<PAGE> 1
Form 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended September 30, 1995
or
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1933
Commission File No. 1-12848
CROWN LABORATORIES, INC.
Delaware 75-2300995
(State of Incorporation) (I.R.S. Employer I.D. No.)
6780 Caballo Street
Las Vegas, Nevada 89119
(Address of Principal Executive Office)
(702) 696-9300
(Registrant's Telephone Number, Including Area Code)
Indicate by a check mark whether the registrant (1) has filed all the reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. YES X NO
----- -----
The number of outstanding shares of the registrant's only class of common stock
as of September 30, 1995
Common Stock, $.001 par value -- 13,802,513
<PAGE> 2
CROWN LABORATORIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
(UNAUDITED)
1. BACKGROUND AND ORGANIZATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with instructions to Form 10-QSB and Item 310
of Regulation S-B. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three and nine
month periods ended September 30, 1995 are not necessarily indicative of the
results that may be expected for the year ending December 31, 1995. For
further information, refer to the consolidated financial statements and
footnotes thereto included in the Crown Laboratories, Inc. Annual Report on
Form 10-KSB/A2 (as amended).
2. MANUFACTURING FACILITY
The Company received its approval from the State of Nevada Health Department to
produce dry mix and milk products and began production of its line of dry mix
adult nutritional specialty dietary products during the quarter. Limited
inter-company transfers of dry-mix products to an affiliate began in August,
1995 (in respect of which transfer, no revenues were recognized) but sales of
liquid nutritional products, the Company's intended primary product line,
cannot begin until certification of the aseptic manufacturing and filling
equipment is completed.
The Company is presently in the process of seeking to commission the equipment
necessary to manufacture its proprietary line of aseptic liquid products.
Commissioning of the equipment is required by the U.S. Food and Drug
Administration. The commissioning process begins with the manufacture, (in
this case, the Company), working with an independent laboratory, (the Process
Authority), to review its manufacturing equipment, manufacturing procedures,
manuals and monitor the bacteriological kill tests. After the samples of
inoculated product (the final test required for certification) are prepared,
they are incubated for a 21 day period and if the test results are favorable,
the Process Authority summarizes and presents their findings to the F.D.A. on
the Company's behalf. The F.D.A. then has 30 working days to respond to the
Company with additional questions or requests for information. In the absence
of such a request, the Company is authorized to produce and market its
products. There can be no assurances that the test samples will pass the test
criteria, or if they do pass, that the F.D.A. will approve the Company's
process and equipment.
Although the equipment manufacturers have warranted that the purchased equipment
has been manufactured to the F.D.A. regulatory specifications for aseptic
packaging and processing equipment, the filler is the first of its kind
manufactured for a U.S. company requiring F.D.A. aseptic
1
<PAGE> 3
processing approval. The delays in certifying the Company's production
equipment can be attributed to the aseptic filling machine. The machine was
unable to pass certification testing when it was originally shipped from
Germany in February. Numerous modifications, primarily related to installing
monitoring devices to seek to meet F.D.A. requirements, have been made to the
machinery at the request of the Process Authority. The manufacturer of the
aseptic filling machine has filed for bankruptcy in the German courts. The
Company has filed claim against the manufacturer of the aseptic filler in
the German Bankruptcy Court for damages caused by the delays in certifying the
filler and seeks to have these damages applied against the purchase price of the
machine. Further, the Company has filed suit in Las Vegas, Nevada against the
manufacturer and its alter egos and subsidiaries alleging fraud,
misrepresentation, and alter ego among other allegations. To further protect
its rights to the machinery and its related technology, the Company has
purchased the blueprints and the rights to its aseptic filling machine from the
German bankruptcy court.
While the Company believes that the machinery will ultimately be certified,
there can be no assurances that the machinery will receive certification from
the F.D.A. or that the certification will be granted within a specific time
frame. Furthermore, there can be no assurances that, if the machinery is
certified, if and when the Company will commence initial production of its
liquid nutritional products or that the products will meet with acceptance in
the market.
3. FINANCING
Since January 1, 1995, the Company has raised approximately $2.4 million
(before offering expenses of $330,000) in additional equity financing primarily
through a private placement and this amount is reflected in accompanying
financial statements. Each unit was purchased for $50,000. A unit consisted
of 25,000 shares of common stock and warrnts to purchase 12,500 shares of
common stock for $3 per share. The warrants expire two years from the date of
issuance. (Fractional units have been sold). In addition, the Company issued
to the Placement Agent and brokers 2,500 options to acquire shares of the
Company's common stock at a price of $2.40 per share for each unit sold. These
options expire five years from the date of issuance.
The Company has also raised $3 million (before offering expenses of $150,000)
through the issuance of Series C Preferred Stock during the third quarter and
$500,000 thereafter. The Seriec C Preferred Stock pays no dividends, but
imputes a 6% effective annual interest rate upon conversion into common stock
which will be accounted for over the time during which the preferred stock is
outstanding. The conversion rate is determined by the acquisition value of the
preferred stock (plus imputed interest referred to above) and an 18% discount
to the 5 day average market price of the common shares at the time of exercise.
As of September 30, 1995, approximately 29% of the Series C Preferred Stock
issued had been converted into 715,447 shares. To the extent that the Company
uses equity securities to raise additional funds to satisfy its working capital
needs, there will be additional dilution to the Company's existing
shareholders. See "Management's Discussion and Analysis and Results of
Operation and Financial Condition".
4. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
Refer to Form 10-KSB/A2 for discussions on significant Accounting Policies.
2
<PAGE> 4
5. COMMITMENTS AND CONTINGENCIES
The Company has entered into a five year lease for its Las Vegas manufacturing
facility, which requires monthly payments of $25,802, subject to annual CPI
escalations in September of each year. Minimum payments due on the building are
as follows:
<TABLE>
<S> <C>
1995 $303,848
1996 $309,624
1997 $309,624
1998 $309,624
1999 $206,416
</TABLE>
As of September 30, 1995, the Company estimates that its additional costs to
complete the facility and pay for and install packaging equipment will be
approximately $0.5 million.
6. LITIGATION
The Company will be subject to normal business litigation and claims concerning
products and services rendered to the Company. Associated with the Company's
construction of its manufacturing facility, the Company has disputes with three
contractors over the services performed. The Company's claims are for
defective workmanship, excessive charges for services rendered, and returns
which have not been accepted by the vendor. These vendors have filed suit
against the Company and the Company has filed its counterclaims, recognizing
the amount of two of the claims, capitalizing the expenses and recording the
liabilities. Although the Company believes that its claims and counterclaims
have merit, there can be no assurances that the Company will prevail on the
merits of any or all of its claims.
In addition to normal business litigation, the Company has the following
material litigation:
In CROWN V. SWINNEY et al., the Company has sought to enforce the legends on
its stock under the Securities Act of 1933. The Court failed to uphold the
temporary restraining order previously issued, and the Company has appealed
this decision on the basis that this action ignores applicable federal law.
The Company feels that its liability will be limited to attorney's fees which
amount will not be material.
CROWN v. ANTRETTER was filed in Federal District Court in the State of Nevada
by the Company in November, 1994 seeking injunctive relief concerning
disclosures made by Antretter selectively to his clients. Such disclosure was
in violation of certain agreements Antretter has with the Company and the
Company alleged this disclosure to be in violation of the Securities Exchange
Act of 1934. The Court dismissed, for lack of standing, the causes of action
concerning the Securities Exchange Act of 1934. The Court further dismissed,
without prejudice, the injunctive causes of action so that they could be
brought in State Court.
7. SUBSEQUENT EVENTS
The Company has identified a line of water solution products which it
anticipates will complement its initial line of liquid nutritionals, selling to
the same customer base and delivered through the same
3
<PAGE> 5
distribution channels. It has produced samples of its water solution products;
sterile water, normal saline and potassium chloride solution and has forwarded
them to an independent laboratory for testing. This is the first stage in the
certification process for sterile water products. While the Company believes
that it can compete effectively in the market for these products, there can be
no assurances that, if the machinery is certified, if and when the Company will
commence initial production of its water solution products or that the products
will meet with acceptance in the market.
In May, the Company filed for patent rights on its primary product, WinLac, and
its related processing technology. It presently has patent pending status.
In the fourth quarter, the Company has sold approximately $40,000 of dry mix
products in one European Country through an affiliate and has collected a
portion of the resulting receivables.
The Company has received an option to purchase its current manufacturing
facility in Las Vegas, Nevada for $2,700,000 and intends to pursue this option.
The Company has secured a commitment for a first mortgage loan of $1,860,000 on
the building from an insurance company. The mortgage, which carries an interest
rate of 8.65%, provides for an 18 year amortization ($16,984 per month) with a
balloon payment due at the end of ten years at the insurance company's request.
The seller of the property has agreed to accept 153,043 shares of the Company's
common stock in lieu of $440,000 of the purchase price and has agreed to extend
a 3 year $300,000 second mortgage to the Company bearing a 12% annual effective
interest rate. The balance of the purchase price, ($100,000) plus any closing
costs will be paid by the Company.
The Company has raised an additional $500,000 through the issuance of Series C
Preferred Stock.
The Company has sublet 20,000 square feet of its plant for a year at rate of
$.42 per square foot. The lessee has the option to extend the lease for a two
month period.
4
<PAGE> 6
CROWN LABORATORIES, INC.
Consolidated Statement of Operations
<TABLE>
<CAPTION>
FOR THE 3 MONTH PERIODS ENDED FOR THE 9 MONTH PERIODS ENDED
-------------------------------- --------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1995 1994 1995 1994
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
NET SALES $ - $ - $ - $ -
Cost of Sales - - - -
General and Administrative Expenses 1,064,050 353,753 2,531,445 855,098
----------- ------------ ----------- -----------
OPERATING PROFIT/(LOSS) (1,064,050) (353,753) (2,531,445) (855,098)
Other Income/(Expense)
Interest expense (84,152) (18,974) (153,048) (20,673)
Interest income 7,914 4,291 36,657 30,183
----------- ------------ ----------- -----------
LOSS BEFORE INCOME TAXES (1,140,288) (368,436) (2,647,836) (845,568)
Income Tax Provision - - - -
----------- ------------ ----------- -----------
NET PROFIT/(LOSS) $(1,140,288) $ (368,436) $(2,647,836) $ (845,588)
=========== ============ =========== ===========
NET LOSS PER SHARE $(0.09) $(0.04) $(0.20) $(0.08)
====== ====== ====== ======
WEIGHTED AVERAGE NUMBER OF COMMON AND
COMMON EQUIVALENT SHARES OUTSTANDING 12,663,873 10,210,966 13,289,678 10,210,966
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements.
<PAGE> 7
CROWN LABORATORIES, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS UNAUDITED AUDITED
SEPTEMBER 30, DECEMBER 31,
1995 1994
------------- -------------
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 1,768,486 $1,826,935
Employee and officer advances 15,466 5,445
Inventory
Raw & Packaging Materials 171,960 1,588
Finished Goods 50,000
-------
221,960
Prepaid expenses 19,821 62,866
----------- ----------
Total current assets 2,015,733 1,896,834
PROPERTY AND EQUIPMENT
Leasehold improvements 1,193,185 886,424
Equipment 6,670,842 2,418,946
----------- ----------
7,864,027 3,305,370
Accumulated Depreciation & Amortization (95,879) (36,284)
----------- ----------
Net Property and Equipment 7,768,148 3,269,086
DEPOSITS & DEFERRED ASSETS 301,824 899,124
----------- ----------
Total assets $10,085,705 $6,065,044
=========== ==========
LIABILITIES ANS SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt and
capital lease liabilities $ 245,886 $ 298,320
Accounts payable and accrued expenses 1,109,050 243,830
----------- -----------
Total current liabilities 1,354,936 542,150
LONG-TERM DEBT & CAPITAL LEASE LIABILITIES 1,452,194 813,431
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
PREFERRED STOCK - $0.001 par value; 2,120,000
5,000,000 shares authorized;
212 shares outstanding
COMMON STOCK - $0.001 par value;
50,000,000 shares authorized;
13,802,513 and 11,840,941 shares
outstanding in 1995 and 1994,
respectively 13,802 11,841
Additional paid-in-capital 11,748,487 8,653,500
Accumulated deficit (6,603,714) (3,955,878)
----------- -----------
Total shareholders' equity 7,278,575 4,709,463
Total liabilities and shareholders' equity $10,085,705 $ 6,065,044
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidted Financial Statements are
an Integral Part of these Financial Statements.
