SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): January 26, 1998
TII INDUSTRIES, INC.
-------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Charter)
DELAWARE
-------------------------------------------------------------------------
(State of Incorporation)
1-8048 66-0328885
-------------------------------------------------------------------------
(Commission File No.) (IRS Employer Identification No.)
1385 AKRON STREET, COPIAGUE, NEW YORK 11726
-------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(516) 789-5000
-------------------------------------------------------------------------
(Registrant's telephone number, including area code
NOT APPLICABLE
-------------------------------------------------------------------------
(Former Name or Former Address, if Changed Since Last Report)
<PAGE>
ITEM 5. OTHER EVENTS
- ------- ------------
On January 26, 1998, the Company completed a private placement of
5,000 shares of its newly-created Series C Convertible Preferred Stock (the
"Preferred Shares") and Warrants to purchase an aggregate of 200,000 shares of
the Company's Common Stock (the "Warrants") to two qualified institutional
buyers and three other accredited investors for an aggregate purchase price of
$5,000,000.
The following discussion of the Preferred Shares and the Warrants is
qualified in its entirety by reference to the Certificate of Designation under
which the Preferred Shares were created (the "Certificate of Designation") and
to the form of Warrant which appear as Exhibits 4.1 and 99.1 to this Report,
respectively.
The Preferred Shares bear no dividends, have a liquidation preference
of $1,150 per Preferred Share and have no voting rights, except as required by
the Delaware General Corporation Law and with respect to (a) any changes to the
Certificate of Designation 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) any issuance of any
additional such Preferred Shares. The Preferred Shares are convertible into
shares of the Company's Common Stock commencing on May 27, 1998, following which
a holder may convert, in any thirty-day period, up to one-third of the aggregate
number of Preferred Shares purchased by the initial holder of such Preferred
Shares, subject to acceleration of such conversion right in certain cases. The
Preferred Shares are convertible into shares of the Company's Common Stock (a)
at a conversion price equal to approximately $7.08 per share (the "Fixed
Conversion Price") until July 25, 1997 and (b) thereafter at a conversion price
equal to the lower of (i) the Fixed Conversion Price or (ii) 95% (or 90% if the
Company's cash, cash equivalents and marketable securities at December 26, 1997,
adjusted to give effect to the receipt by the Company of the proceeds from the
sale of the Preferred Shares and Warrants, is less than $6.0 million) of the
average of the closing bid prices of the Company's Common Stock during the ten
consecutive trading days immediately preceding the conversion date of the
Preferred Shares. The Fixed Conversion Price and percentages set forth above are
subject to reduction in the event, among other things, a registration statement
under the Securities Act of 1933, as amended (the "Securities Act"), covering
the shares of Common Stock underlying the Preferred Shares is not filed with the
Securities and Exchange Commision by February 26, 1998 or declared effective by
May 26, 1998 or thereafter, subject to certain exceptions, sales of shares of
Common Stock underlying the Preferred Shares cannot be made under the
registration statement. The conversion price is also subject to antidilution
adjustments under a formula in certain circumstances, including, with certain
exceptions, (a) the issuances of Common Stock, or the issuance of securities
which are exercisable into, exchangeable for or convertible into Common Stock,
for a consideration (including amounts receivable upon such exercise, exchange
or conversion) at below the then Fixed Conversion Price and (b) subdivisions or
combination of the Company's Common Stock. The Company is subject to potential
penalties in the event it fails to timely permit conversion of Preferred Shares.
The Company is not obligated to issue more than 1,520,000 shares of Common Stock
upon
-2-
<PAGE>
conversion of Preferred Shares if the issuance of a larger number would breach
the Company's obligations under rules and regulations of The Nasdaq Stock Market
(the "Exchange Cap"). If the Company cannot issue Common Stock for any reason,
including by reason of the Exchange Cap, or fails to have sufficient shares
registered under the Securities Act for resale, the Company is to issue as many
shares of Common Stock as it is able to issue without violating any restriction
and the holder of unconverted Preferred Shares may, among other things, require
the Company to redeem those Preferred Shares which the Company is unable to
convert at a redemption price per Preferred Share equal to the greater of $1,150
or the closing bid price on the proposed conversion date of the Common Stock
which would have otherwise been issued.
Unless converted or redeemed prior thereto, the Preferred Shares are
to be automatically converted into Common Stock on January 26, 2003 (subject to
possible delay in certain instances). The Company may also require conversion of
the Preferred Shares at any time on or after January 26, 2001, subject to the
fulfillment of certain conditions.
The Preferred Shares are redeemable, prior to conversion, (a) at the
option of the Company until May 26, 1998 at a redemption price of $1,150 per
Preferred Share and (b) at the option of the holders thereof at a price equal to
the higher of $1,150 or the then closing bid price of the underlying shares of
the Company's Common Stock in the event of certain business combinations of the
Company, the sale of substantially all of the Company's assets or in the case of
a purchase, tender or exchange offer for more than 50% of the Company's Common
Stock and in certain other cases, including the failure of the Company to obtain
effectiveness of the registration statement discussed above by September 23,
1998, to maintain such registration statement effective for specified periods of
time, to maintain the listing of the Company's Common Stock on the Nasdaq
National Market or to convert Preferred Shares.
The Warrants are exercisable until January 25, 2001 at an exercise
price equal to approximately $7.03 per share, subject to adjustment in the event
of stock splits, dividends, combinations, reclassifications, recapitalizations
or like capital adjustments.
The Company has also agreed to file, on or prior to March 27, 1998, a
registration statement under the Securities Act covering the shares of Common
Stock issuable upon conversion of the Preferred Shares and exercise of the
Warrants for resale by the investors should they choose to do so following any
conversion of the Preferred Shares or any exercise of the Warrants, and to use
its best efforts to have such registration statement declared effective as soon
as is practicable, but in no event later than May 26, 1998. The Company has
further agreed to maintain the registration statement effective until all shares
of Common Stock issued upon conversion of the Preferred Shares and exercise of
the Warrants are sold or until they may be sold without registration pursuant to
paragraph (k) of Rule 144 promulgated under the Securities Act. The Company has
also agreed to permit, with certain exceptions, the investors to join in other
registration statements filed by the Company. The Company is to bear all
expenses in connection with any such registration other than underwriting
discounts and commissions, fees and disbursements of investment bankers for the
investors and counsel fees in excess of a specified amount.
-3-
<PAGE>
In connection with such private placement, the Company paid a
commission of $250,000 to a registered broker-dealer for its services in placing
the Preferred Shares and Warrants.
The net proceeds from the private placement are intended to be used
to purchase additional equipment and leasehold improvements to increase the
Company's manufacturing capacity to support recently awarded contracts and for
working capital.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
- ------- ---------------------------------
(a) Financial statements of business acquired: None.
(b) Exhibits.
4.1 Certificate of Designation, as filed with the
Secretary of State of the State of Delaware on
January 26, 1998.
99.1 Form of Warrant issued to the investors in the
Company's January 26, 1998 private placement.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TII INDUSTRIES, INC.
Dated: January 29, 1998 By: /s/ Paul G. Sebetic
-------------------------------
Paul G. Sebetic,
Vice President Finance
-4-
<PAGE>
EXHIBIT INDEX
Exhibit No.
- -----------
4.1 Certificate of Designation, as filed with the Secretary of
State of the State of Delaware on January 26, 1998.
99.1 Form of Warrant issued to the investors in the Company's
January 26, 1998 private placement.
-5-
CERTIFICATE OF DESIGNATION
OF
SERIES C CONVERTIBLE PREFERRED STOCK
TII INDUSTRIES, INC.
TII INDUSTRIES, INC., a corporation organized and existing under the
laws of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY:
1. The Certificate of Incorporation of the Corporation, as amended
and restated, authorizes the issuance of 1,000,000 shares of Preferred Stock,
par value $1.00 per share, in one or more series as determined from time to time
by the Board of Directors of the Corporation, and expressly vests in the Board
of Directors of the Corporation the authority to designate each series and the
number of shares thereof and to fix and determine the preferences and relative,
participating, optional and other special rights, and the qualifications,
limitations and restrictions thereof.
2. The Securities Committee of the Board of Directors of the
Corporation, pursuant to the authority expressly vested in it by the Board of
Directors of the Corporation pursuant to Section 141(c)(1) of the General
Corporation Law of the State of Delaware, on January 23, 1998 adopted the
following resolutions creating a series of 5,000 shares of Preferred Stock,
designated, "Series C Convertible Preferred Stock" pursuant to the provisions of
Section 151 of the General Corporation Law of the State of Delaware:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of the Corporation (the "Board of Directors") in accordance with the
provisions of its Certificate of Incorporation, as amended and restated, a
series of the Preferred Stock of the Corporation be, and it hereby is, created,
and that the designation and number thereof and the preferences and relative,
participating, optional and other special rights of the shares of such series,
and the qualifications, limitations and restrictions thereof are as follows:
1. DESIGNATION AND AMOUNT OF THE SERIES. The shares of the series
of Preferred Stock created by this resolution shall be designated as Series C
Convertible Preferred Stock, $1.00 par value per share (hereinafter referred to
as the "PREFERRED SHARES"), and the number of shares constituting such series
shall be 5,000. Such number of shares may be decreased, at any time and from
time to time, by resolution of the Board of Directors; PROVIDED, HOWEVER, that
no decrease shall reduce the number of Preferred Shares to a number less than
that of the Preferred Shares then outstanding.
