holder without the
consent of the Company.
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IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by Steven J. Schoch, its Senior Vice President and
Chief Financial Officer, as of the 12th day of June, 2000.
eTOYS INC.
By:
---------------------------------
Name: Steven J. Schoch
Its: Senior Vice President and
Chief Financial Officer
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EXHIBIT I
eTOYS INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
eToys Inc. for its Series D Convertible Preferred Stock (the "CERTIFICATE OF
DESIGNATIONS"). In accordance with and pursuant to the Certificate of
Designations, the undersigned hereby elects to convert the number of shares of
Series D Convertible Preferred Stock, par value $0.0001 per share (the
"PREFERRED SHARES"), of eToys, Inc., a Delaware corporation (the "COMPANY"),
indicated below into shares of Common Stock, par value $0.0001 per share (the
"COMMON STOCK"), of the Company, as of the date specified below.
Date of Conversion:____________________________________________________
Number of Preferred Shares to be converted: ___________________________
Stock certificate no(s). of Preferred Shares to be converted: _________
Please confirm the following information:
Conversion Price:______________________________________________________
Number of shares of Common Stock to be issued:_________________________
Holders Taxpayer ID#:__________________________________________________
Notwithstanding anything to the contrary contained herein, this Notice shall
constitute a representation by the holder of Preferred Shares submitting this
Notice that, after giving effect to the conversion provided for in this Notice,
the beneficial owner of such shares (together with such Person's affiliates)
will not have acquired, through conversion of Preferred Shares or otherwise,
beneficial ownership of a number of shares of Common Stock during the 60-day
period ending on and including the Conversion Date of such conversion (the "60
DAY PERIOD"), that, when added to the number of shares of Common Stock
beneficially owned by such Person (together with such Person's affiliates) at
the beginning of the 60 Day Period, exceeds 9.99% of the number of shares of
Common Stock outstanding as reflected in the Company's most recent Form 10-Q or
Form 10-K, as the case may be, or more recent public press release or other
notice by the Company setting forth the number of shares of Common Stock
outstanding, but after giving effect to conversions of Preferred Shares and
issuances of Dividend Shares and exercises of the Warrants by such holder since
the date as of which such number of outstanding shares of Common Stock was
reported. The holder of Preferred Shares has sold or will sell the shares of
common stock issuable pursuant to this Notice pursuant to a registration
statement or an exemption from registration under the Securities Act of 1933, as
amended.
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:______________________________________________________________
______________________________________________________________
Taxpayer ID#:__________________________________________________________
Facsimile Number:______________________________________________________
Authorization:_________________________________________________________
By:__________________________________________________
Title:_______________________________________________
Dated:_________________________________________________________________
Account Number (if electronic book entry transfer):___________________
Transaction Code Number (if electronic book entry transfer):___________
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ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby
directs [TRANSFER AGENT] to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated June 12, 2000
from the Company and acknowledged and agreed to by [TRANSFER AGENT].
eTOYS INC.
By:________________________
Name:______________________
Title:_____________________
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