<PAGE> 8
CROWN LABORATORIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOW
UNAUDITED
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
----------------------------
SEPTEMBER 30, SEPTEMBER 30,
1995 1994
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Profit/(Loss) $(2,647,836) $ (845,588)
Add/(deduct) items not impacting cash:
Depreciation and amortization 59,595 5,805
Employee stock grants 140,992
Issuance of shares to consultants 7,407
Funds used in Operations:
(Increase)/Decrease in inventories (220,372)
(Increase)/Decrease in prepaid expenses 33,024 (133,261)
and employee advances
Increase/(Decrease) in accounts payable 865,220 (60,553)
and accrued expenses
Increase/(Decrease) in deferred assets 25,800
Total Cash Generated from/(used for)
operations $(1,761,970) $(1,007,797)
CASH FLOWS FROM INVESTING ACTIVITIES
Capital Expenditures (4,251,896) (1,915,875)
(Increase)/Decrease in leasehold
improvements (306,761) (65,149)
(Increase)/Decrease in deposits and
deferred assets 597,300
(Increase)/Decrease in fund raising
activities (79,289)
Total cash (used in)/generated from
investing activities (3,961,357) (2,060,313)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from loans 750,000 659,332
Repayment of loans payable (163,671) (147,448)
Proceeds from issuance of common and
preferred stock and the exercise of
options 5,399,750 46,348
Fundraising costs (331,201)
Repurchase of common shares (29,600)
Prior period adjustments 56,520
Total cash provided by/(used in) financing
activiies 5,654,878 585,152
Net increase/(decrease) in cash and cash
equivalents (68,449) (2,482,958)
Cash and cash equivalents, beginning of period 1,826,935 2,827,412
----------- -----------
Cash and cash equivalents, end of period $ 1,758,486 $ 344,454
=========== ===========
</TABLE>
The Accompanying Notes to the Consolidated Financial Statements are
an Integral Part of these Financial Statements
<PAGE> 9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
The Company has been in the pre-marketing phase of operation and had no sales
for the nine month periods ended September 30, 1995 and 1994. For the three
and nine month periods ended September 30, 1995, the Company incurred losses of
$1,140,288 and $2,647,836, respectively. The accumulated consolidated deficit
at September 30, 1995 was $6,603,714. Losses have continued since such date
due primarily to expenditures for salaries, plant start-up and other operating
expenses.
The Company is presently in the process of seeking to commission the equipment
necessary to manufacture its proprietary line of aseptic liquid products.
Commissioning of the equipment is required by the U.S. Food and Drug
Administration. The commissioning process begins with the manufacture, (in
this case, the Company), working with an independent laboratory, (the Process
Authority), to review its manufacturing equipment, manufacturing procedures,
manuals and monitor the bacteriological kill tests. After the samples of
inoculated product (the final test required for certification) are prepared,
they are incubated for a 21 day period and if the test results are favorable,
the Process Authority summarizes and presents their findings to the F.D.A. on
the Company's behalf. The F.D.A. then has 30 working days to respond to the
Company with additional questions or requests for information. In the absence
of such a request, the Company is authorized to produce and market its
products. There can be no assurances that the test samples will pass the test
criteria, or if they do pass, that the F.D.A. will approve the Company's
process and equipment.
Although the equipment manufacturers have warranted that the purchased
equipment has been manufactured to the F.D.A. regulatory specifications for
aseptic packaging and processing equipment, the filler is the first of its kind
manufactured for a U.S. company requiring F.D.A. aseptic processing approval.
The delays in certifying the Company's production equipment can be attributed
to the aseptic filling machine. The machine was unable to pass certification
testing when it was originally shipped from Germany in February. Numerous
modifications, primarily related to installing monitoring devices to seek to
meet F.D.A. requirements, have been made to the machinery at the request of the
Process Authority. The manufacturer of the aseptic filling machine has filed
for bankruptcy in the German courts. The Company has filed claim against the
manufacturer of the aseptic filler in the German Bankruptcy Court for damages
caused by the delays in certifying the filler and seeks to have these damages
applied against the purchase price of the machine. Further, the Company has
filed suit in Las Vegas, Nevada against the manufacturer and its alter egos and
subsidiaries alleging fraud, misrepresentation, and alter ego among other
allegations. To further protect its rights to the machinery and its related
technology, the Company has purchased the blueprints and the rights to its
aseptic filling machine from the German bankruptcy court.
While the Company believes that the machinery will ultimately be certified,
there can be no assurances that the machinery will receive certification from
the F.D.A. or that the certification will be granted within a specific time
frame. Furthermore, there can be no assurances that, if the
5
<PAGE> 10
machinery is certified, if and when the Company will commence initial
production of its liquid nutritional products or that the products will meet
with acceptance in the market.
Through the first nine months of 1995, the Company has entered into agreements
with certain employees which provide for the grant of common stock and stock
options which vest over a five year period. Compensation expense relating to
these common stock grants approximates $140,000 for the nine months ended
September 30, 1995. Stock options were granted at 85% of market price at the
time of the grant and did not result in any compensation expense.
FINANCIAL CONDITION
Working capital at September 30, 1995 was $.5 million with $.8 million in
accounts payable attributable to capital expenditures and leasehold
improvements. Since September 30, 1995, the Company has raised an additional
$500,000. Cash and equivalents balances were $1.8 million as of September 30,
1995. The Company believes that it has adequate funds to support its
operations until early 1996 or, the commencement of production of the Company's
liquid nutritional products, whichever comes first. After that time, the
Company will require additional funding to support its working capital needs
as it begins to enter the market or to provide for normal operating expenses if
certification has not been achieved. The Company is presently exploring its
possible alternatives for raising additional funds. There can be no assurances
that the Company will not require additional funds earlier than set forth above
or that the Company will be able to secure the necessary financing, (or if a
source of funding is identified, that the funding will be on terms and
conditions which are acceptable to the Company).
FUNDING
Through September 30, 1995, the Company has raised approximately $2.4 million
(before offering expenses of $330,000) in additional equity financing primarily
through a private placement and this amount is reflected in accompanying
financial statements. Each unit was purchased for $50,000. A unit consisted
of 25,000 shares of common stock and warrants to purchase 12,500 shares of
common stock for $3 per share. The warrants expire two years from the date of
issuance. (Fractional units have been sold.) In addition, the Company
issued to the Placement Agent and brokers 2,500 options to acquire shares of
the Company's common stock at a price of $2.40 per share for each unit sold.
These options expire five yers from the date of issuance.
The Company has also raised $3 million (before offering expenses of $150,000)
through the issuance of Series C Preferred Stock during the third quarter and
$500,000 thereafter. The Series C Preferred Stock pays no dividends, but
imputes a 6% effective annual interest rate upon conversion into common stock
which will be accounted for over the time during which the preferred stock is
outstanding. The conversion rate is determined by the acquisition value of the
preferred stock (plus imputed interest referred to above) and an 18% discount
to the 5 day average market price of the common shares at the time of exercise.
As of September 30, 1995, approximately 29% of the Series C Preferred Stock
issued had been converted into 715,447 shares. To the extent that the Company
uses equity securities to raise additional funds to satisfy its working capital
needs, there will be additional dilution to the Company's existing
shareholders.
6
<PAGE> 11
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
See Note 6 in the Notes to Financial Statements
Item 4. Submission of Matters to a Vote of Security-Holders
The annual meeting of shareholders of the Company was held on July
27, 1995, at the Rio Hotel and Casino in Las Vegas, Nevada. At the
meeting, an election of members of the Board of Directors of the
Company was held and the following individuals (comprising the entire
membership of the Board) were elected to one year terms:
<TABLE>
<CAPTION>
MEMBER OF THE BOARD VOTES FOR VOTES AGAINST ABSTENTIONS
------------------- --------- ------------- -----------
<S> <C> <C> <C>
Craig E. Nash 8,940,454 121,607 3,354
Scott O. Nash 8,940,454 121,607 3,354
Arthur M. Berkowitz 8,940,454 121,607 3,354
Dr. Linda Carrick, Ph.D. 8,940,454 121,607 3,354
Vincent J. Casella 8,940,454 121,607 3,354
Christopher Demetree 8,940,454 121,607 3,354
Lee Allen Hooker 8,940,454 121,607 3,354
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
1.0 Certificate of Incorporation (as amended)
(b) Reports on Form 8-K
None
7
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CROWN LABORATORIES, INC.
Date: November 13, 1995 By: /s/ CRAIG E. NASH
------------------------------
Craig E. Nash
Chief Executive Officer
Chairman, Board of Directors
By: /s/ SCOTT E. HILLEY
------------------------------
Scott E. Hilley
Vice President, Finance
8
<PAGE> 1
EXHIBIT 1.0
CORRECTED
RESTATED CERTIFICATE OF INCORPORATION
OF
CROWN LABORATORIES, INC.
A Delaware Corporation
CROWN LABORATORIES, INC., a corporation organized and existing
under and by virtue of the General Corporation Law of the State of Delaware,
DOES HEREBY CERTIFY:
On October 3, 1994, Crown Laboratories, Inc. inadvertently filed a
"Restated Certificate of Incorporation of Articles of Incorporation."
The Board of Directors of Crown Laboratories, Inc. did not
unanimously approve the "Restated Certificate of Incorporation of Articles of
Incorporation" as stated therein.
The stockholders of Crown Laboratories, Inc. did not unanimously
approve the "Restated Certificate of Incorporation of Articles of Incorporation"
as stated therein.
The entire "Restated Certificate of Incorporation of Articles of
Incorporation" was incorrectly filed in its entirety since it reflects
throughout amendments to the Certificate of Incorporation which were not
approved by the Board of Directors, the deletion of existing Articles and
additions of Articles to the of Certificate of Incorporation.
The following is the correct version of the Restated Certificate of
Incorporation of Crown Laboratories, Inc.:
<PAGE> 2
ARTICLE ONE: NAME
The name of this corporation is CROWN LABORATORIES, INC..
ARTICLE TWO: REGISTERED OFFICE AND AGENT
The address of the registered office of the corporation in the State
of Delaware is 201 N. Walnut Street, 3 Christina Center, Wilmington, County of
New Castle, Delaware 19801. The name of the corporation's registered agent at
that address is The Corporation Trust Company.
ARTICLE THREE: PURPOSE
The purpose of the corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware, as amended from time to time.
ARTICLE FOUR: AUTHORIZED CAPITAL
Section 1. This corporation is authorized to issue two classes of
shares designated "Common Stock" and "Preferred Stock," respectively, and
referred to herein either as Common Stock or Common shares and Preferred Stock
or Preferred shares, respectively. The number of shares of Common Stock which
this corporation is authorized to issue is Fifty Million (50,000,000) of the par
value of one tenth of one cent ($.001) per share, and the number of shares of
Preferred Stock which this corporation is authorized to issue is Five Million
(5,000,000) of the par value of one tenth of one cent ($.001) per share.