2. HOLDER'S CONVERSION OF PREFERRED SHARES. A holder of Preferred
Shares shall have the right, at such holder's option, to convert the Preferred
Shares into shares of the Company's Common Stock, $0.01 par value per share (the
"COMMON STOCK"), on the following terms and conditions:
<PAGE>
(a) CONVERSION RIGHT. Subject to the provisions of this
Section 2 and Sections 3, 4, 12 and 15 below, at any time or times beginning on
and including the day which is one hundred twenty-one (121) days after the
Closing Date (as defined below), any holder of Preferred Shares shall be
entitled to convert any whole number of Preferred Shares into fully paid and
nonassessable shares (rounded up to the nearest whole share in accordance with
Section 2(h) below) of Common Stock, at the Conversion Rate (as defined below);
provided, however, that in no event shall any holder be entitled to convert
Preferred Shares in excess of that number of Preferred Shares which, upon giving
effect to such conversion, would cause the aggregate number of shares of Common
Stock beneficially owned by the holder and its affiliates to exceed 4.9% of the
outstanding shares of the Common Stock following such conversion. For purposes
of the foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of the Preferred Shares which
such holder has elected to convert, but shall exclude the number of shares of
Common Stock which would be issuable upon (i) conversion of the remaining,
nonconverted Preferred Shares beneficially owned by the holder and its
affiliates and (ii) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Company (including, without limitation,
any warrants) subject to a limitation on conversion or exercise analogous to the
limitation contained herein beneficially owned by the holder and its affiliates.
Except as set forth in the preceding sentence, for purposes of this paragraph,
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. The holder may waive the foregoing
limitations by written notice to the Company upon not less than 61 days prior
notice (with such waiver taking effect only upon the expiration of such
sixty-one (61) day notice period).
(b) CONVERSION RATE. The number of shares of Common Stock
issuable upon conversion of each of the Preferred Shares pursuant to Sections
(2)(a) and 2(g) shall be determined according to the following formula (the
"CONVERSION RATE"):
$1,000
-------------------
Conversion Price
For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
(i) "CONVERSION PRICE" means, as of any Conversion Date
(as defined below) or other date of determination, the lower of the Fixed
Conversion Price and the Floating Conversion Price, each in effect as of such
date and subject to adjustment as provided herein; provided, however, that
during the period ending on and including the date which is 180 days after the
Closing Date, the Conversion Price shall be the Fixed Conversion Price (as
defined below), except that this proviso shall not apply on and after the date
of the occurrence of a Triggering Event (as defined in Section 3(d) below) or
the public announcement or occurrence of a Major Transaction (as defined in
Section 3(c) below).
-2-
<PAGE>
(ii) "FIXED CONVERSION PRICE" means 125% of the Market
Price on the Closing Date subject to adjustment as provided herein;
(iii) "FLOATING CONVERSION PRICE" means, as of any date
of determination, the amount obtained by multiplying the Conversion Percentage
in effect as of such date by either (i) 95% of the Market Price as of such date
or (ii) if the sum of the Company's cash, cash equivalents and marketable
securities at December 26, 1997 as same will be reflected in the Company's
Quarterly Report on Form 10-Q for the quarter ended December 26, 1997, adjusted
to give effect to receipt by the Company of the proceeds from the sale of the
Preferred Shares and Warrants accompanying the Preferred Shares is less than
$6.0 million, 90% of the Market Price as of such date, as applicable;
(iv) "CONVERSION PERCENTAGE" means 100%, subject to
adjustment as provided in Section 2(c);
(v) "MARKET PRICE" means, with respect to any security
for any date, the average of the Closing Bid Prices (as defined below) for such
security during the ten consecutive trading days immediately preceding such
date;
(vi) "CLOSING BID PRICE" means, for any security as of
any date, the last closing bid price for such security on the Nasdaq National
Market as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the
Nasdaq National Market is not the principal trading market for such security,
the last closing bid price of such security on the principal securities exchange
or trading market where such security is listed or traded 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 Nasdaq electronic bulletin board
for such security as reported by Bloomberg, or, if no 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 bid prices of any
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. for such day. 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 Preferred Shares. 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(f)(iii) below with the term "Closing Bid Price" being
substituted for the term "Market Price." (All such determinations to be
appropriately adjusted for any stock dividend, stock, split or other similar
transaction during such period).
(vii) "CLOSING DATE" and "ISSUANCE DATE" mean the date
the Preferred Shares are first issued.
(c) EFFECT OF FAILURE TO OBTAIN AND MAINTAIN EFFECTIVENESS
OF REGISTRATION STATEMENT. If the registration statement (the "REGISTRATION
STATEMENT") covering the resale
-3-
<PAGE>
of the shares of Common Stock issuable upon conversion of the Preferred Shares
and required to be filed by the Company pursuant to the Registration Rights
Agreement between the Company and the Buyers referred to therein (the
"REGISTRATION RIGHTS AGREEMENT") is not (i) filed within thirty (30) days of the
Closing Date (the "SCHEDULED FILING DATE"), (ii) declared effective by the
United States Securities and Exchange Commission (the "SEC") on or before the
earlier of (x) five (5) business days after the Securities and Exchange
Commission advises the Company that it will not review the Registration
Statement or has no further comments thereon and will entertain a request to
accelerate the effectiveness of the Registration Statement or (y) one hundred
twenty (120) days after the Closing Date (the "SCHEDULED EFFECTIVE DATE"), or
(iii) if after the Registration Statement has been declared effective by the
SEC, sales of all the shares of Common Stock issued or issuable upon conversion
of the Preferred Shares (without taking into account any limitations or
restrictions on the timing or amount of conversions of the Preferred Shares or
sales of the underlying Common Stock) cannot be made pursuant to the
Registration Statement (whether because of a failure to keep the Registration
Statement effective, to disclose such information as is necessary for sales to
be made pursuant to the Registration Statement, to register sufficient shares of
Common Stock or otherwise, provided that such inability to sell shares is not
due to the action or inaction of the Buyers), then, as partial relief for the
damages to any holder by reason of any such delay in or reduction of its ability
to sell the underlying shares of Common Stock (which remedy shall not be
exclusive of any other remedies available at law or in equity), the Conversion
Percentage and the Fixed Conversion Price shall be adjusted as follows:
(A) CONVERSION PERCENTAGE. The Conversion Percentage
in effect at such time shall be reduced by a number of percentage points equal
to the product of (I) .06 and (II) the sum of (x) the number of days after the
Scheduled Effective Date until (but excluding) the date that the relevant
Registration Statement is declared effective by the SEC and (y) the number of
days that sales cannot be made pursuant to the Registration Statement in
accordance with the Registration Rights Agreement after the Registration
Statement has been declared effective, without including the number of days
during any Grace Period (as defined in the Registration Rights Agreement) (such
number of days being collectively referred to herein as the "REGISTRATION
STATEMENT DEFAULT DAYS"). (For example, if the Registration Statement becomes
effective thirty (30) days after the Scheduled Effective Date (regardless of
when the Registration Statement is filed), the Conversion Percentage would be
98.2% percent until any subsequent adjustment; if thereafter sales could not be
made pursuant to the Registration Statement for a period of forty (40)
additional days, the Conversion Percentage would then be 95.8%); and
(B) FIXED CONVERSION PRICE. The Fixed Conversion
Price in effect at such time shall be reduced by an amount equal to the product
of (I) the Fixed Conversion Price in effect as of the Closing Date and (II)
.0006 multiplied by (III) Registration Statement Default Days. The Registration
Statement Default Days shall not include the number of days during any Grace
Period (as defined in the Registration Rights Agreement). (For example, assuming
for purposes of this Section 3(c)(B) only that the Fixed Conversion Price equals
$5.00, if the Registration Statement becomes effective thirty (30) days after
the Scheduled Effective Date, the Fixed Conversion Price would be $4.91 until
any subsequent adjustment; if thereafter sales could not be made pursuant to the
-4-
<PAGE>
Registration Statement for a period of forty (40) additional days, the Fixed
Conversion Price would then be $4.79.)
(d) ADJUSTMENT TO CONVERSION PRICE -- DILUTION AND OTHER
EVENTS. In order to prevent dilution of the rights granted under this
Certificate of Designation, the Conversion Price will be subject to adjustment
from time to time as provided in this Section 2(d). No adjustment of the
Conversion Price shall be made if the result of the computation would be to
adjust the Conversion Price by an amount less than $.02 (and any fraction of a
cent shall be rounded down to the nearest cent) but, in that event, any
adjustment that would otherwise be required then to be made shall be carried
forward and shall be made at the time of and together with any subsequent
adjustment which, together with any adjustment or adjustments so carried
forward, shall amount to $.02 or more.