Section 2. The Preferred Stock may be issued from time to time in one
or more series. The Board of Directors of this
-2-
<PAGE> 3
corporation is authorized to determine the number of series into which shares of
Preferred stock may be divided, to determine (except to the extent such matters
are fixed by this Certificate of Incorporation) and alter the rights,
preferences, privileges and restrictions granted to or imposed upon any wholly
unissued series of Preferred Stock or the holders thereof, to fix the
designation and number of shares constituting any series prior to the issue of
shares of that series and to increase or decrease, within the limits stated in
any resolution or resolutions of the board originally fixing the number of
shares constituting any series (but not below the number of shares of such
series then outstanding), the number of shares of any such series subsequent to
the issue of shares of that series.
ARTICLE FIVE: SERIES A PREFERRED STOCK
The designation of, the number of shares constituting, and the
rights, preferences, privileges, and restrictions relating to the respective
initial series of Preferred Stock are as follows:
Section 1. Designation.
The initial series of Preferred Stock shall be designated "Series A
Preferred Stock," and shall be referred to herein either as Series A Preferred
Stock or Series A shares. Other series of Preferred Stock may be created by the
Board of Directors in accordance with ARTICLE FOUR, Section 2, above.
Section 2. Number of Shares.
The number of shares constituting the Series A Preferred Stock shall
be Nine Hundred Ninety-nine Thousand (999,000).
-3-
<PAGE> 4
Section 3. Dividend Rights.
Each holder of Series A Preferred Stock shall be entitled to receive
in any calendar year, out of any funds legally available therefor, dividends at
the rate ten percent (10%) per annum of the per share Stated Price (as defined
below) prior and in preference to the declaration or payment of any dividends on
the Series B Preferred Stock and the Common Stock. Such dividends shall not be
cumulative, but shall be payable only when, if and as declared by the Board of
Directors. Dividends may be declared and paid on shares of Common Stock in any
calendar year only if dividends shall have been paid on or declared and set
apart for payment on all shares of Series A Preferred Stock at such annual rate;
and no further dividends shall be paid on the Preferred Stock in any calendar
year in excess of such annual rate unless at the same time equivalent dividends
are paid on the Series B Preferred Stock and Common Stock. For purposes hereof,
the Stated Price of the Series A Preferred Stock is One Dollar fifty Cents
($1.50) per share.
Section 4. Liquidation Preferences.
(a) In the event of any liquidation, dissolution, or winding up of
the affairs of the corporation, voluntarily or involuntarily, the holders of
shares of Series A Preferred Stock shall be entitled to receive, prior to any
distribution to the holders of Series B Preferred Stock and Common Stock by
reason of their ownership thereof, a preferential amount of assets with an
aggregate fair market value equal to One Dollar Fifty Cents ($1.50) per share of
Series A Preferred Stock then held by them
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plus, in each case, an amount equal to all declared but unpaid dividends
thereon. If upon such liquidation, dissolution, or winding up, the assets of the
corporation are insufficient to provide for the payment to the holders of the
Series A Preferred Stock of the full preferential amounts aforesaid, such assets
as are available shall be paid out pro rata (in proportion to the full
preferential amount each such holder would otherwise be entitled to receive)
amongst the holders of the Series A Preferred Stock.
(b) Upon the completion of the distribution required by subsection
(a) of this Section 4, if assets remain in this corporation, the holders of the
Series B Preferred Stock and Common Stock shall be entitled to receive, prior
and in preference to any further distribution of the assets of the corporation
to the holders of Series A Preferred Stock by reason of their ownership thereof,
an amount of assets with an aggregate fair market value equal to One Dollar
Fifty Cents ($1.50) per share of Common Stock then held by them plus an amount
equal to all declared but unpaid dividends thereon.
(c) Upon the completion of the distributions required by subsections
(a) and (b) of this Section 4, if assets remain in this corporation, the holders
of Series A Preferred Stock, Series B Preferred Stock and Common Stock shall
share all remaining assets in the same proportion as the total number of shares
of the Series A Preferred Stock, Series B Preferred Stock and Common Stock then
held by each of them bears to the total number of
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shares of Series A Preferred Stock, Series B Preferred Stock and Common Stock of
this corporation then issued and outstanding.
(d) The following shall be deemed to be a liquidation, dissolution or
winding up within the meaning of this Section 4: a consolidation or merger of
this corporation with or into any other corporation or corporations, other than
a consolidation or merger in which the stockholders of this corporation
immediately before the consolidation or merger own, immediately after the
consolidation or merger, equity securities of the surviving or acquiring
corporation, or of a parent corporation of either of such corporations,
possessing more than fifty percent (50%) of the voting power of the surviving or
acquiring corporation or parent corporation. As used in this subsection (d), the
term "parent corporation" means a corporation which owns, directly or
indirectly, equity securities possessing more than fifty percent (50%) of the
voting power of the surviving or acquiring corporation.
Section 5. Conversion of Series A Preferred Stock.
The holders of Series A Preferred Stock have the following conversion
rights (the "Conversion Rights"):
(a) Right to Convert. Each share of Series A Preferred Stock shall be
convertible, at the option of the holder thereof, at any time after the date of
issuance of such share, at the office of the corporation or any transfer agent
for such shares, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing One Dollar Fifty Cents ($1.50) by the
Series A Conversion Price, determined as
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hereinafter provided, in effect at the time of conversion. The price at which
shares of Common Stock shall be deliverable upon conversion of the Series A
Preferred Stock (the "Series A Conversion Price") shall be initially One Dollar
Fifty Cents ($1.50) per share of Common Stock. Such initial Series A Conversion
Price shall be subject to adjustment as hereinafter provided.
(b) Automatic Conversion. Each outstanding share of Series A
Preferred Stock shall be converted automatically into fully paid and
nonassessable shares of Common Stock at the then effective Series A Conversion
Price upon (i) the closing of a firm commitment underwritten public offering
pursuant to an effective registration statement under the Securities Act of
1933, as amended, covering the offer and sale of Common Stock for the account of
the corporation which results in aggregate gross proceeds of not less than Three
Million Dollars ($3,000,000), or (ii) the approval (by vote or written consent)
of the holders of 60% or more of the outstanding shares of Series A Preferred
Stock voting as a single class. Automatic conversion provided for in clause (i)
of the preceding sentence shall be deemed to have taken place immediately prior
to the closing of such offering. Upon automatic conversion provided for herein,
the Secretary of the corporation shall promptly deliver notice of such
conversion to each holder of Series A Preferred Stock, who shall thereupon
surrender the certificates representing such shares at the office of the
corporation or of any transfer agent for such Series A Preferred Stock. The
corporation shall, as soon as practicable
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thereafter, issue and deliver at such office to such holder a certificate or
certificates for the number into which such shares of Series A Preferred Stock
have been automatically converted.
(c) Mechanics of Conversion. Before any holder of shares of Series A
Preferred Stock shall be entitled to convert the same into full shares of Common
Stock pursuant to Section 5(a), he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the corporation or of any
transfer agent for such Series A Preferred Stock, and shall give written notice
to the corporation at such office that he elects to convert the same and shall
state therein his name or the name or names of his nominees in which he wishes
the certificate or certificates for shares of Common Stock to be issued. The
corporation shall, as soon as practicable thereafter, issue and deliver at such
office to such holder, or to his nominee or nominees, a certificate or
certificates for the number of full shares of Common Stock to which he shall be
entitled as aforesaid. Conversion pursuant to Section 5(a) shall be deemed to
have occurred immediately prior to the close of business on the date of such
surrender of the shares of Series A Preferred Stock to be converted, and the
person or persons entitled to receive the shares of Common Stock issuable upon
such conversion shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on such date.
(d) Adjustments to Conversion Price.
(i) Special Definition. For purposes of this Section 5(d), the
following definition shall apply:
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"Original Issue Date" shall mean, for Series A Preferred
Stock, the original date on which a share of Series A Preferred Stock was first
issued.
(ii) Adjustment for Stock Splits and Combinations. If the
corporation shall at any time or from time to time after the Original Issue Date
applicable to Series A Preferred Stock effect a subdivision of the outstanding
Common Stock, the applicable Series A Conversion Price then in effect
immediately before that subdivision shall be proportionately decreased and,
conversely, if the corporation shall at any time or from time to time after the
Original Issue Date applicable to Series A Preferred Stock combine the
outstanding shares of Common Stock, the applicable Series A Conversion Price
then in effect immediately before the combination shall be proportionately
increased. Any adjustments under this subsection (ii) shall become effective at
the close of business on the date the subdivision or combination becomes
effective.
(iii) Adjustment for Certain Dividends and Distributions. In the
event the corporation at any time, or from time to time after the Original Issue
Data applicable to Series A Preferred Stock shall make or issue, or fix a record
date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in shares of Common Stock, then and in
each such event the applicable Conversion Price then in effect shall be
decreased as of the time of such issuance or, in the event such a record date
shall have been fixed, as of the close of business on such record date, by
multiplying the
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applicable Series A Conversion Price then in effect by a fraction:
(1) the numerator of which shall be the total number of shares
of Common Stock issued and outstanding immediately prior to the time of
such issuance or the close of business on such record date, and
(2) the denominator of which shall be the total number of
shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus
the number of shares of Common Stock issuable in payment of such dividend
or distribution; provided, however, if such record date shall have been
fixed and such dividend is not fully paid or if such distribution is not
fully made on the date fixed therefor, the applicable Series A Conversion
Price shall be recomputed accordingly as of the close of business on such
record date and thereafter such Series A Conversion Price shall be
adjusted pursuant to this subsection (iii) as of the time of actual
payment of such dividends or distributions.
provided, however, if such record date shall have been fixed and such dividend
is not fully paid or if such distribution is not fully made on the date fixed
therefor, the applicable Series A Conversion Price shall be recomputed
accordingly as of the close of business on such record date and thereafter such
Series A Conversion Price shall be adjusted pursuant to this subsection (iii)
as of the time of actual payment of such dividends or distributions.
(iv) Adjustment for Other Dividend and Distributions. In the event
the corporation at any time or from time to time after the Original Issue Date
of Series A Preferred Stock shall make or issue, or fix a record date for the
determination of holders of Common Stock entitled to receive, a dividend or
other distribution payable in securities of the corporation other than shares of
Common Stock, then and in such event provisions shall
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be made so that the holders of Series A Preferred Stock shall receive upon
conversion thereof in addition to the number of shares of Common Stock
receivable thereupon, the amount of securities of the corporation which they
would have received had their Series A Preferred Stock been converted into
Common Stock on the date of such event and had thereafter, during the period
from the date of such event to and including the conversion date, retained such
securities (together with any distributions payable thereon during such period)
receivable by them as aforesaid during such period, giving application to all
adjustments called for during such period under this Section 5 with respect to
the rights of the holders of the Series A Preferred Stock.
(v) Adjustment for Reclassification, Exchange, or Substitution. If
the Common Stock issuable upon the conversion of the Series A Preferred Stock at
any time or from time to time after the Original Issue Date applicable to Series
A Preferred Stock shall be changed into the same or different number of shares
of any class or classes of stock, whether by capital reorganization,
reclassification, or otherwise (other than a subdivision or combination of
shares or stock dividends provided for in Sections 5(d)(ii) and (iii) above, or
a reorganization, merger, consolidation, or sale of assets provided for in
Section 5(d)(vi) below), then, and in each such event, provisions shall be made
(by adjustment to the Series A Conversion Price or otherwise) so that the holder
of each share of Series A Preferred Stock shall have the right thereafter to
convert such share into the kind and amount of shares of stock and other
securities
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receivable upon such reorganization, reclassification, or other change, by
holders of the number of shares of Common Stock into which such share of Series
A Preferred Stock might have been converted immediately prior to such
reorganization, reclassification, or change, all subject to further adjustment
as provided herein.