(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 is deemed to have issued or
sold as hereinafter provided, any shares of Common Stock for a consideration per
share less than the Fixed Conversion Price in effect immediately prior to such
time (the "APPLICABLE PRICE"), then immediately after such issue or sale, the
Fixed Conversion Price 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 determined by dividing (1) the sum of (I) the product of the
Applicable Price and the number of shares of Common Stock Deemed Outstanding (as
defined below) immediately prior to such issue or sale, and (II) the
consideration, if any, received by the Company upon such issue or sale, by (2)
the product of (I) the Applicable Price and (II) the number of shares of Common
Stock Deemed Outstanding immediately after such issue or sale. No adjustment
shall be made with respect to shares of Common Stock deemed to have been issued
by the Company in connection with the issuance or conversion of Preferred
Shares, the issuance or exercise of the Warrants (as defined in the Securities
Purchase Agreement between the Company and the initial holders of the Preferred
Shares (the "SECURITIES PURCHASE AGREEMENT"), the issuance of shares upon the
exercise of options, warrants and Convertible Securities outstanding on January
23, 1998 (as set forth in the Securities Purchase Agreement), the grant or
exercise of options under an Approved Stock Plan (as defined below) or an
Excluded Issuance (as defined below). For purposes of determining the adjusted
Fixed Conversion Price under this Section 2(d)(i), the following shall be
applicable:
(A) ISSUANCE OF OPTIONS. If, after January 23, 1998,
the Company in any manner grants any rights or options to subscribe for or to
purchase (i) Common Stock (other than pursuant to an Approved Stock Plan or the
Warrants) or (ii) any stock or other securities convertible into or exchangeable
for Common Stock (such rights or options being herein called "OPTIONS" and such
convertible or exchangeable stock or securities being herein called "CONVERTIBLE
SECURITIES") and the price per share for which Common Stock is issuable upon the
exercise of such Options or upon conversion or exchange of such Convertible
Securities is less than the Applicable Price, then the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such Options shall be deemed to be
outstanding
-5-
<PAGE>
and to have been issued and sold by the Company for such price per share. For
purposes of this Section 2(d)(i)(A), the "price per share for which Common Stock
is issuable upon exercise of such Options or upon conversion or exchange of such
Convertible Securities" is determined by dividing (I) the total amount, if any,
received or receivable by the Company as consideration for the granting of such
Options, plus the minimum aggregate amount of additional consideration payable
to the Company upon the exercise of all such Options, plus in the case of such
Options which relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the issuance or
sale of such Convertible Securities and the conversion or exchange thereof, by
(II) the total maximum number of shares of Common Stock issuable upon exercise
of such Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No 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 or exchange of
such Convertible Securities.
(B) ISSUANCE OF CONVERTIBLE SECURITIES. If the
Company in any manner issues or sells any Convertible Securities and the price
per share for which Common Stock is issuable upon such conversion or exchange is
less than the Applicable Price, then the maximum number of shares of Common
Stock issuable upon conversion or exchange of such Convertible Securities shall
be deemed to be outstanding and to have been issued and sold by the Company for
the price per share for which Common Stock is issuable upon such conversion or
exchange. For the purposes of this Section 2(d)(i)(B), the "price per share for
which Common Stock is issuable upon such conversion or exchange" is determined
by dividing (I) the total amount received or receivable by the Company as
consideration for the issue or sale of such Convertible Securities, plus the
minimum aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (II) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange of all
such Convertible Securities. No adjustment of the Fixed Conversion Price shall
be made upon the actual issue of such Common Stock upon conversion or exchange
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(d)(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 price provided for in any Options, the additional consideration, if
any, payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible into
or exchangeable for Common Stock change at any time, the Fixed Conversion Price
in effect at the time of such change shall be readjusted to the Fixed Conversion
Price which would have been in effect at such time had such Options or
Convertible Securities still outstanding 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. Nothing in this Section
2(d)(i)(C) shall be construed to require any readjustment to the Fixed
Conversion Price where the Board of Directors of the Company votes to reprice at
fair market value any rights or options to subscribe for or to purchase
-6-
<PAGE>
Common Stock granted pursuant to an Approved Stock Plan in order to provide
appropriate employee incentives.
(D) CERTAIN DEFINITIONS. For purposes of determining
the adjusted Fixed Conversion Price under this Section 2(d)(i), the following
terms shall have the meanings set forth below:
(I) "APPROVED STOCK PLAN" shall mean any
contract, plan or agreement which has been, or may in the future be, approved by
the Board of Directors of the Company, pursuant to which the Company's
securities may be issued to any employee, officer, director, consultant or other
service provider.
(II) "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 at
such given time pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof regardless
of whether the Options or Convertible Securities are actually exercisable at
such time, but excluding any shares of Common Stock issuable upon conversion of
the Preferred Shares.
(III) "EXCLUDED ISSUANCE" shall mean (i) any
underwritten public offering by the Company consisting solely of Common Stock,
with or without warrants and other rights to purchase Common Stock, including
Convertible Securities (and warrants issued to the underwriter therefor as part
of the underwriters' compensation), (ii) any transaction involving the Company's
issuance of securities in connection with any strategic partnership or joint
venture (the primary purpose of which is not to raise equity capital), (iii) any
issuance of securities by a subsidiary of the Company, and (iv) any issuance of
securities by the Company as consideration for the acquisition of a license or a
business by the Company; provided that (x) in each instance under clause (ii)
immediately above the consideration received by the Company for each such share
of Common Stock issued is not less than the lesser of (A) the Closing Bid Price
as of the date on which the Company's Board of Directors authorizes the issuance
of such shares and (B) the average of the Closing Bid Prices for the Common
Stock for the twenty (20) consecutive trading days immediately preceding the
date on which the Company's Board of Directors authorizes the issuance of such
shares, and (y) in each instance under clause (ii) above the consideration
received by the Company for each such share of Common Stock issued (exclusive of
underwriting discounts, commissions and expense allowances and exclusive of
expenses of the Company) is not less than 95% of the Closing Bid Price on the
date on which the Company and the underwriter agree upon the public offering
price for such shares.
(E) EFFECT ON FIXED CONVERSION PRICE OF CERTAIN
EVENTS. For purposes of determining the adjusted Fixed Conversion Price under
this Section 2(d)(i), the following shall be applicable:
-7-
<PAGE>
(I) CALCULATION OF CONSIDERATION RECEIVED.
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 net amount received by the Company therefor. In case
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 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 on the twenty (20) consecutive trading
days immediately preceding the date of receipt. 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 ten (10) days after the
occurrence of an event requiring valuation (the "VALUATION EVENT"), the fair
value of such consideration will be determined within forty-eight (48) hours of
the tenth (10th) day following the Valuation Event by an independent, reputable
appraiser selected by the Company. The determination of such appraiser shall be
deemed binding upon all parties absent manifest error.
(II) INTEGRATED TRANSACTIONS. 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 equal to the difference between the total
consideration received by the Company and the consideration (calculated pursuant
to the foregoing clause (I)) deemed received by the Company for such other
securities.
(III) TREASURY SHARES. The number of shares of
Common Stock outstanding at any given time shall not include shares owned or
held by or for the account of the Company, but the disposition of any shares so
owned or held will be considered an issue or sale of Common Stock.
(IV) RECORD DATE. If the Company issues to
holders of Common Stock rights entitling them (1) to receive a dividend or other
distribution payable in Common Stock, Options or Convertible Securities or (2)
rights 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 or any other securities 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.
(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) 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) 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.
-8-
<PAGE>
(iii) ADJUSTMENT OF FLOATING CONVERSION PRICE UPON ISSUANCE OF
CONVERTIBLE SECURITIES. If the Company in any manner issues or sells Convertible
Securities that are convertible into Common Stock at a price which varies with
the market price of the Common Stock (the formulation for such variable price
being herein referred to as, the "VARIABLE PRICE") and such Variable Price is
not calculated using the same formula used to calculate the Floating 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. If the holders of Preferred Shares representing at
least two-thirds (2/3) of the Preferred Shares then outstanding provide written
notice via facsimile and overnight courier (the "VARIABLE PRICE ELECTION
NOTICE") to the Company within five (5) business days of receiving a Variable
Notice that such holders desire to replace the Floating Conversion Price then in
effect with the Variable Price described in such Variable Notice, the Company
shall prepare and deliver to each holder of the Preferred Shares via facsimile
and overnight courier a copy of an amendment to this Certificate of Designation
(the "VARIABLE PRICE AMENDMENT") that substitutes the Variable Price for the
Floating Conversion Price (together with such modifications to this Certificate
of Designation as may be required to give full effect to the substitution of the
Variable Price for the Floating Conversion Price) no less than five (5) business
days nor more than ten (10) business days after receipt of the requisite number
of Variable Price Election Notices set forth above. The Company shall file such
Variable Price Amendment with the Secretary of State of the State of Delaware no
less than five (5) business days nor more than ten (10) business days after
delivery of the Variable Price Amendment to the holders of the Preferred Shares;
provided that in the event that the Company receives a notice prior to the
filing of the Variable Price Amendment from any holder who has delivered a
Variable Price Election Notice in connection with such Variable Price Amendment
that such holder objects to the form of the Variable Price Amendment, the
Company shall not file such Variable Price Amendment until such time as the
Variable Price Amendment has been revised to the reasonable satisfaction of such
holder and approved in writing by the holders of the Preferred Shares
representing at least two-thirds (2/3) of the Preferred Shares then outstanding.
Except as provided in the preceding proviso, a holder's delivery of a Variable
Price Election Notice shall serve as the consent required to amend this
Certificate of Designation pursuant to Section 12 below. If the Company does not
receive the requisite number of Variable Price Election Notices within seven (7)
business days after it has given Variable Notices to all holders of Preferred
Shares, the holders of Preferred Shares shall be deemed to have elected not to
replace the Floating Conversion Price then in effect.
(iv) 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 (as defined below) 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 an "ORGANIC CHANGE." Prior to
the consummation of any Organic Change, the Company will 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
-9-
<PAGE>
holders of the Preferred Shares will thereafter have the right to acquire and
receive in lieu of or addition to (as the case may be) the shares of Common
Stock acquirable and receivable upon the conversion of such holder's Preferred
Shares immediately prior to such Organic Change, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for the number of shares of Common Stock immediately theretofore acquirable and
receivable upon the conversion of such holder's Preferred Shares had such
Organic Change not taken place (without taking into account any limitations or
restrictions on the timing or amount of conversions). In any such case, the
Company will make appropriate provision (in form and substance satisfactory to
the holders of a majority of the Preferred Shares then outstanding) with respect
to such holders' rights and interests to insure that the provisions of this
Section 2(d) and Section 2(e) below will thereafter be applicable, as closely as
practicable, to the Preferred Shares (including, in the case of any such
consolidation, merger or sale in which the successor entity or purchasing entity
is other than the Company, an immediate adjustment of the Fixed Conversion Price
to the value for the Common Stock reflected by the terms of such consolidation,
merger or sale, if the value so reflected is less than the Fixed Conversion
Price in effect immediately prior to such consolidation, merger or sale). The
Company will not effect any such consolidation, merger or sale, unless prior to
the consummation thereof, the successor entity (if other than the Company)
resulting from consolidation or merger or the entity purchasing such assets
assumes, by written instrument, the obligation to deliver to each holder of
Preferred Shares such shares of stock, securities or assets as, in accordance
with the foregoing provisions, such holder may be entitled to acquire. "PERSON"
shall mean 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.
(v) CERTAIN EVENTS. If any event occurs of the type
contemplated by the provisions of this Section 2(d) 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
other than rights to be settled exclusively in cash), 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(d).
-10-
<PAGE>
(vi) NOTICES.
(A) As soon as practicable, upon any adjustment of the
Conversion Price, 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, dissolution or liquidation, but in no
event shall such notice be provided to such holder prior to such information
being made known to the public.
(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 and in no event shall
such notice be provided to such holder prior to such information being made
known to the public.
(e) PURCHASE RIGHTS. In addition to any adjustments of the
Conversion Price pursuant to Section 2(d) above, 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 (i) 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 timing or
amount of conversions) 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 and (ii) no
adjustment shall be made to the Fixed Conversion Price pursuant to Section 2(d).
(f) MECHANICS OF CONVERSION. Subject to the Company's inability to
fully satisfy its obligations under a Conversion Notice (as defined below) as
provided for in Section 4 below:
(i) HOLDER'S DELIVERY REQUIREMENTS. To convert Preferred
Shares into full 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 a
fully executed notice of conversion in the form attached hereto as Exhibit I
(the "CONVERSION NOTICE"), to the Company, and (B) surrender to a common carrier
for delivery to the Company or its designated transfer agent (the "TRANSFER
AGENT") as soon as practicable following such date, the original certificates
representing the Preferred Shares being
-11-
<PAGE>
converted (or an indemnification undertaking with respect to such shares in the
case of their loss, theft or destruction) (the "PREFERRED STOCK CERTIFICATES")
and the originally executed Conversion Notice.
(ii) COMPANY'S RESPONSE. Upon receipt by the Company of a
facsimile copy of a Conversion Notice, the Company shall promptly (but no later
than the next business day following the date of receipt) send, via facsimile
(provided such holder has filed a facsimile address with the Company, included
in such Conversion Notice; otherwise in accordance with the provisions of
Section 17 herein), a confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Company or the Transfer Agent of the Preferred Stock
Certificates to be converted pursuant to a Conversion Notice, together with the
originally executed Conversion Notice, the Company or the Transfer Agent (as
applicable) shall, on the next business day following the date of receipt, (I)
issue and surrender to a common carrier for overnight delivery 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, or (II) 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 The Depository Trust Company (if so designated
by the holder in the Conversion Notice). If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion is
greater than the number of Preferred Shares being converted, then the Company or
Transfer Agent, as the case may be, shall, as soon as practicable and in no
event later than two (2) business days after receipt of the Preferred Stock
Certificate(s) and 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 Market Price or the arithmetic calculation of the
Conversion Rate, the Company shall promptly issue to the holder the number of
shares of Common Stock that is not disputed and shall submit the disputed
determinations or arithmetic calculations to the holder via facsimile as soon as
possible, but in no event later than two (2) business days after receipt of such
holder's Conversion Notice. If such holder and the Company are unable to agree
upon the determination of the Market Price or arithmetic calculation of the
Conversion Rate within one (1) business day of such disputed determination or
arithmetic calculation being submitted to the holder, then the Company shall
within one (1) business day submit via facsimile (A) the disputed determination
of the Market Price to an independent, reputable investment bank or (B) the
disputed arithmetic calculation of the Conversion Rate to its 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 forty-eight
(48) hours 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.
-12-
<PAGE>
(v) COMPANY'S FAILURE TO TIMELY CONVERT. If within ten (10)
business days of the Company's or the Transfer Agent's receipt of the Preferred
Stock Certificates to be converted and the originally executed Conversion Notice
the Company shall fail to issue a certificate to a holder or credit the holder's
balance account with The Depository Trust Company for the number of shares of
Common Stock to which such holder is entitled upon such holder's conversion of
Preferred Shares or to issue a new Preferred Stock Certificate representing the
number of Preferred Shares to which such holder is entitled pursuant to Section
2(f)(ii), 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 (on the
last day of each calendar month during which any such failure exists) additional
damages to such holder for each date on and after the tenth (10th) business day
after the Company's receipt of such Conversion Notice that such conversion is
not timely effected in an amount equal to 0.25% of the product of (A) the sum of
the number of shares of Common Stock not issued to the holder on a timely basis
pursuant to Section 2(f)(ii) and to which such holder is entitled and, in the
event the Company has failed to deliver a Preferred Stock Certificate to the
holder on a timely basis pursuant to Section 2(f)(ii) and the holder thereof has
elected to convert same, the number of shares of Common Stock issuable upon
conversion of the Preferred Shares represented by such Preferred Stock
Certificate which such holder has elected to convert, as of the last possible
date which the Company could have issued such Preferred Stock Certificate to
such holder without violating Section 2(f)(ii) and (B) the Closing Bid Price of
the Common Stock on the last possible date which the Company could have issued
such Common Stock and such Preferred Stock Certificate, as the case may be, to
such holder without violating Section 2(f)(ii).
(g) MANDATORY CONVERSION. If any Preferred Shares remain outstanding
on the Mandatory Conversion Date (as defined below), then all such Preferred
Shares shall be converted as of such date in accordance with this Section 2 as
if the holders of such Preferred Shares had given the Conversion Notice on the
Mandatory Conversion Date. All holders of Preferred Shares shall thereupon
surrender all Preferred Stock Certificates, duly endorsed for cancellation, to
the Company or the Transfer Agent. "MANDATORY CONVERSION DATE" means the date
which is five (5) years after the Closing Date, plus such number of days as the
Mandatory Conversion Date may be extended pursuant to Section 4(k) of the
Securities Purchase Agreement or Section 3(f) of the Registration Rights
Agreement. All shares so mandatorily converted shall cease to be outstanding on
the Mandatory Conversion Date and shall thereupon only be entitled to receive
the number of shares of Common Stock issuable upon such conversion upon
submission of the applicable Preferred Stock Certificates.
(h) FRACTIONAL SHARES. 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
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 pay for
such fraction of a share
-13-
<PAGE>
of Common Stock in cash based on the Market Value of such fractional share on
the Conversion Date.
(i) TAXES. The Company shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of Common Stock upon
the conversion of the Preferred Shares.
(j) CONVERSION RESTRICTIONS. Without the prior consent of the
Company, a holder of Preferred Shares (together with such holder's direct or
indirect transferee) shall not be entitled to convert in any thirty (30) day
period while such Preferred Shares are convertible more than one-third (1/3) of
the aggregate number of Preferred Shares purchased by such holder (and such
holder's direct or indirect transferee) on the Issuance Date. Notwithstanding
the foregoing, the conversion restriction set forth in this Section 2(j) shall
not apply if an event constituting a Major Transaction (as defined in Section
3(c) below) or a Triggering Event (as defined in Section 3(d) below) shall have
occurred or been publicly announced and be continuing.