(vi) Adjustment for Reorganization, Merger, Consolidation or Sales
of Assets. If at any time or from time to time after the Original Issue Date of
the Series A Preferred Stock there shall be a capital reorganization of the
corporation (other than a subdivision, combination, reclassification, exchange
or substitution of shares provided for in Sections 5(d)(ii) and (v) above) or a
merger or consolidation of the corporation with or into another corporation, or
the sale of all or substantially all of this corporation's properties and assets
to any other person, then, as a part of such reorganization, merger,
consolidation, or sale, provision shall be made (by adjustment to the applicable
Series A Conversion Price or otherwise) so that the holders of the Series A
Preferred Stock shall thereafter be entitled to receive upon conversion of the
Series A Preferred Stock, the number of shares of stock or other securities or
property of the corporation, or of any successor corporation resulting from such
merger or consolidation or sale, to which a holder of Common Stock deliverable
upon conversion of such shares would have been entitled on such capital
reorganization, merger, consolidation, or sale. In any such case, appropriate
adjustment shall be made in the
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application of the provisions of this Section 5(d) with respect to the rights
of the holders of the Series A Preferred Stock after the reorganization,
merger, consolidation, or sale to the end that the provisions of this Section
5(d) (including adjustment of the applicable Series A Conversion Price then in
effect and the number of shares of stock or other securities deliverable upon
conversion of the Series A Preferred Stock) shall be applied after that event
in as nearly an equivalent manner as may be practicable. Notwithstanding the
foregoing, this subsection (vi) shall not apply to any merger or consolidation
which is to be treated as a liquidation under Section 4(e) above.
(e) No Impairment. The corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the corporation, but will at
all times in good faith assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Series A Conversion Rights of the holders of
the Series A Preferred Stock against impairment.
(f) Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Series A Conversion Price pursuant to this Section 5, the
corporation at its expense shall promptly compute such adjustment or
readjustment in accordance
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with the terms hereof and furnish to each holder of such Series A Preferred
Stock a certificate setting forth such adjustment or readjustment and showing
in detail the facts upon which such adjustment or readjustment is based. The
corporation shall, upon the written request at any time of any holder of such
affected Series A Preferred Stock, furnish or cause to be furnished to such
holder a like certificate setting forth (i) such adjustments and readjustments,
(ii) the applicable Series A Conversion Price at the time in effect, and (iii)
the number of shares of Common Stock and the amount, if any, of other property
which at the time would be received upon the conversion of a share of such
Series A Preferred Stock.
(g) Notices of Record Date. In the event that:
(i) this corporation shall set a record date for the purpose of
entitling the holders of its shares of Common Stock to receive a dividend, or
other distribution, payable otherwise than in cash;
(ii) this corporation shall set a record date for the purpose of
entitling the holders of its shares of Common Stock to subscribe for or purchase
any shares of any class or to receive any other rights;
(iii) there shall occur any capital reorganization of this
corporation, reclassification of the shares of this corporation (other than a
subdivision or combination of its outstanding Common Stock), consolidation or
merger of this corporation with or into another corporation, or conveyance of
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all or substantially all of the assets of this corporation to another
corporation; or
(iv) there shall occur a voluntary or involuntary dissolution,
liquidation or winding up of this corporation; then, and in any such case, this
corporation shall cause to be mailed to the holders of record of the outstanding
shares of the Series A Preferred Stock, at least fifteen (15) days prior to the
date hereinafter specified, a notice stating (a) the date which (x) has been set
as the record date for the purpose of such dividend, distribution, or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up is to take place and (b) the record date
as of which holders of Common Stock of record shall be entitled to other
property deliverable upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up.
(h) Notices. Any notice required by the provisions of this Section 5 to be
given to the holders of shares of Series A Preferred Stock shall be in writing
and may be delivered by personal service or sent by telegraph or cable or sent
by registered or certified mail, return receipt requested, with postage thereon
fully prepaid. All such communications shall be addressed to each holder of
record at its address appearing on the books of this corporation. If sent by
telegraph or cable, a conformed copy of such telegraphic or cabled notice shall
promptly be sent by mail (in the manner provided above) to the holders. Service
of any such communication made only by mail
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shall be deemed complete on the date of actual delivery as shown by the
addressee's registry or certification receipt or at the expiration of the
fourth (4th) business day after the date of mailing, whichever is earlier in
time.
(i) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of Series A Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the corporation shall
pay cash equal to the product of such fraction multiplied by the fair market
value of one share of the corporation's Common Stock on the date of conversion,
as determined in good faith by the Board of Directors.
(j) Reservation of Common Stock. The corporation shall at all times
reserve and keep available, out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the Series A
Preferred Stock, the full number of shares of Common Stock deliverable upon the
conversion of all shares of Series A Preferred Stock from time to time
outstanding. The corporation shall from time to time in accordance with the laws
of the State of Delaware, increase the authorized number of shares of Common
Stock remaining unissued shall not be sufficient to permit the conversion of all
of the Series A Preferred Stock at the time outstanding.
Section 6. Status of Converted Stock. No shares of Series A Preferred
Stock that have been converted shall ever again be reissued, and all such shares
so converted shall, upon
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such conversion, cease to be a part of the authorized shares of the
corporation.
Section 7. Voting Rights.
(a) General Voting Rights. Except as provided in this Section 7 and in
ARTICLE FIVE, Section 8 below, and except as otherwise required by law, the
holders of the Series A Preferred Stock shall be entitled to notice of any
stockholders' meeting and to vote upon any matter submitted to stockholders for
a vote, and shall vote together with the holders of Common Stock and Series B
Preferred Stock as a single class and not as separate classes. The holders of
each share of Series A Preferred Stock shall be entitled to the number of votes
equal to the number of shares then convertible. Fractional votes shall not be
permitted, however, and any fractional voting rights resulting from the above
formula (after aggregating all shares into which shares of Series A Preferred
Stock held by each holder could be converted) shall be rounded to the nearest
whole number (with one-half (0.5) being rounded upward). Each share of Common
Stock issued and outstanding shall have one vote on all matters.
(b) Election of Directors. In addition to the foregoing voting rights, the
holders of the Series A Preferred Stock (so long as any such shares are
outstanding), voting as a single class, shall be entitled to elect 25% of the
authorized number of directors of the corporation; provided, that if such 25% is
not a whole number, the holders of the Series A Preferred Stock, voting together
as a single class, shall be entitled to elect the nearest higher whole number of
directors that is at least 25% of
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the authorized number of directors. Holders of the Common Stock, voting as a
separate class, shall be entitled to elect the remaining directors.
Section 8. Protective Provisions.
(a) So long as any shares of Series A Preferred Stock are outstanding, the
corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by law) of not less than a majority of the Series A shares
then outstanding, voting as a single class, do any of the following:
(i) amend the corporation's Certificate of Incorporation or
Bylaws in any manner that would adversely affect the rights, preferences,
privileges, or powers of the Series A Preferred Stock; or
(ii) increase the authorized number of shares of Series A
Preferred Stock; or
(iii) authorize or create shares of any class of stock (whether
through reclassification or otherwise) having any preference or priority as to
dividends or assets superior to or on a parity with any such preference or
priority of the Series A Preferred Stock, or create any obligation or security
convertible into any shares of the corporation having any such preference or
priority; or
(iv) effect any sale, lease, assignment, transfer or other
conveyance of all or substantially all of the assets of the corporation; or
(v) effect any consolidation or merger of the corporation with or
into any other corporation, except for a
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consolidation or merger with or into a subsidiary of the corporation; or
(vi) repurchase shares of Common Stock and/or Preferred Stock in
any calendar year in an amount which exceeds, in the aggregate, 20% of the total
number of shares of Common Stock and Preferred Stock outstanding as of the first
day of such calendar year; or
(vii) effect a dissolution or liquidation of the corporation.
(b) The provisions of this Section 8 shall terminate and shall have no
further effect after (i) August 1, 1999 or (ii) the closing of the initial
public offering of shares of Common Stock pursuant to a registration statement
under the Securities Act of 1933, as amended, whichever occurs first.
Section 9. Residual Rights. All rights accruing to the outstanding shares
of this corporation not expressly provided for to the contrary herein shall be
vested in the Series A Preferred Stock, and Common Stock without distinction, to
the same extent as though all such shares were of one class.
ARTICLE SIXTH: SERIES B PREFERRED STOCK
The designation of, the number of shares constituting, and the rights,
preferences, privileges, and restrictions relating to the respective second
initial series of Preferred Stock are as follows:
Section 1. Designation.
The second series of Preferred Stock shall be designated "Series B
Preferred Stock," and shall be referred to herein
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either as Series B Preferred Stock or Series B shares. Other series of
Preferred Stock may be created by the Board of Directors in accordance with
ARTICLE FOUR, Section 2, above.
Section 2. Number of Shares.
The number of shares constituting the Series B Preferred Stock shall be
Nine Hundred Ninety-nine Thousand (999,000).
Section 3. Dividend Rights.
Each holder of Series B Preferred Stock shall be entitled to receive the
same dividends per share as each share of Common Stock as and when declared by
the Board of Directors.
Section 4. Liquidation Preferences.
In the event of any liquidation, dissolution, or winding up of the affairs
of the corporation, voluntarily or involuntarily, each share of Series B
Preferred Stock shall be entitled to receive the same amount per share as each
share of Common Stock.
Section 5. Conversion of Series B Preferred Stock.
(a) Each share of Series B Preferred Stock shall be convertible, at the
option of the holder thereof, at any time after the date of issuance of such
share, at the office of the corporation or any transfer agent for such shares,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing one Dollar Fifty Cents ($1.50) by the Deemed Conversion
Price, determined as hereinafter provided, in effect at the time of conversion.
The price at which shares of Common Stock shall be deliverable upon conversion
of the Series B Preferred Stock (the "Deemed Conversion Price") shall be
initially Three Dollars ($3.00) per share of Common Stock. Such
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initial Deemed Conversion Price and the number of shares of Common Stock into
which the Series B Preferred Stock may be converted shall be subject to
adjustment from time to time in certain cases as set forth below:
(i) In case the corporation shall (A) pay a dividend in shares of
Common Stock or Convertible Securities (as defined in Section 5(a)(iv)) or make
a distribution in shares of Common Stock or Convertible Securities, (B) issue
shares of Common Stock or other securities by way of stock-split, spin-off,
reclassification, combination or subdivision of shares or other corporation
rearrangement, or (C) be a party to any other event or transaction, the result
of which would be to have an effect similar to any one or more of the aforesaid,
then, and in each such case, each share of Series B Preferred Stock shall be
entitled to receive upon any conversion hereof the kind and number of shares or
other securities which it would have owned or have been entitled to receive on
the effective date of any of the events described above, had each share of
Series B Convertible Preferred Stock been converted immediately prior to the
effective date of such event or any record date with respect thereto.
(ii) The Deemed Conversion Price shall be subject to adjustment from
time to time as hereinafter provided. Upon each adjustment of the Deemed
Convertible Price, each share of Series B Preferred Stock shall thereafter be
entitled to receive the number of shares of Common Stock (calculated to the
nearest whole share) obtained by multiplying the Deemed Conversion Price in
effect immediately prior to such adjustment by the number of
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shares to be received immediately prior to such adjustment and dividing the
product thereof by the Deemed Conversion Price resulting from such adjustment.
Any adjustment required to be made pursuant to Section 5(a)(iii), 5(a)(iv) and
5(a)(v) shall be effective as of the date of the issue, sale or grant which
required the adjustment to be made.