(k) ADJUSTMENT OF CONVERSION RESTRICTIONS UPON ISSUANCE OF
CONVERTIBLE SECURITIES. If the Company in any manner issues or sells Convertible
Securities that are convertible into Common Stock and are subject to (i)
restrictions on the amount of shares that can be converted, or (ii) no
restrictions on the amount of shares that can be converted (the restriction on
conversions or lack thereof being herein referred to as the "CONVERSION
RESTRICTION"), and such Conversion Restriction is not formulated with using the
same time periods and percentages used in Section 2(j), then the Company shall
provide written notice thereof via facsimile and overnight courier to each
holder of the Preferred Shares ("CONVERSION RESTRICTION NOTICE") on the date of
issuance of such Convertible Securities. If the holders of Preferred Shares
representing at least two-thirds (2/3) of the Preferred Shares then outstanding
which remain subject to the restrictions in Section (j) provide written notice
via facsimile and overnight courier (the "CONVERSION RESTRICTION ELECTION
NOTICE") to the Company within five (5) business days of receiving a Conversion
Restriction Notice that such holders desire to replace the conversion
restrictions set forth in Section 2(j) then in effect with the Conversion
Restriction described in such Conversion Restriction Notice, the Company shall
prepare and deliver to each holder of the Preferred Shares via facsimile and
overnight courier a copy of an amendment to this Certificate of Designation (the
"CONVERSION RESTRICTION AMENDMENT") that substitutes the Conversion Restriction
for conversion restrictions set forth in Section 2(j) (together with such
modifications to this Certificate of Designation as may be required to give full
effect to the substitution of the Conversion Restriction for the conversion
restrictions set forth in Section 2(j)) within five (5) business days after
receipt of the requisite number of Conversion Restriction Election Notices set
forth above. The Company shall file such Conversion Restriction Amendment with
the Secretary of State of the State of Delaware within five (5) business days
after delivery of the Conversion Restriction Amendment to the holders of the
Preferred Shares; provided that in the event that the Company receives a notice
prior to the filing of the Conversion Restriction Amendment from any holder who
has delivered a Conversion Restriction Election Notice in connection with such
Conversion Restriction Amendment that such holder objects to the form of the
Conversion Restriction Amendment, the Company shall not file such
-14-
<PAGE>
Conversion Restriction Amendment until such time as the Conversion Restriction
Amendment has been revised to the reasonable satisfaction of such holder and
approved in writing by the holders of the Preferred Shares representing at least
two-thirds (2/3) of the Preferred Shares then outstanding. Except as provided in
the preceding proviso, a holder's delivery of a Conversion Restriction Election
Notice shall serve as the consent required to amend this Certificate of
Designations pursuant to Section 12 below.
(l) CONVERSION AT THE OPTION OF THE COMPANY. At any time or times on
or after the date which is three (3) years after the Issuance Date, the Company
shall have the right, in its sole discretion, to require that any or all of the
outstanding Preferred Shares issued on such Issuance Date be converted
("CONVERSION AT COMPANY'S ELECTION") at the Conversion Rate; provided that the
Conditions to Conversion at Company's Election (as defined below) are satisfied.
The Company shall exercise its right to Conversion at Company's Election by
providing each holder of such Preferred Shares written notice ("NOTICE OF
CONVERSION AT COMPANY'S ELECTION") at least thirty (30) days prior to the date
selected by the Company for conversion ("COMPANY'S ELECTION CONVERSION DATE").
If the Company elects to require conversion of some, but not all, of such
Preferred Shares, the Company shall convert an amount from each then holder of
such Preferred Shares equal to such holder's pro rata amount (based on the
number of Preferred Shares then held by such holder relative to the number of
Preferred Shares outstanding on Company's Election Conversion Date) of all
Preferred Shares the Company is requiring to be converted. The Notice of
Conversion at Company's Election shall indicate (x) the number of Preferred
Shares the Company has selected for conversion, (y) the Company's Election
Conversion Date, which date shall be not less than thirty (30) or more than
forty (40) days after the Company's giving of such notice, and (z) each holder's
pro rata share of outstanding Preferred Shares. All Preferred Shares selected
for conversion in accordance with the provision of this Section 2(l) shall be
converted as of the Company's Election Conversion Date in accordance with this
Section 2 as if the holders of such Preferred Shares selected by the Company to
be converted had given the Conversion Notice on the Company's Election
Conversion Date. All Preferred Shares so called for conversion shall cease to be
outstanding on the Company's Election Conversion Date and shall thereupon only
be entitled to receive the number of shares of Common Stock issuable upon such
conversion upon submission of the applicable Preferred Stock Certificates. All
holders of Preferred Shares shall thereupon and within two (2) business days of
the Company's Election Conversion Date surrender all Preferred Stock
Certificates selected for conversion, duly endorsed for cancellation, to the
Company or the Transfer Agent. "CONDITIONS TO CONVERSION AT COMPANY'S ELECTION"
means the following conditions: (i) unless paragraph (k) of Rule 144 promulgated
under the Securities Act of 1933, as amended ("RULE 144") is available with
respect to the sale of such Conversion Shares, on each day during the period
beginning twenty (20) days prior to the Notice of Conversion at the Company's
Election and ending on and including the Company's Election Conversion Date, the
Registration Statement shall be effective and available for the sale of the
number of Conversion Shares then issuable upon the conversion of all outstanding
Preferred Shares, including the Conversion Shares to be issued pursuant to such
Conversion at the Company's Election (up to the Exchange Cap allocable to such
Preferred Shares pursuant to Section 11), (ii) on each day during the period
beginning twenty (20) days prior to the date of the Company's Notice of
Conversion at
-15-
<PAGE>
Company's Election and ending on and including the Company's Election Conversion
Date, the Common Stock is designated for quotation on the Nasdaq National
Market, The New York Stock Exchange, Inc. or The American Stock Exchange, Inc.
and is not suspended from trading; (iii) none of the holders shall have been
subject to a lockup agreement under Section 4(k) of the Securities Purchase
Agreement at any time during the period beginning twenty (20) days prior to the
date of the Company's Notice of Conversion at Company's Election and ending on
and including the Company's Election Conversion Date; (iv) the Company shall
have timely delivered Conversion Shares with respect to such Conversion at
Company's Election, and (v) the Company has otherwise satisfied its obligations
in all material respects under, and is not then in default under, this
Certificate of Designation, the Securities Purchase Agreement, the Registration
Rights Agreement and the Warrants issued in conjunction with the original
issuance of the Preferred Shares. 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(a) on or prior to the
date immediately preceding the Company's Election Conversion Date (and, after
such holder's receipt of the Notice of Conversion at Company's Election, without
regard to the conversion limitations set forth in Section 2(j) above other than
the restrictions contained in Sections 4 and 11 which shall continue to
pertain).
3. REDEMPTION AT OPTION OF HOLDERS.
(a) REDEMPTION OPTION UPON MAJOR TRANSACTION. In addition to
all other rights of the holders of Preferred Shares contained herein,
simultaneous with or after the occurrence of a Major Transaction (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)
$1,150 and (ii) the product of (A) the Conversion Rate at such time and (B) the
Closing Bid Price on the date of the public announcement of such Major
Transaction or the next date on which the exchange or market on which the Common
Stock is traded is open if such public announcement is made (X) after 12:00 p.m.
(noon), New York City Time, time on such date or (Y) on a date on which the
exchange or market on which the Common Stock is traded is closed ("MAJOR
TRANSACTION REDEMPTION PRICE").
(b) 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) $1,150, and (ii) the product of (A) the Conversion Rate at
such time and (B) the Closing Bid Price calculated as of the last date on which
the exchange or market on which the Common Stock is traded is open immediately
preceding such Triggering Event ("TRIGGERING EVENT REDEMPTION PRICE" and,
collectively with "MAJOR TRANSACTION REDEMPTION PRICE," the "REDEMPTION PRICE").
(c) "MAJOR TRANSACTION". A "MAJOR TRANSACTION" shall be
deemed to have occurred at such time as any of the following events:
-16-
<PAGE>
(i) the consolidation, merger or other business
combination of the Company with or into another Person (other than pursuant to a
migratory merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company or changing the Company into a holding or operating
company);
(ii) the sale or transfer of all or substantially all
of the Company's assets; or
(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.
(d) "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 Registration Statement to be
declared effective by the SEC on or prior to the date that is two hundred forty
(240) days after the Closing Date;
(ii) while the Registration Statement is required to
be maintained effective pursuant to the terms of 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 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 ten (10) consecutive trading days (in addition to any days
during a Grace Period (as defined in Section 3(f) of the Registration Rights
Agreement)), provided that the cause of such lapse or unavailability is not due
to factors primarily within the control of such holder of Preferred Shares;
(iii) the failure of the Common Stock to be listed on
the Nasdaq National Market, The New York Stock Exchange, Inc. or The American
Stock Exchange, Inc. for a period of seven (7) consecutive days; or
(iv) the Company's notice to any holder of Preferred
Shares, including by way of public announcement, at any time, of its intention
not to comply with proper requests for conversion of any Preferred Shares into
shares of Common Stock, including due to any of the reasons set forth in Section
4(a) below.
(e) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON MAJOR
TRANSACTION. No sooner than fifteen (15) days nor later than ten (10) days prior
to the consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written notice
thereof via facsimile and overnight courier ("NOTICE OF MAJOR TRANSACTION") to
each holder of Preferred Shares. At any time after receipt of a Notice of Major
Transaction, the holders of at least two-thirds (2/3) of the Preferred Shares
then outstanding may
-17-
<PAGE>
require the Company to redeem all of the holders' Preferred Shares then
outstanding by delivering written notice thereof via facsimile and overnight
courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER UPON MAJOR TRANSACTION") to
the Company, which Notice of Redemption at Option of Buyer Upon Major
Transaction shall indicate (i) the number of Preferred Shares that such holders
are voting in favor of redemption and (ii) the applicable Major Transaction
Redemption Price, as calculated pursuant to Section 3(a) above.
(f) MECHANICS OF REDEMPTION AT OPTION OF BUYER UPON
TRIGGERING EVENT. Within one (1) 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 receipt of a Notice of Triggering Event, any holder of the
Preferred Shares then outstanding may require the Company to redeem all or any
portion of the Preferred Shares held by such holder by delivering written notice
thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF
BUYER UPON TRIGGERING EVENT") to the Company, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the number of Preferred
Shares that such holder is submitting for redemption and (ii) the applicable
Triggering Event Redemption Price, as calculated pursuant to Section 3(b) above.
Notwithstanding the foregoing, if (A) the Triggering Event is one described in
Section 3(d)(ii) above, and (B) such lapse discontinues and a holder of
Preferred Shares receives notice from the Company that the lapse in the
effectiveness of the Registration Statement no longer continues prior to such
holder's delivery to the Company of the holder's Notice of Redemption at Option
of Buyer Upon Triggering Event, then the holder shall no longer have the right
to deliver a Notice of Redemption at Option of Buyer Upon Triggering Event to
the Company with respect to such lapse and any outstanding Notices of Redemption
at Option of Buyer Upon Triggering Event shall be deemed canceled AB INITIO.
(g) PAYMENT OF REDEMPTION PRICE. Upon the Company's receipt
of a Notice(s) of Redemption at Option of Buyer Upon Major Transaction from the
holders of at least two-thirds (2/3) of the Preferred Shares then outstanding
the Company shall immediately notify each holder by facsimile of the Company's
receipt of such requisite notice(s) necessary to effect a redemption and each
holder of Preferred Shares shall thereafter promptly send such holder's
Preferred Stock Certificates to be redeemed to the Company or its Transfer
Agent. Upon the Company's receipt of a Notice(s) of Redemption at Option of
Buyer Upon Triggering Event 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) of Redemption at Option of Buyer Upon
Triggering Event and each holder which has sent such a notice shall promptly
submit to the Company or its Transfer Agent such holder's Preferred Stock
Certificates which such holder has elected to have redeemed. The Company shall
deliver the applicable Redemption Price to such holder within ten (10) business
days after the Company's receipt of the requisite notices required to effect a
redemption; provided that a holder's Preferred Stock Certificates shall have
been so delivered to the Company or its Transfer Agent; provided further that if
the Company is unable to redeem all of the Preferred Shares to be redeemed, the
Company shall redeem an amount from each holder of Preferred Shares being
redeemed equal to such holder's pro-rata amount (based on the number of
Preferred Shares held by
-18-
<PAGE>
such holder relative to the number of Preferred Shares outstanding) of all
Preferred Shares being redeemed. If the Company shall fail to redeem all of the
Preferred Shares submitted for redemption (other than pursuant to a dispute as
to the arithmetic calculation of the Redemption Price), in addition to any
remedy such holder of Preferred Shares may have under this Certificate of
Designation and the Securities Purchase Agreement, the applicable Redemption
Price payable in respect of such unredeemed Preferred Shares shall bear interest
at the rate of 2.0% per month (prorated for partial months) until paid in full.
Until the Company pays such unpaid applicable Redemption Price in full to a
holder of Preferred Shares submitted for redemption, such holder shall have the
option, in the case of a Notice of Redemption at Option of Buyer Upon Triggering
Event, and, in the event of a Notice of Redemption at Option of Buyer Upon Major
Transaction, the holders of at least two-thirds (2/3) of the Preferred Shares
then outstanding (including Preferred Shares submitted for redemption pursuant
to this Section 3 and for which the applicable Redemption Price has not been
paid) shall have the option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu
of redemption, require the Company to promptly return to such holder(s) all of
the Preferred Shares that were submitted for redemption by such holder(s) under
this Section 3 and for which the applicable Redemption Price 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(s) and prior to payment of the full applicable Redemption
Price to such holder, (i) the Notice(s) of Redemption at Option of Buyer Upon
Triggering Event or the Notice(s) of Redemption at Option of Buyer Upon Major
Transaction, as the case may be, shall be null and void with respect to those
Preferred Shares submitted for redemption and for which the applicable
Redemption Price has not been paid, (ii) the Company shall immediately return
any Preferred Shares submitted to the Company by each holder for redemption
under this Section 3(g) and for which the applicable Redemption Price has not
been paid, and (iii) the Fixed Conversion Price of such 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(s) is delivered
to the Company and (B) the lowest Closing Bid Price during the period beginning
on the date on which the Notice(s) of Redemption of Option of Buyer Upon Major
Transaction or the Notice(s) of Redemption at Option of Buyer Upon Triggering
Event, as the case may be, is delivered to the Company and ending on the date on
which the Void Optional Redemption Notice(s) is delivered to the Company;
provided that no adjustment shall be made if such adjustment would result in an
increase of the Fixed Conversion Price then in effect. Notwithstanding the
foregoing, in the event of a dispute as to the determination of the Closing Bid
Price or the arithmetic calculation of the Redemption Price, such dispute shall
be resolved pursuant to Section 2(f)(iii) above with the term "Closing Bid
Price" being substituted for the term "Average Market Price" and the term
"Redemption Price" being substituted for the term "Conversion Rate". Payments
provided for in this Section 3 shall have priority to payments to other
stockholders in connection with a Major Transaction.
4. INABILITY TO FULLY CONVERT.
(a) HOLDER'S OPTION IF COMPANY CANNOT FULLY CONVERT. If,
upon the Company's receipt of a Conversion Notice, the Company can not issue
shares of Common Stock registered for resale under the Registration Statement
for any reason, including, without limitation, because the
-19-
<PAGE>
Company (x) does not have a sufficient number of shares of Common Stock
authorized and available, (y) is otherwise prohibited by applicable law or by
the rules or regulations of any stock exchange, interdealer quotation system or
other self-regulatory organization with jurisdiction over the Company or its
Securities, including without limitation by reason of the Exchange Cap (as
defined in Section 11 below), from issuing all of the Common Stock which is to
be issued to a holder of Preferred Shares pursuant to a Conversion Notice or (z)
unless paragraph (k) of Rule 144 is available with respect to such Conversion
Shares, fails to have a sufficient number of shares of Common Stock registered
for resale under the Registration Statement, then the Company shall issue as
many shares of Common Stock as it is able to issue in accordance with such
holder's Conversion Notice and pursuant to Section 2(f) above without violating
any of the foregoing and, with respect to the unconverted Preferred Shares, the
holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder
those Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at a
price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
Triggering Event Redemption Price as of such Conversion Date;
(ii) if the Company's inability to fully convert
Preferred Shares is pursuant to Section 4(a)(z) above, require the Company to
issue restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(f) above;
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were to be
converted pursuant to such holder's Conversion Notice; or
(iv) if the Company's inability to fully convert
Preferred Shares is pursuant to the Exchange Cap described in Section 4(a)(y)
above, require the Company to issue shares of Common Stock in accordance with
such holder's Conversion Notice and pursuant to Section 2(f) above at a
Conversion Price equal to the Market Price on the Closing Date.
(b) MECHANICS OF FULFILLING HOLDER 'S ELECTION. The Company
shall immediately send via facsimile to a holder of Preferred Shares, upon
receipt of a facsimile copy of a Conversion Notice from such holder which cannot
be fully satisfied as described in Section 4(a) above, a notice of the Company's
inability to fully satisfy such holder's Conversion Notice (the "INABILITY TO
FULLY CONVERT NOTICE"). Such Inability to Fully Convert Notice shall indicate
(i) the reason why the Company is unable to fully satisfy such holder's
Conversion Notice, (ii) the number of Preferred Shares which cannot be converted
and (iii) the applicable Mandatory Redemption Price. Such holder must within ten
(10) business days of the Company's giving of such Inability to Fully Convert
Notice deliver written notice via facsimile to the Company ("NOTICE IN RESPONSE
TO INABILITY TO CONVERT") of its election pursuant to Section 4(a) above. If
such holder fails to timely deliver such Notice in Response to Inability to
Convert, such holder shall be deemed to have made the election contemplated by
Section 4(a)(iii).
-20-
<PAGE>
(c) PAYMENT OF REDEMPTION PRICE. If such holder shall elect
to have its shares redeemed pursuant to Section 4(a)(i) above, the Company shall
pay the Mandatory Redemption Price in cash to such holder within ten (10) days
of the Company's receipt of the holder's Notice in Response to Inability to
Convert. If the Company shall fail to pay the applicable Mandatory Redemption
Price to such holder on a timely basis as described in this Section 4(c) (other
than pursuant to a dispute as to the determination of the arithmetic calculation
of the Redemption Price), in addition to any remedy such holder of Preferred
Shares may have under this Certificate of Designation and the Securities
Purchase Agreement, such unpaid amount shall bear interest at the rate of 2.0%
per month (prorated for partial months) until paid in full. Until the full
Mandatory Redemption Price is paid in full to such holder, such holder may void
the Mandatory Redemption with respect to those Preferred Shares for which the
full Mandatory Redemption Price has not been paid and receive back such
Preferred Shares. Notwithstanding the foregoing, if the Company fails to pay the
applicable Mandatory Redemption Price within such ten (10) days time period due
to a dispute as to the determination of the arithmetic calculation of the
Redemption Rate, such dispute shall be resolved pursuant to Section 2(f)(iii)
above with the term "Redemption Price" being substituted for the term
"Conversion Rate".
(d) PRO-RATA CONVERSION AND REDEMPTION. Conversion and
Redemption shall be on a "first come, first served" basis. In the event the
Company receives a Conversion Notice, a Notice of Redemption at Option of Buyer
upon Major Transaction or a Notice of Redemption at Option of Buyer upon
Triggering Event from more than one holder of Preferred Shares on the same day
and the Company can convert and redeem some, but not all, of the Preferred
Shares pursuant to this Section 4, the Company shall convert and redeem from
each holder of Preferred Shares electing to have Preferred Shares converted and
redeemed at such time an amount equal to such holder's pro-rata amount (based on
the number of Preferred Shares held by such holder relative to the number of
Preferred Shares outstanding) of all Preferred Shares being converted and
redeemed at such time.