(iii) In case at any time the corporation shall issue or sell any
shares of Common Stock for a consideration per share less than the then Current
Market Price (as defined in Section 5(a)(vi), or any adjustment shall be
required by Sections 5(a)(iv) and 5(a)(v), then the Deemed Conversion Price for
each outstanding share of Series B Preferred Stock shall he reduced to a price
(calculated to the nearest cent) determined by dividing (A) an amount equal to
the sum of (i) the number of shares of Common Stock outstanding immediately
prior to such issue or sale multiplied by the then existing Deemed Conversion
Price, and (ii) the consideration, if any, received by the Company upon such
issue or sale, by (B) the total number of shares of Common Stock outstanding
immediately after such issue or sale. No adjustment of the Deemed Conversion
Price, however, shall be made in an amount less than Five Cents ($0.05) per
share, but any lesser adjustment shall be carried forward and shall be made at
the time of and together with the next subsequent adjustment which, together
with any adjustments so carried forward, shall amount to Five Cents ($0.05) per
share or more.
(iv) In case at any time the corporation shall grant any rights to
subscribe for, or any rights or options to
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purchase, Common Stock or any stock or other securities convertible into or
exchangeable for Common Stock (such convertible or exchangeable stock or
securities being herein called "Convertible Securities"), whether or not such
rights or options or the right to convert or exchange any such Convertible
securities are immediately exercisable, and the price per share for which Common
Stock is issuable upon the exercise of such rights or options or upon conversion
or exchange of such Convertible Securities [determined by dividing (1) the total
amount, if any, received or receivable by the corporation as consideration for
the granting of such rights or options, plus the minimum aggregate amount of
additional consideration payable to the Corporation upon the exercise of such
rights or options, plus, in the case of any such rights or options which relate
to such Convertible Securities, the minimum aggregate amount of additional
consideration, if any, payable upon the issue or sale of such Convertible
Securities and upon the conversion or exchange thereof, by (2) the total maximum
number of shares of Common Stock issuable upon the exercise of such rights or
options and upon conversion or exchange of all such Convertible Securities]
shall be less than the Current Market Price immediately prior to the time of the
granting of such rights or options, then the total maximum number of shares of
Common Stock issuable upon the exercise of such rights or options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities issuable upon the exercise of such right or options shall (as of the
date of granting of such rights or
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options) be deemed to be outstanding and to have been issued for such price per
share and the adjustment provided for in Section 5 shall be made as of such
date. Except as provided in Section 5 no further adjustments of the Deemed
Conversion Price shall be made upon the actual issues of such Common Stock or
of such Convertible Securities upon exercise of such rights or options or upon
the actual issued of such Common Stock upon conversion or exchange of any such
Convertible Securities.
(v) In case at any tine the Company shall issue or sell any
Convertible Securities, whether or not the rights to exchange or convert
thereunder are immediately exercisable, and the price per share for which Common
Stock is issuable upon such conversion or exchange [determined by dividing (A)
the total amount received or receivable by the corporation as consideration for
the issue or sale of such Convertible Securities, plus the minimum aggregate
amount of additional consideration, if any, payable to the corporation upon the
conversion or exchange thereof, by (B) the total maximum number of shares of
Common Stock issuable upon the conversion or exchange of all such Convertible
Securities] shall be less than the Current Market Price immediately prior to the
time of such issue or sale, then the total maximum number of shares of Common
Stock issuable upon conversion or exchange of all such Convertible Securities
shall (as of the date of the issue or sale of such Convertible Securities) be
deemed to be outstanding and to have been issued for such price per share and
the adjustment provided for in Section 5 shall be made as of such date, provided
that (X),
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except as provided in Section 5, no further adjustments of the Deemed
Conversion Price shall be made upon the actual issue of such Common Stock upon
conversion or exchange of such Convertible Securities, and (Y) if any such
issue or sales of such Convertible Securities is made upon exercise of any
rights to subscribe for or to purchase or any option to purchase any such
Convertible Securities for which adjustments of the Deemed Conversion Price
have been or are to be made pursuant to the provisions of Section 5(a)(iv), no
further adjustment of the Deemed Conversion Price shall be made by reason of
such issue or sale.
(vi) For the purpose of any computation under Section 5(a)(iii),
5(a)(iv) and 5(a)(v) the term "Current Market Price" shall mean (A) if the
Common Stock is traded only otherwise than on a securities exchange and is not
quoted on the National Association of securities Dealers' Automated Quotation
System ("NASDAQ"), the average of the mean between the average daily bid and
average daily asked prices of the Common Stock of the corporation during the 30
trading days preceding the date in question as quoted in the "pink sheets"
published by the National Daily Quotation Bureau, (B) if the Common Stock is
traded only otherwise than on a securities exchange or the NASDAQ National
Market System and is quoted on NASDAQ, the average of the mean between the
closing bid and the closing asked prices of the Common Stock of the corporation
during the 30 trading days preceding the date in question, as reported by the
National Quotation Bureau, or (C) if the Common Stock is admitted to
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trading on a securities exchanged, or the NASDAQ National Market System, the
average of the daily closing prices of the Common Stock of the corporation
during the 30 trading days preceding the date in question, as quoted in the
Wall Street Journal. If there is no Current Market Price because the Common
Stock is not traded in the over-the-counter market or on a stock exchange, then
the Current Market Price shall be the Deemed Conversion Price.
(vii) For the purpose of any computation under this Section 5, the
terms "Deemed Conversion Price,, shall mean the then Deemed Conversion Price, as
adjusted from time to time pursuant to Section 5(a)(iii).
(viii) For the purposes of determining the consideration or price
paid for Common Stock and/or Convertible Securities under Section 5(d)(iii),
5(a)(iv) and 5(a)(v), the following subparagraphs (A) and (B) shall also be
applicable:
(A) In case at any time any shares of Common Stock or
Convertible Securities or any rights or options to purchase any such
Common Stock or Convertible Securities shall be issued or sold for cash,
the consideration received therefor shall be deemed to be the amount
received by the corporation therefor, without reduction therefrom of any
expenses incurred or any underwriting commissions or concessions or
discounts paid or allowed by the corporation in connection therewith.
(B) In case any shares of Common Stock or Convertible Securities
or any rights or options to purchase any such Common Stock or Convertible
securities shall be
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issued in connection with the merger of another corporation into the
corporation or the acquisition of all or substantially all of the assets
of another corporation or entity, or issued or sold for a consideration
other than cash, the amount of the consideration other than cash received
by the corporation shall be determined as follows: The Board of Directors
of the corporation shall, by resolution, determine in good faith the fair
value of such consideration to the corporation and give notice of such
determination to the corporation. The determination of the Board of
Directors, in the absence of fraud, shall be binding upon the parties
hereto.
(ix) No adjustment in the Deemed Conversion Price shall be made in
connection with (A) the issuance of shares of Common Stock or Convertible
Securities or rights or options to purchase such Common Stock or Convertible
Securities pursuant to any stock purchase plan, stock option plan, employee
savings or profit sharing plan or other incentive or benefit plan of the
corporation approved of by the shareholders of the corporation, now in existence
or hereafter adopted, for the benefit of employees, (B) the conversion of the
Series A Preferred Stock or Series B Preferred Stock, or (C) any option or
warrant outstanding on the date hereof.
(x) In case of the consolidation or merger of the corporation with
or into another corporation or the sale or conveyance of all or substantially
all of the assets of the corporation into another corporation (any such
consolidation,
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merger, sale or conveyance is hereinafter referred to as "Reorganization"),
each share of Series B Preferred Stock shall thereafter be convertible into the
same kind and amount of securities (including shares of stock) or other assets,
or both, which were issuable or distributable to the holders of outstanding
shares of Common Stock of the corporation upon such Reorganization, in respect
of that number of shares of Common Stock into which each share of Series B
Preferred Stock might have been converted immediately prior to such
Reorganization; and in any such case, appropriate adjustments (as determined in
good faith by the Board of Directors of the corporation) shall be made in the
application of the provisions herein set forth with respect to the rights and
interests thereafter of the holders of the Series B Preferred Stock, to the end
that the provisions set forth herein (including provisions with respect to
changes in, and other adjustments of, the Deemed Conversion Price) shall
thereafter be applicable, as nearly as reasonably nay be, in relation to any
securities or other assets thereafter deliverable upon the conversion of the
Series B Preferred Stock.
(xi) In the event of a Reorganization, the holders shall not be
required to exercise the conversion rights herein contained nor shall any such
Reorganization be deemed to accelerate in any manner whatsoever such conversion
rights.
(xii) The corporation will not enter into any Reorganization with
any other corporation unless the corporation resulting from such merger or
consolidation (if not the corporation) shall expressly assume, by supplemental
agreement
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and duly executed and delivered to the holders of Series B Preferred Stock, the
due and punctual performance and observance of each and every covenant and
condition of this Section 5 to be performed and observed by the corporation.
(xiii) When any adjustment is required to be made in the Deemed
Conversion Price, initial or adjusted, the Corporation shall forthwith determine
the new Deemed Conversion Price, and
(i) prepare a statement describing in reasonable detail the
method used in arriving at the new Deemed Conversion Price; and
(ii) cause a copy of such statement to be nailed to the holders
of Series B Preferred Stock as of a date within twenty (20) days
after the date when the circumstances giving rise to the adjustment
occurred.
(xiv) If the purchase price provided for in any right or option
referred to in Section 5(a)(iv), or the rate at which any Convertible Securities
referred to in Section 5(a)(iv) and 5(a)(v) are convertible into or exchangeable
for Common Stock, shall change or a difference purchase price or rate shall
become effective at any time or from time-to-time (other than under or by reason
of provisions designed to protect against dilution), then, upon such change or
different purchase price or rate becoming effective, the Deemed Conversion Price
then in effect hereunder shall forthwith be increased or decreased to such
Deemed Conversion Price as would have obtained had the adjustments made upon the
issuance of such rights or options or Convertible Securities been made upon the
basis of (and the total
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consideration received therefor) (A) the issuance of the number of shares of
Common Stock theretofore actually delivered upon the exercise of such options or
rights or upon the conversion or exchange of such Convertible Securities, (B)
the issuance of all Common Stock and all other rights, options and Convertible
Securities issued after the issuance of such rights, options or Convertible
Securities, and (C) the number of shares of Common Stock issuable at the time of
such change or different purchase price or rate becoming effective, pursuant to
any such options, rights and Convertible Securities then still outstanding. On
the expiration of any such option or right or the termination of any such right
to convert or exchange such Convertible Securities, the Deemed Conversion Price
then in effect hereunder shall forthwith be increased or decreased to such
Deemed Conversion Price as would have obtained (x) had the adjustments made upon
the issuance of such rights or options or Convertible Securities been made upon
the basis of the issuance of only the number of shares of Common Stock
theretofore actually delivered (and the total consideration received therefor)
upon the exercise of such rights or options or upon the conversion or exchange
of such Convertible Securities and (y) had adjustments been made on the basis of
the Deemed Conversion Price as adjusted under the immediately preceding clause
(x) for all issues or sales of Common Stock or rights, options or Convertible
Securities made after the issuance of such rights or options or Convertible
Securities. If the purchase price provided for in any right or option referred
to in Section 5(a)(iv), or the rate at which any
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Convertible Securities referred to in Section 5(a)(iv) and 5(a)(v) are
convertible into or exchangeable for Common Stock, shall decrease at any time
under or by reason of provisions with respect thereto designed to protect
against dilution, then in the case of the delivery of shares of Common Stock
upon the exercise of any such right or option or upon conversion or exchange of
any such Convertible Securities, the Deemed Conversion Price then in effect
hereunder shall forthwith be decreased to such Deemed Conversion Price as would
have obtained had the adjustments been made upon issuance of such right or
option or Convertible Securities been made upon the basis of the issuance of
(and the total consideration received for) the shares of Common Stock delivered
as aforesaid.
(xv) Notwithstanding any other provision of this Section 5, the
provisions of Section 5(a)(iii), 5(a)(iv), 5(a)(V), 5(a)(vii), 5(a)(viii) or
5(a)(xiv) shall no longer apply or result in any adjustment of the Deemed
Conversion Price on and after the date the Common Stock of the corporation is
first listed on NASDAQ, the NASDAQ National Market System or on any national
securities exchange, whichever occurs first.
(b) Mechanics of Conversion. Before any holder of shares of Series B
Preferred Stock shall be entitled to convert the same into full shares of Common
Stock pursuant to this Section 5, he shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the corporation or of any
transfer agent for such Series B Preferred Stock, and shall give written notice
to the corporation at such office that he elects to
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convert the same and shall state therein his name or the name or names of his
nominees in which he wishes the certificate or certificates for shares of
Common Stock to be issued. The corporation shall, as soon as practicable
thereafter, issue and deliver at such office to such holder, or to his nominee
or nominees, a certificate or certificates for the number of full shares of
Common Stock to which he shall be entitled as aforesaid. Conversion pursuant
to this Section 5 shall be deemed to have occurred immediately prior to the
close of business on the date of such surrender of the shares of Series B
Preferred Stock to be converted, and the person or persons entitled to receive
the shares of Common Stock issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Common Stock on
such date.
(c) Notices of Record Date. In the event that:
(i) this corporation shall set a record date for the purpose or
entitling the holders of its shares of Common Stock to receive a dividend, or
other distribution, payable otherwise than in cash;
(ii) this corporation shall set a record date for the purpose of
entitling the holders of its shares of Common Stock to subscribe for or purchase
any shares of any class or to receive any other rights;
(iii) there shall occur any capital reorganization of this
corporation, reclassification of the shares of this corporation (other than a
subdivision or combination of its outstanding Common Stock), consolidation or
merger of this
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corporation with or into another corporation, or conveyance of all or
substantially all of the assets of this corporation to another corporation; or
(iv) there shall occur a voluntary or involuntary dissolution,
liquidation or winding up of this corporation; then, and in any such case, this
corporation shall cause to be mailed to the holders of record of the outstanding
shares of the Series B Preferred Stock, at least fifteen (15) days prior to the
date hereinafter specified, a notice stating (a) the date which (x) has been set
as the record date for the purpose of such dividend, distribution, or rights, or
(y) such reclassification, reorganization, consolidation, merger, conveyance,
dissolution, liquidation or winding up is to take place and (b) the record date
as of which holders of Common Stock of record shall be entitled to other
property deliverable upon such reclassification, reorganization, consolidation,
merger, conveyance, dissolution, liquidation or winding up.
(d) Notices. Any notice required by the provisions of this Section 5 to be
given to the holders of shares of Series B Preferred Stock shall be in writing
and may be delivered by personal service or sent by telegraph or cable or sent
by registered or certified mail, return receipt requested, with postage thereon
fully prepaid. All such communications shall be addressed to each holder of
record at its address appearing on the books of this corporation. If sent by
telegraph or cable, a conformed copy of such telegraphic or cabled notice shall
promptly be sent by mail (in the manner provided above) to the
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holders. Service of any such communication made only by mail shall be deemed
complete on the date of actual delivery as shown by the addressee's registry or
certification receipt or at the expiration of the fourth (4th) business day
after the date of mailing, whichever is earlier in time.
(e) Fractional Shares. No fractional shares of Common Stock shall be
issued upon conversion of Series B Preferred Stock. In lieu of any fractional
shares to which the holder would otherwise be entitled, the corporation shall
pay cash equal to the product of such fraction multiplied by the fair market
value of one share of the corporation's Common Stock on the date of conversion,
as determined in good faith by the Board of Directors.
(f) Reservation of Common Stock. The corporation shall at all times
reserve and keep available, out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting the conversion of the Series B
Preferred Stock, the full number of shares of Common Stock deliverable upon the
conversion of all shares of Series B Preferred Stock from time to time
outstanding. The corporation shall from time to time in accordance with the laws
of the State of Delaware, increase the authorized number of shares of Common
Stock remaining unissued shall not be sufficient to permit the conversion of all
of the Series A Preferred Stock at the time outstanding.
(g) Status of Converted Stock. No shares of Series B Preferred Stock that
have been converted shall ever again be reissued, and all such shares so
converted shall, upon such
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conversion, cease to be a part of the authorized shares of the corporation.
ARTICLE SEVEN: CERTAIN CORPORATE TRANSACTIONS
Section 1. In addition to whatever shareholder vote may be required by
law, the affirmative vote or consent of the holders of fifty-one percent (51%)
of all shares (as defined in ARTICLE SEVEN, Section 2(c) below) of stock of the
Corporation, [but without considering as outstanding and not counting the vote
of any shares owned beneficially, directly or indirectly, by any other entity
(as defined in ARTICLE SEVEN, Section 2(a) below) entitled to vote in elections
of directors, considered for the purposes of this ARTICLE SEVEN as one class,
shall be required for the adoption or authorization of:
(A) a business combination (as defined in ARTICLE SEVEN, Sections
2(d)(i), 2(d)(ii) and 2(d)(iii) below) with such other entity if, (i) as
of the record date for the determination of stockholders entitled to
notice thereof and to vote thereon or consent thereto or (ii) immediately
prior to, such other entity is:
(B) a business combination (as defined in ARTICLE SEVEN, Section
2(d)(iv) below) if, (i) on the record date for determination of
stockholders entitled to notice thereof or to vote thereon or consent
thereto or
(ii) immediately prior thereto, such other entity is: the beneficial owner
(as defined in ARTICLE SEVEN, Section 2(b) below), directly or indirectly, of
twenty-five percent (25%) or more of the outstanding shares of stock of the
Corporation
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entitled to vote in elections of directors considered for the purposes of this
ARTICLE SEVEN as one class; provided that such fifty- one percent (51%) voting
requirements shall not be applicable if:
(a) The cash or fair market value of other consideration to be received
per share by common stockholders of the Corporation in such business combination
is at least an amount equal to that sum which bears the same or a greater
percentage relationship to the market price of the Corporation's Common Stock
immediately prior to the announcement of such business combination as the
highest per share price (including brokerage commissions, dealer manager and/or
soliciting dealers' fees) which such other entity has theretofore paid for any
of the shares of the Corporation's Common Stock already owned by it bears to the
market price of the Common Stock of the Corporation immediately prior to (i) the
announcement of an intention by the other entity to acquire shares of the
Corporation's Common Stock or (ii) the commencement of acquisition of the
Corporation's Common Stock by such other entity, whichever occurs first;
(b) The cash or fair market value of other consideration to be received
per share by common stockholders of the Corporation in such business combination
(i) is not less than the highest per share price (including brokerage
commissions, dealer manager and/or soliciting dealers' fees) paid by such other
entity in acquiring any of its holdings of the Corporation's Common Stock, and
(ii) is not less than the aggregate earnings per share of Common Stock of the
Corporation for the four full consecutive
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fiscal quarters immediately preceding the record date for solicitation of votes
on such business combination, multiplied by the then average price earnings
multiple (if any) of such other entity for the twenty trading days immediately
prior to said record date as reported in The Wall Street Journal, or if not so
reported, then as would be customarily computed and reported in the financial
community;
(c) The consideration to be received per share by common stockholders of
the Corporation in such business combination shall be the same form and type of
consideration, whether it be cash, other property or securities, as such other
entity has heretofore paid for the shares of Common Stock already owned by it.
In the event that the other entity has paid for the shares of Common Stock
already owned by it with varying forms and types of consideration, the form and
type of consideration shall be the form and type which the other entity used to
acquire the largest percentage of the Common Stock of the Corporation already
owned by it;
(d) After such other entity has acquired a twenty-five percent (25%) or
greater interest and prior to the consummation of such business combination: (i)
such other entity shall have taken steps to ensure that the Corporation's Board
of Directors included at all times representation by continuing director(s) (as
defined in ARTICLE SEVEN, Section 2(e) below) proportionate to the stockholdings
of the Corporation's public common stockholders not affiliated with such other
entity (with a continuing director to occupy any resulting fractional board
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position); (ii) there shall have been no reduction in the rate of dividends
payable on the Corporation's Common Stock except as may have been approved by a
unanimous vote of all the directors; (iii) such other entity shall not have
acquired any newly issued shares of stock, directly or indirectly, from the
Corporation (except upon a conversion of convertible securities acquired by it
prior to obtaining a twenty-five percent (25%) or greater interest or as a
result of a pro rata stock dividend or stock split); and (iv) such other entity
shall not have acquired any additional shares of the Corporation's outstanding
Common Stock except as a part of the transaction which results in such other
entity acquiring its twenty-five percent (25%) or greater interest;
(e) Such other entity shall not have (i) received the benefit, directly or
indirectly (except proportionately as a stockholder), of any loans, advances,
guarantees, pledges or other financial assistance or tax credits provided by the
Corporation, or (ii) made any major change in the Corporation's business or
equity capital structure without the unanimous approval of all the directors, in
either case prior to the consummation of such business combination; and
(f) A proxy statement responsive to the requirements of the Securities
Exchange Act of 1934 shall be mailed to public stockholders of the Corporation
for the purpose of soliciting stockholder approval of such business combination
and shall contain in the forepart thereof, in a prominent place, any
recommendations as to the advisability (or inadvisability) of the
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business combination which the continuing directors, or any of them, may choose
to state and, if deemed advisable by a majority of the continuing directors, an
opinion of a reputable investment banking firm as to the fairness (or lack
thereof) of the terms of such business combination from the point of view of
the remaining public stockholders of the Corporation and the Corporation (such
investment banking firm to be selected by a majority of the continuing
directors and to be paid a reasonable fee for their services by the Corporation
upon receipt of such opinion).
The provisions of this Article Six shall also apply to a business
combination with any other entity which at any time has been the beneficial
owner, directly or indirectly, of more than twenty-five percent (25%) of the
outstanding shares of stock of the Corporation entitled to vote in elections of
directors considered for the purposes of this Article 6 as one class,
notwithstanding the fact that such other entity has reduced its stockholdings
below twenty-five percent (25%) if, (i) as of the record date for the
determination of stockholders entitled to notice of and to vote on or consent to
the business combination, or (ii) immediately prior to such business
combination, such other entity is an "affiliate" of the Corporation (as defined
in ARTICLE SEVEN, Section 2(a) below).