5. REISSUANCE OF CERTIFICATES. In the event of a conversion or
redemption pursuant to this Certificate of Designation 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 so converted or redeemed.
6. RESERVATION OF SHARES. The Company shall, so long as any of the
Preferred Shares are outstanding, reserve and keep available out of its
authorized and unissued Common Stock, solely for the purpose of effecting the
conversion 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 the lesser of (a) the maximum
number of shares it can issue without violating the Exchange Cap and (b)150% of
the number of shares of Common Stock for which the Preferred Shares are at any
time convertible; provided further that such shares of Common Stock so reserved
shall be allocated for issuance upon conversion of Preferred Shares pro rata
among the holders of
-21-
<PAGE>
Preferred Shares based on the number of Preferred Shares held by such holder
relative to the total number of authorized Preferred Shares.
7. VOTING RIGHTS. Holders of Preferred Shares shall have no voting
rights, except as required by law, including but not limited to the General
Corporation Law of the State of Delaware, and as expressly provided in this
Certificate of Designation.
8. DIVIDENDS. The Preferred Shares shall not bear any dividends.
9. 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 "PREFERRED 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
the distributions and payments on the liquidation, dissolution and winding up of
the Company, an amount per Preferred Share equal to $1,150 (such sum being
referred to as the "LIQUIDATION VALUE"); provided that, if the Preferred 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
Preferred Funds (the "PARI PASSU SHARES"), then each holder of Preferred Shares
and Pari Passu Shares shall receive a percentage of the Preferred Funds equal to
the full amount of Preferred Funds payable to such holder as a liquidation
preference, in accordance with their respective Certificate of Designation, as a
percentage of the full amount of Preferred 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. No holder of Preferred
Shares shall be entitled to receive any amounts with respect thereto upon any
liquidation, dissolution or winding up of the Company other than the amounts
provided for herein.
10. PREFERRED RANK. All shares of Common Stock shall be of junior
rank to all Preferred Shares in 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 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 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
-22-
<PAGE>
State of Delaware 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 corporation, the Preferred Shares shall maintain
their relative powers, designations and preferences provided for herein and no
merger shall result inconsistent therewith.
11. RESTRICTION ON REDEMPTION AND CASH DIVIDENDS WITH RESPECT TO
OTHER CAPITAL STOCK. 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 Common Stock
without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares.
12. LIMITATION ON NUMBER OF CONVERSION SHARES. The Company shall not
be obligated to issue upon conversion of the Preferred Shares, in the aggregate,
more than 1,520,000 shares of Common Stock (such amount to be proportionately
and equitably adjusted from time to time in the event of stock splits, stock
dividends, combinations, reverse stock splits, reclassification, capital
reorganizations and similar events relating to the Common Stock) (the "EXCHANGE
CAP") if issuance of a larger number of shares of Common Stock would constitute
a breach of the Company's obligations under the rules or regulations of The
Nasdaq Stock Market, Inc. or any other principal securities exchange or market
upon which the Common Stock is or becomes traded. The Exchange Cap shall be
allocated among the Preferred Shares pro rata based on the total number of
authorized Preferred Shares.
13. VOTE TO CHANGE THE TERMS OF OR ISSUE PREFERRED SHARES. Except to
the extent a lesser or greater vote is permitted or required elsewhere in this
Certificate of Designation, 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 (1) any change to this Certificate of Designation 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, or (2)
any issuance of Preferred Shares other than pursuant to the Securities Purchase
Agreement.
14. LOST OR STOLEN CERTIFICATES. Upon receipt by the Company of
evidence 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 any indemnification
undertaking by the holder to the Company 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.
-23-
<PAGE>
15. REDEMPTION AT OPTION OF THE COMPANY.
By notice given ("NOTICE OF REDEMPTION AT COMPANY'S ELECTION")
at any time or times on or prior to the date which is not more than one hundred
twenty (120) days following the Closing Date, the Company shall have the right,
in its sole discretion, to redeem any or all of the outstanding Preferred Shares
("REDEMPTION AT COMPANY'S OPTION") at a price per share of $1,150 (the "COMPANY
REDEMPTION PRICE"). Notice of Redemption at Company's Election shall be given by
facsimile (to the extent the Company has been provided a facsimile address by
the holder of the Preferred Shares being redeemed) and overnight courier, not
less than five (5) nor more than ten (10) business days prior to the date fixed
for redemption (the "COMPANY REDEMPTION DATE"), to each holder of record of
Preferred Shares to be redeemed; but neither the failure to give any such notice
to one or more such holders nor any defect in any notice given shall affect the
sufficiency of the proceedings for redemption as to other holders. Each such
notice shall state the Company Redemption Date, the number of Preferred Shares
to be redeemed, and, if less than all the Preferred Shares held by such holder
are to be redeemed, the number of Preferred Shares to be redeemed from such
holder, the Company Redemption Price and the place or places where such
Preferred Shares are to be surrendered for payment of the Company Redemption
Price. Notice having been mailed as aforesaid, from and after the Company
Redemption Date (unless default shall be made by the Company in providing money
for the payment of the Company Redemption Price), the Preferred Shares called
for redemption shall no longer be deemed to be outstanding, all rights of the
holders thereof as shareholders of the Company shall cease and terminate except
for the right to receive the Company Redemption Price and any right of
conversion or exchange which may be exercisable (to the extent then exercisable)
up to the close of business on the Company Redemption Date. Upon surrender of
the Preferred Stock Certificates evidencing the Preferred Shares called for
redemption in accordance with said notice, the Company shall make payment of the
Company Redemption Price with respect thereto.
-24-
<PAGE>
16. NOTICES.
Any notice or demand authorized by this Certificate of
Designation to be given shall be sufficiently given for all purposes if sent in
the manner specifically provided for elsewhere in this Certificate of
Designation or, if not specifically provided for, by facsimile (to the extent,
in the case of a notice to a holder of Preferred Shares, the Company has been
provided a facsimile address by such holder), overnight courier or United States
certified mail, return receipt requested. Any notice or demand to the Company
shall be addressed to it at TII Industries, Inc., 1385 Akron Street, Copiague,
New York 11726, facsimile 516-789-2228, Attention: President; or at such other
address as may be furnished in writing by the Company to holders of Preferred
Shares. Any notice or demand to the Transfer Agent shall be addressed to it at
Harris Trust and Savings Bank, 311 West Monroe Street, Chicago, Illinois 60606,
facsimile 312-765-8052, Attention: Mr. Dennis M. Sneyers, or at such other
address as may be furnished in writing by the Company or the Transfer Agent to
the holders of Preferred Shares or the Company. Any notice to a holder of
Preferred Shares shall be addressed to such holder at its address provided in
such holder's Securities Purchase Agreement, or at such other address as may be
furnished in writing by such holder (or such holder's direct or indirect
transferee) to the Company. Unless otherwise specifically provided in this
Certificate of Designation, notices and demands shall be effective when (i) sent
by facsimile (provided a confirmation of transmission is mechanically generated
and kept on file by the sending party and regardless of whether a copy is also
sent by overnight courier), (ii) the first (1st) business day after sent by
overnight courier (unless such notice has also been given by facsimile which
results in an earlier effective notice date) or (iii) three (3) business days
after being sent by certified mail return receipt requested.
17. MISCELLANEOUS
(a) RETURN TO AUTHORIZED AND UNISSUED STATUS. Preferred Shares
issued and reacquired or redeemed by the Corporation, or converted into shares
of Common Stock shall have the status of authorized and unissued shares of
Preferred Stock, undesignated as to series, subject to later issuance.
(b) NO PREEMPTIVE RIGHTS. No holder of Preferred Shares of the
Corporation shall, because of his ownership of such Preferred Shares, have a
pre-emptive right to purchase, subscribe for or take any part of any shares of
capital stock of the Corporation or any securities, convertible into, or
warrants or options exercisable for, any shares of capital stock of the
Corporation.
-25-
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be signed by Timothy J. Roach, its President and Chief Executive
Officer, as of the 26th day of January 1998.
TII INDUSTRIES, INC.
By: /s/ Timothy J. Roach
-------------------------
Timothy J. Roach, President
Attest:
/s/ Virginia M. Hall
- -------------------------------------
Virginia M. Hall, Assistant Secretary
-26-
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE,
SOLD, TRANSFERRED OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
APPLICABLE STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR APPLICABLE
STATE SECURITIES LAWS.
TII INDUSTRIES, INC.
COMMON STOCK PURCHASE WARRANT
WP -
1. ISSUANCE. For good and valuable consideration, the receipt of
which is hereby acknowledged by TII INDUSTRIES, INC., a Delaware corporation
(the "Company"), __________________________, or registered assigns (the
"Holder") is hereby granted the right to purchase at any time commencing two (2)
days following the date hereof and until 5:00 P.M., New York City time, on
January __, 2001 (the "Expiration Date"), __________________________(__) fully
paid and nonassessable shares of the Company's Common Stock, $.01 par value per
share (the "Common Stock") at an initial exercise price per share equal to
$7.03125 (the "Exercise Price"), subject to further adjustment as set forth in
Section 6 hereof.