Section 2. As used in this ARTICLE SEVEN:
(a) the term "other entity" shall include any corporation, person or other
entity and any other entity with which it or its "affiliate" or "associate" (as
defined in this ARTICLE SEVEN, Section 2(a)) has any agreement, arrangement or
understanding,
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directly or indirectly, for the purpose of acquiring, holding, voting or
disposing of stock of the Corporation, or which is an "affiliate" or
"associate" as those terms are defined in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934 as in effect on January
1, 1991, together with the successors and assigns of such persons which
acquired, directly or indirectly, shares of the Corporation's Common Stock in
any transaction or series of transactions not involving a public offering of
the Corporation's stock within the meaning of the Securities Act of 1933;
(b) the other entity (as defined in ARTICLE SEVEN, Section 2(a) above)
shall be deemed to be the beneficial owner of any shares of stock of the
Corporation which the other entity has the right to acquire pursuant to any
agreement, or upon exercise of conversion rights, warrants or options, or
otherwise;
(c) the outstanding shares of any class of stock of the Corporation shall
include shares deemed owned through application of clause (b) above but shall
not include any other shares which may be issuable pursuant to any agreement, or
upon exercise of conversion rights, warrants or options, or otherwise;
(d) the term "business combination" shall include:
(i) any merger or consolidation of the Corporation with or into
any other entity;
(ii) any sale or lease or exchange or other disposition (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Corporation;
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(iii) any sale or lease or exchange or other disposition (in one
transaction or a series of related transactions) to the Corporation or any
subsidiary of the Corporation of any assets (except assets having an aggregate
fair market value of less than $1,000,000) in exchange for voting securities (or
securities convertible into or exchangeable for voting securities, or options,
warrants or rights to purchase voting securities or securities convertible into
or exchangeable for voting securities) of the Corporation or any subsidiary of
the Corporation; or
(iv) any reclassification of securities, recapitalization or other
transaction designed to decrease the number of holders of the Corporation's
voting securities;
(e) the term "continuing director" shall mean a person who was a member of
the Board of Directors of the Corporation elected by the public stockholders
prior to the time that such other entity acquired in excess of ten percent (10%)
of the stock of the Corporation entitled to vote in the election of directors,
or a person recommended to succeed a continuing director by a majority of
continuing directors;
(f) for purposes of ARTICLE SEVEN, Sections 1(a) and 1(b) above, the term
"fair market value or other consideration" shall be as determined in good faith
by the Board of Directors of the Corporation and concurred in by a majority of
continuing directors; and
(g) for the purpose of ARTICLE SEVEN, Section 1(a) and 1(b) above, the
term "other consideration to be received" shall
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include Common Stock of the Corporation retained by its existing public
stockholders in the event of a business combination with such other entity in
which the Corporation is the surviving corporation.
Section 3. A majority of the continuing directors shall have the power and
duty to determine for the purpose of this ARTICLE SEVEN, on the basis of
information known to them, whether (a) such other entity beneficially owns
twenty-five percent (25%) or more of the outstanding shares of stock of the
Corporation entitled to vote in election of directors, (b) the other entity (as
defined in ARTICLE SEVEN, Section 2(a) above) is an "affiliate" or "associate"
(as defined in ARTICLE SEVEN, Section 2(a) above) of another entity, (c) the
other entity (as defined in Section 2(a) above) has an agreement, arrangement or
understanding with another entity, or (d) the assets being acquired by the
Corporation, or any subsidiary thereof, have an aggregate fair market value of
less than $1,000,000.
4. Nothing contained in this ARTICLE SEVEN shall be construed to relieve
the other entity (as defined in ARTICLE SEVEN, Section 2(a) above) from any
fiduciary obligation imposed by law.
5. Notwithstanding any other provision of the Certificate of Incorporation
of this Corporation, no amendment to the Certificate of Incorporation of this
Corporation shall amend, alter, change or repeal any of the provisions of this
ARTICLE SEVEN, unless the amendment effecting such amendment, alteration, change
or repeal shall receive the affirmative vote or consent of
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the holders of fifty-one percent (51%) of all outstanding shares of stock of
the Corporation [but without considering as outstanding and not counting the
vote of shares owned beneficially, directly or indirectly, by any other entity
(as defined in ARTICLE SEVEN, Section 2(a) above)] entitled to vote in election
of directors, considered for the purposes of this paragraph of this ARTICLE
SEVEN as one class; provided that this paragraph of this ARTICLE SEVEN shall
not apply to, and such fifty-one percent (51%) vote or consent shall not be
required for, any amendment, alteration, change or repeal unanimously
recommended to the stockholders by the Board of Directors of the Corporation if
all of such directors are persons who would be eligible to serve as "continuing
directors" within the meaning of ARTICLE SEVEN, Section 2(e) above.
ARTICLE EIGHT:
LIMITATION OF DIRECTOR'S LIABILITY
A director of this corporation shall not be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, provided that this provision shall not eliminate or limit
the liability of a director (i) for any breach of his duty of loyalty to the
corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of the laws, (iii)
under Section 174 of the General Corporation Law of the State of Delaware, or
(iv) for any transaction from which the director derives an improper personal
benefit. Any repeal or modification of this ARTICLE EIGHT by the
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stockholders of the corporation shall be prospective only, and shall not
adversely affect any limitation on the personal liability of a director of the
corporation existing at the time of such repeal or modification.
ARTICLE NINE: AMENDMENT BY BYLAWS
The Board of Directors of this corporation shall have concurrent power
with the stockholders to make, alter, amend, change, add to or repeal the Bylaws
of the corporation.
ARTICLE TEN: COMPROMISES AND ARRANGEMENTS
Whenever a compromise or arrangement is proposed between this corporation
and its creditors or any class of them, and/or between this corporation and its
stockholders or any class of them, any court of equitable jurisdiction within
the State of Delaware may, on the application in a summary way of this
corporation or of any creditor or stockholder thereof or on the application of
any receiver or receivers appointed for this corporation under the provisions of
Section 291 of Title 8 of the Delaware Code, order a meeting of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths in value of the
creditors or class of creditors, and/or of the stockholders or class of
stockholders of this corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this corporation as a consequence of
such compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all of the creditors or class of creditors, and/or
on all the stockholders or class of stockholders, of this corporation, as the
case may be, and also on this corporation. TWO: That the aforesaid Corrected
Restated Certificate of Incorporation is being filed in accordance with the
applicable provisions of Section 103(f) of the General Corporation Law of the
State of Delaware.
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IN WITNESS WHEREOF, Crown Laboratories, Inc. has caused this Corrected
Restated Certificate of Incorporation to be signed by Craig E. Nash, its
Chairman of the Board and Chief Executive Officer, and attested Christopher
Demetree its Secretary, this 24th day of July, 1995.
CROWN LABORATORIES, INC.
By: /s/ Craig E. Nash
------------------------------
CRAIG E. NASH, Chairman of the
Board and Chief Executive
Officer
Attest:
By:/s/ Christopher Demetree
------------------------------
Christopher Demetree
Secretary
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CROWN LABORATORIES, INC.
CERTIFICATE OF DESIGNATION
OF
SERIES C PREFERRED STOCK
(Pursuant to Section 151 of the Delaware General
Corporation Law)
We, Craig Nash and Christopher Demetree, the Chief Executive Officer
and Secretary, respectively, of Crown Laboratories, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY
CERTIFY:
That pursuant to the authority vested in the Board of Directors by
the Certificate of Incorporation of the said corporation, the Board of Directors
adopted the following resolution creating a series of 300 shares of its
Preferred Stock to be a designated Series C Preferred Stock;
"WHEREAS, the Certificate of Incorporation of the Corporation
authorizes a class of stock designated Preferred Stock, comprising 5,000,000
shares (of which 999,000 shares of Series A Preferred Stock are authorized and
no shares of Series A Preferred Stock are currently outstanding and 999,000
shares of Series B Preferred Stock are authorized and no shares are outstanding)
and provides that such Preferred Stock may be divided into such number of series
as the Board of Directors may determine, and authorizes the Board of Directors
to (i) determine and alter the powers, preferences, rights, qualifications,
limitations and restrictions granted to or imposed upon any series of Preferred
Stock and (ii) fix the number of shares of any series of Preferred Stock and the
designation of such series of Preferred Stock.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, this Board of Directors hereby creates a series of Series C
Preferred Stock, par value $0.001 per share, of the Corporation, and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, and restrictions thereof (in addition to any provisions set forth
in the Certificate of Incorporation of the Corporation which are applicable to
the Preferred Stock of all classes and series) as follows:
SERIES C PREFERRED STOCK
Section 1: Designation and Amount. The shares of such series shall be
designated as "Series C Preferred Stock" (the
<PAGE> 47
"Series C Preferred Stock") and the number of shares constituting the Series C
Preferred Stock shall be 300. Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no decrease
shall reduce the number of shares of Series C Preferred Stock to a number less
than the number of shares then outstanding plus the number of shares reserved
for issuance upon the exercise of outstanding options, rights or warrants or
upon the conversion of any outstanding securities issued by the Corporation
convertible into Series C Preferred Stock.
Section 2: Rank. The Series C Preferred Stock shall rank: (i) prior
to all of the Corporation's Common Stock, par value $0.001 per share ("Common
Stock") and the Corporation's Series B Preferred Stock, par value $0.001 per
share (collectively the "Junior Securities"); and (ii) (subject to the
provisions of Section 8 hereof) on parity with the Corporation's Series A
Preferred Stock, $0.001 par value, and any class or series of capital stock of
the Corporation hereafter created specifically ranking by its terms on parity
with the Series C Preferred Stock (collectively "Parity Securities"); and (iii)
(subject to the provisions of Section 8 hereof) or any class or series of
capital stock of the Corporation hereafter created specifically ranking higher
than the Series C Preferred Stock ("Senior Securities"), in each case as to
distributions of assets upon liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary (all such distributions being
referred to collectively as "Distributions").
Section 3: Dividends. The Series C Preferred Stock will bear no
dividends.
Section 4: Liquidation Preference.
(a) In the event of any liquidation, dissolution or winding up
of the Corporation, either voluntary or involuntary, the holders of shares of
Series C Preferred Stock shall be entitled to receive, immediately after any
distributions to Senior Securities required by the Corporation's Certificate of
Incorporation or any certificate of designation of preferences, and prior and in
preference to any distribution to Junior Securities but in parity with any
distribution to Parity Securities, an amount per share equal to the sum of (i)
$10,000 for each outstanding share of Series C Preferred Stock (the "Original
Series C Issue Price") and (ii) an amount equal to 6% of the Original Series C
Issue Price for each 12 months that has passed since the date of issuance of any
Series C Preferred Stock (such amount being referred to herein as the
"Premium"). If upon the occurrence of such event and after payment to the Senior
Securities, the assets and funds thus distributed among the holders of the
Series C Preferred Stock and Parity Securities shall be insufficient to permit
the payment to such holders of the full preferential amounts due to the holders
of the Series C Preferred Stock and the Parity Securities, respectively, then
the
-2-
<PAGE> 48
entire assets and funds of the Corporation legally available for distribution
shall be distributed among the holders of the Series C Preferred Stock and the
Parity Securities, pro rata, based on the respective liquidation amounts to
which each such series of stock is entitled by this Certificate of Incorporation
and any certificate of designation of preferences.
(b) Upon the completion of the distribution required by
subsection 4(a), if assets remain in this Corporation, they shall be distributed
to holders of Junior Securities in accordance with the corporation's Certificate
of Incorporation or any certificate of designation or preferences.
(c) A consolidation or merger of this Corporation with or into
any other corporation or corporations, or a sale, conveyance or disposition of
all or substantially all of the assets of this corporation or the effectuation
by the Corporation of a transaction or series of related transactions in which
more than 50% of the voting power of the Corporation is disposed of, shall not
be deemed to be a liquidation, dissolution or winding up within the meaning of
this Section 4, but shall instead be treated pursuant to Section 6 hereof.
Section 5. Conversion. The holders of the Series C Preferred Stock
shall have conversion rights as follows (the "Conversion Rights"):
(a) Right to Convert. Each share of Series C Preferred Stock
shall be convertible, subject to the Corporation's rights of redemption set
forth in Section 6, at the option of the holder thereof, at any time after 40
days following the date of issuance of such share at the office of the
Corporation or any transfer agent for the Series C Preferred Stock, into that
number of fully-paid and non-assessable shares of Common Stock calculated in
accordance with the following formula:
[ ($10,000) (N/365) (.06)] + $10,000
------------------------------------
Conversion Price per share
N= the number of days between the original date of issuance of
the Series C Preferred Stock (the "Original Issuance Date")
and the applicable date of conversion.