2. EXERCISE OF WARRANTS. This Warrant is exercisable in whole or in
part at the Exercise Price per share of Common Stock payable hereunder, payable
in cash or by certified or official bank check, or by "cashless exercise" by
means of tendering this Warrant Certificate to the Company to receive a number
of shares of Common Stock equal in Market Value to the difference between the
Market Value of the shares of Common Stock issuable upon exercise of this
Warrant and the total cash exercise price thereof. Upon surrender of this
Warrant Certificate with the annexed Notice of Exercise Form duly executed,
together with payment of the Exercise Price for the shares of Common Stock
purchased, the Holder shall be entitled to receive a certificate or certificates
for the shares of Common Stock so purchased. For the purposes of this Section 2,
"Market Value" shall be an amount equal to the average of the closing bid prices
of a share of Common Stock for the five (5) trading days preceding the Company's
receipt of the Notice of Exercise Form duly executed.
3. RESERVATION OF SHARES. The Company hereby agrees that at all
times during the term of this Warrant there shall be reserved for issuance upon
exercise of this Warrant such number of shares of its Common Stock as shall be
required for issuance upon exercise of this Warrant (the "Warrant Shares"). The
Company shall use its best efforts and all due diligence to increase the number
of shares of Common Stock so reserved to cure any deficiencies, and, if
necessary, to obtain
<PAGE>
approval of its stockholders therefor, including authorization of such
additional number of shares of Common Stock as may be required in excess of the
number so reserved.
4. MUTILATION OR LOSS OF WARRANT. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Warrant, and (in the case of loss, theft or destruction) receipt of
reasonably satisfactory indemnification, and (in the case of mutilation) upon
surrender and cancellation of this Warrant, the Company will execute and deliver
a new Warrant of like tenor and date and any such lost, stolen, destroyed or
mutilated Warrant shall thereupon become void.
5. RIGHTS OF THE HOLDER. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or equity,
and the rights of the Holder are limited to those expressed in this Warrant and
are not enforceable against the Company except to the extent set forth herein.
6. PROTECTION AGAINST DILUTION.
6.1. ADJUSTMENT MECHANISM. If an adjustment of the Exercise
Price is required pursuant to this Section 6, the Holder shall be entitled to
purchase such number of shares of Common Stock as will cause (i) the total
number of shares of Common Stock the Holder is entitled to purchase pursuant to
this Warrant (after such adjustment) multiplied by the adjusted Exercise Price
to equal (ii) the total number of shares of Common Stock the Holder was entitled
to purchase before such adjustment multiplied by the Exercise Price before the
adjustment.
6.2. CAPITAL ADJUSTMENTS. In case of any stock split or
combination, stock dividend, reclassification of the Common Stock,
recapitalization, or like capital adjustment affecting the Common Stock of the
Company, the Exercise Price shall be proportionately adjusted in a fair,
equitable and reasonable manner so as to give effect, as nearly as reasonably
practicable to the purposes hereof.
6.3. MERGER, SALE OF ASSETS, ETC. If at any time while this
Warrant, or any portion hereof, is outstanding and unexpired there shall be (i)
a reorganization (other than a stock split or combination, stock dividend,
reclassification, or like capital adjustment of shares otherwise provided for
herein), (ii) a merger or consolidation of the Company with or into another
corporation or other entity including a merger or consolidation in which the
Company is the surviving entity but the shares of the Company's capital stock
outstanding immediately prior to the merger are converted by virtue of the
merger into other property, whether in the form of securities, cash, or
otherwise, or (iii) a sale or transfer of the Company's properties and assets
as, or substantially as, an entirety to any other person, then as a part of such
reorganization, merger, consolidation, sale or transfer lawful provision shall
be made so that the holder of this Warrant shall thereafter be entitled to
receive upon exercise of this Warrant, during the period specified herein and
payment of the Exercise Price then in effect, the number of shares of stock or
other securities or property resulting from such reorganization, merger,
consolidation, sale or transfer that a holder of the shares deliverable upon
-2-
<PAGE>
exercise of this Warrant would have been entitled to receive in such
reorganization, consolidation, merger, sale or transfer if this Warrant had been
exercised immediately before such reorganization, merger, consolidation, sale or
transfer, all subject to further adjustment as provided in this Section 6. The
foregoing provisions of this Section 6 shall similarly apply to successive
reorganization, consolidations, mergers, sales and transfers and to the stock or
securities of any other corporation or other entity that are at the time
receivable upon the exercise of this Warrant. If the per-share consideration
payable for shares in connection with any such transactions is in a form other
than cash or marketable securities, then the value of such consideration shall
be determined in good faith by the Company's Board of Directors. In all events,
appropriate adjustment (as determined in good faith by the Company's Board of
Directors) shall be made in the application of the provisions of this Warrant
with respect to the rights and interests of the Holder after the transaction, to
the end that the provisions of this Warrant shall be applicable after that
event, as near as reasonably practicable, in relation to any shares or other
property deliverable after that event upon exercise of this Warrant.
7. TRANSFER TO COMPLY WITH THE SECURITIES ACT; REGISTRATION RIGHTS.
(a) This Warrant has not been registered under the Securities Act
and has been issued to the Holder for investment purposes and not with a view to
the distribution of either the Warrant or the Warrant Shares. Neither this
Warrant nor any of the Warrant Shares or any other security issued or issuable
upon exercise of this Warrant may be sold, transferred, pledged or hypothecated
in the absence of an effective registration statement under the Securities Act
relating to such security or an opinion of counsel reasonably satisfactory to
the Company that registration is not required under the Securities Act. Each
certificate for the Warrant, the Warrant Shares and any other security issued or
issuable upon exercise of this Warrant shall contain a legend on the face
thereof, in form and substance satisfactory to counsel for the Company, setting
forth the restrictions on transfer contained in this Section.
(b) The Company agrees to file a registration statement, which shall
include the Warrant Shares, on Form S-3 or another available form (the
"Registration Statement"), pursuant to the terms of the Registration Rights
Agreement between the Company and the Holder dated January 26, 1998.
8. NOTICES. Any notice required or permitted hereunder shall be
given in writing and shall be deemed effectively given: (i) upon receipt, when
delivered personally, (ii) upon receipt, when sent by facsimile (provided a
confirmation of transmission is mechanically generated and kept on file by the
sending party), (iii) three (3) days after sent by U.S. certified mail, return
receipt requested, or (iv) one (1) business day after deposit with a nationally
recognized overnight delivery service, such as Federal Express, in each case
with postage and delivery fees prepaid, addressed to the party to receive same
at the following addresses, or at such other addresses as a party may designate
by written notice to each of the other parties hereto.
-3-
<PAGE>
COMPANY: Paul Sebetic, CFO
TII Industries, Inc.
1385 Akron Street
Copiague, NY 11726
(516) 789-2228
with a copy to: Parker Chapin Flattau & Klimpl, LLP
1211 Avenue of Americas
New York, NY 10036
(212) 704-6288
Attention: Richard A. Rubin, Esq.
HOLDER: At the address set forth on the Schedule of Buyers of the Securities
Purchase Agreement (or to any transferee of the initial Holder of
the Warrant, at the address provided by such transferee to the
Company).
with a copy to: Kramer, Levin, Naftalis & Frankel
910 Third Avenue
New York, NY 10022
(212) 715-8000
Attention: Mark Segall, Esq.
9. SUPPLEMENTS AND AMENDMENTS; WHOLE AGREEMENT. This Warrant may be
amended or supplemented only by an instrument in writing signed by the parties
hereto. This Warrant, the Securities Purchase Agreement, the Certificate of
Designation and the Registration Rights Agreement each between the Company and
the Initial Holder dated January 26, 1998, contain the full understanding of the
parties hereto with respect to the subject matter hereof and thereof and there
are no representations, warranties, agreements or understanding of the parties
hereto with respect to the subject matter hereof and thereof and there are no
representations, warranties, agreements or understandings other than expressly
contained herein and therein.
10. GOVERNING LAW. This Warrant shall be deemed to be a contract
under the laws of the State of New York and for all purposes shall be governed
by and construed in accordance with the laws of such State applicable to
contracts to be made and performed entirely within such State. Each of the
Company and each Holder hereby irrevocably submits to the non-exclusive
jurisdiction of the state and federal courts sitting the City of New York,
borough of Manhattan, for the adjudication of any dispute hereunder or in
connection herewith or with any transaction contemplated hereby or discussed
herein, and hereby irrevocably waives, and agrees not to assert in any suit,
action or proceeding, any claim that it is not personally subject to the
jurisdiction of any such court, that such suit, action or proceeding is brought
in an inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each of the Company and each Holder hereby irrevocably waives
-4-
<PAGE>
personal service of process and consents to process being served in any such
suit, action or proceeding by mailing a copy thereof to such party at the
address for such notices to it under this Warrant and agrees that such service
shall constitute good and sufficient service of process and notice thereof.
Nothing contained herein shall be deemed to limit in any way any right to serve
process in any manner permitted by law. If any provision of this Warrant shall
be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Warrant in that jurisdiction or the validity or enforceability
of any provision of this Warrant in any other jurisdiction.
11. COUNTERPARTS. This Warrant may be executed in any number of
counterparts and each of such counterparts shall for all purposes be deemed to
be an original, and all such counterparts shall together constitute but one and
the same instrument.
12. DESCRIPTIVE HEADINGS. Descriptive headings of the several
Sections of this Warrant are inserted for convenience only and shall not control
or affect the meaning or construction of any of the provisions hereof.
Capitalized terms used herein which are not otherwise defined shall have the
meanings ascribed to such terms as in the Securities Purchase Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Warrant as of
the 26th day of January, 1998.
TII INDUSTRIES, INC.
By: __________________________
Name: __________________________
Title: __________________________
Attest:
__________________________
-5-