Conversion
Price = 82% of the average closing sale prices (or if none, the
average of the bid and asked prices) for the five (5) trading
days immediately preceding the Date of Conversion; as reported
by the American Stock Exchange (the "AMEX"), or if not quoted
on the AMEX, on the principal stock exchange or NASDAQ, of the
Corporations' Common Stock, (the "Closing Sale Price").
-3-
<PAGE> 49
The number of shares of Common Stock into which each share of Series C
Preferred may be converted is hereinafter referred to as the "Conversion Rate"
for such series.
(b) Mechanics of Conversion. No fractional shares of Common
Stock shall be issued upon conversion of Series C Preferred Stock. In lieu of
any fractional shares to which the holder would otherwise be entitled, the
Corporation shall round up to the nearest whole share. In the case of a dispute
as to the calculation of the Conversion Rate, the Corporation's calculation
shall be deemed conclusive absent manifest error. In order to convert Series C
Preferred Stock into full shares of Common Stock, the holder shall surrender the
certificate or certificates therefor, duly endorsed, by overnight courier to the
office of the Corporation or of any transfer agent for the Series C Preferred
Stock, and shall give written notice to the Corporation at such office that he
elects to convert the same, the number of shares of Series C Preferred Stock so
converted and a calculation of the Conversion Rate (with an advance copy of the
certificate(s) and the notice by facsimile); provided, however, that the
Corporation shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon such conversion unless either the certificates
evidencing such shares of Series C Preferred Stock are delivered to the
Corporation or its transfer agent as provided above, or the holder notifies the
Corporation or its transfer agent that such certificates have been lost, stolen
or destroyed and executes an agreement satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
certificates.
The Corporation shall use reasonable efforts to issue and delivery
within five (5) business days after delivery to the Corporation of such
certificates, to such holder of Series C Preferred Stock at the address of the
holder on the stock books of the Corporation, a certificate or certificates for
the number of shares of Common Stock to which he shall be entitled as aforesaid.
The date on which notice of conversion is given (the "Date of Conversion") shall
be deemed to be the date set forth in such notice of conversion provided that
the original shares of Series C Preferred Stock to be converted are received by
the Corporation or transfer agent, if any, for the Series C Preferred Stock
within five business days thereafter and the person or persons entitled to
receive the shares of Common Stock issuable upon such conversion shall be
treated for all purposes as the record holder or holders of such shares of
Common Stock on such date. If the original shares of Series C Preferred Stock to
be converted are not received by the Corporation or such transfer agent, if any,
within five business days after the Date of Conversion, the notice of conversion
shall become null and void.
-4-
<PAGE> 50
(c) No Impairment. The Corporation will not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
merger, dissolution, issue or sale of securities or any other voluntary action,
avoid or seek to avoid the observance or performance of any of the terms to be
observed or performed hereunder by the Corporation but will at all times in good
faith assist in the carrying out of all the provisions of this Section 5 and in
the taking of all such action as may be necessary or appropriate in order to
protect the Conversion Rights of the holders of the Series C Preferred Stock
against impairment.
(d) Reservation of Stock Issuable Upon Conversion. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock solely for the purpose of effecting the
conversion of the shares of the Series C Preferred Stock, such number of its
shares of Common Stock as shall from time to time be sufficient to effect the
conversion of all then outstanding shares of the Series C Preferred Stock; and
if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of the Series C Preferred Stock, the Corporation will take such corporate action
as may be necessary to increase its authorized but unissued shares of Common
Stock to such number of shares as shall be sufficient for such purpose.
(e) Forced Conversion. The Company is entitled, at its option,
any time commencing on July 31, 1996 to require the holders of the Series C
Preferred Stock to convert each share of Series C Preferred Stock into
fully-paid and non-assessable shares of Common Stock at a Conversion Rate for
each share of Common Stock calculated in accordance with the formula in
Paragraph 5(a) above.
Section 6. Redemption
(a) Right to Redeem. The Corporation shall have the right, in
its sole discretion, upon receipt of a notice of conversion pursuant to Section
5(b) above, to redeem in whole or in part, any shares of Series C Preferred
Stock eligible for conversion, immediately prior to conversion. If the
Corporation elects to redeem some, but not all, eligible for conversion, the
Corporation shall redeem from among the shares submitted by the various
shareholders for conversion on the applicable date a pro- rata amount from each
shareholder so submitting shares for conversion.
(b) Mechanics of Redemption. The Corporation shall effect each
such redemption by giving notice of its election to redeem, by facsimile within
1 business day with a copy by 2-day courier, to the holder of shares of Series C
Preferred Stock eligible for conversion at the address and facsimile number of
such holder appearing in the Corporation's
-5-
<PAGE> 51
register for the Series C Preferred Stock. Such redemption notice shall
indicate whether the Corporation will redeem all or part of the shares of
Series C Preferred Stock eligible for conversion and the applicable redemption
price. The Corporation shall not be entitled to send any notice of redemption
and begin the redemption procedures unless it has the full amount of the
redemption price, in cash or liquid assets, available in demand or other
immediately available account in a bank or similar financial institution on the
date the redemption notice is sent to shareholders.
The redemption price per share of Series C Preferred Stock shall be
calculated in accordance with the following formula:
[[($10,000) (N/365) (.06)] x Closing Sale Price per share
----------------------------
Conversion Price per share
+ $10,000
For the purposes of the above formula "N", "Closing Sale Price" and
"Conversion Price" shall have the meanings set forth in Section 5.
The redemption price shall be paid to the holder of shares of Series
C Preferred Stock redeemed within 10 business days of the delivery of the notice
of such redemption to such holder; provided, however, that the Corporation shall
not be obligated to deliver any portion of such redemption price unless either
the certificates evidencing the shares of Series C Preferred Stock redeemed are
delivered to the Corporation or its transfer agent as provided in Section 5, or
the holder notifies the Corporation or its transfer agent that such certificates
have been lost, stolen or destroyed and executes an agreement satisfactory to
the Corporation to indemnify the Corporation from any loss incurred by it in
connection with such certificates.
Section 7. Corporate Change. The Closing Sale Price used to determine
the Conversion Price shall be appropriately adjusted to reflect as deemed
equitable and appropriate by the Corporation, any stock dividend, stock split or
share combination of the Common Stock. In the event of a merger, reorganization,
recapitalization or similar event of or with respect to the Company (a
"Corporate Change") (other than a Corporate Change in which all or substantially
all of the consideration received by the holders of the Company's equity
securities upon such Corporate Change consists of cash or assets other than
securities issued by the acquiring entity or any affiliate thereof), this Series
C Preferred Stock shall be assumed by the acquiring entity and thereafter this
Series C Preferred Stock shall be convertible into such class and type of
securities as the holder would have received had the holder converted this
Series C Preferred Stock immediately prior to such Corporate Change.
-6-
<PAGE> 52
Section 8. Voting Rights. The holders of Series C Preferred Stock
will not have any voting rights except as set forth below or as otherwise from
time to time required by law.
The affirmative vote of consent of the holders of at least a majority
of the outstanding shares of the Series C Preferred stock, voting separately as
a class, will be required for any amendment, alteration or repeal of the
Corporation's Certificate of Incorporation if, and only if, the amendment,
alteration or repeal adversely affects the powers, preferences or special rights
of the Series C Preferred Stock.
To the extent that under Delaware law the vote of the holders of the
Series C Preferred Stock, voting separately as a class, may be required to
authorize a given action of the Corporation, the affirmative vote or consent of
the holders of at least a majority of the outstanding shares of the Series C
Preferred Stock shall constitute the approval of such action by the class. To
the extent that under Delaware law the holders of the Series C Preferred Stock
are entitled to vote on a matter with holders of Common Stock, Series A
Preferred Stock and Series B Preferred Stock, voting together as one class, each
share of Series C Preferred Stock shall be entitled to a number of votes equal
to the number of shares of Common Stock into which it is then convertible using
the record date for the taking of such vote of stockholders as the date as of
which the Conversion price is calculated. Holders of the Series C Preferred
Stock shall be entitled to notice of all shareholder meetings or written consent
with respect to which they would be entitled to vote, which notice would be
provided pursuant to the Corporation's by-laws and applicable statutes.
Section 9. Protective Provisions. So long as shares of Series C
Preferred Stock are outstanding, this Corporation shall not take any action that
would impair the right of the holders of the Series C Preferred Stock to
exercise the conversion rights set forth herein and shall not without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the outstanding shares of Series C Preferred
Stock:
(a) create any new class or series of stock having a preference
over, or being on a parity with, the Series C Preferred Stock with respect to
distributions (as defined in Section 2 above); or
(b) do any act or thing which would result in taxation of the
holders of shares of the Series C Preferred Stock under Section 305 of the
Internal Revenue Code of 1986, as amended (or any comparable provision of the
Internal Revenue Code as hereafter from time to time amended).
Section 10. Status of Redeemed or Converted Stock. In the event any
shares of Series C Preferred Stock shall be
-7-
<PAGE> 53
converted or redeemed pursuant to Section 5 or Section 6 hereof, the shares
so converted or redeemed shall be cancelled and shall not be reissuable by the
Corporation.
IN WITNESS WHEREOF, Crown Laboratories, Inc. has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Craig Nash, its
Chief Executive Officer, and attested by Christopher Demetree, its Secretary,
this 20 day of July 1995.
By: /s/ Craig Nash July 24, 95
--------------------------------
Craig Nash,
Chief Executive Officer
Attest:
By:/s/ Christopher Demetree July 24 95
------------------------------------
Christopher Demetree, Secretary
-8-
<PAGE> 54
CROWN LABORATORIES, INC.
CERTIFICATE OF AMENDMENT TO
CERTIFICATE OF DESIGNATION
OF
SERIES C PREFERRED STOCK
(Pursuant to Section 151 of the Delaware General
Corporation Law)
----------------------------
We, Craig Nash and Christopher Demetree, the Chief Executive Officer
and Secretary, respectively, of Crown Laboratories, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY
CERTIFY:
That pursuant to the authority vested in the Board of Directors by the
Certificate of Incorporation of the said corporation, the Board of Directors
adopted the following resolution increasing by 300 shares, its authorized shares
of Series C Preferred Stock;
"WHEREAS, the Certificate of Incorporation of the Corporation
authorizes a class of stock designated Preferred Stock, comprising 5,000,000
shares (of which 999,000 shares of Series A Preferred Stock are authorized and
no shares of Series A Preferred Stock are currently outstanding, 999,000 shares
of Series B Preferred Stock are authorized and no shares are outstanding, 300
shares of Series C Preferred Stock are authorized and 212 shares an outstanding
and 1,600 shares of Series D Preferred Stock are authorized and no shares are
outstanding) and provides that such Preferred Stock may be divided into such
number of series as the Board of Directors may determine, and authorizes the
Board of Directors to (i) determine and alter the powers, preferences, rights,
qualifications, limitations and restrictions granted to or imposed upon any
series of Preferred Stock and (ii) fix the number of shares of any series of
Preferred Stock and the designation of such series of Preferred Stock.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Corporation (hereinafter called the "Board of
Directors" or the "Board") in accordance with the provisions of the Certificate
of Incorporation, this Board of Directors hereby amends the Certificate of
Designation of Series C Preferred Stock by amending Section 1 as follows:
Section 1: Designation and Amount. The shares of such series shall be
designated as "Series C Preferred Stock" (the "Series C Preferred Stock") and
the number of shares constituting the Series C Preferred Stock shall be 512.
Such number of shares
<PAGE> 55
may be increased or decreased by resolution of the Board of Directors; provided,
that no decrease shall reduce the number of shares of Series C Preferred Stock
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Corporation convertible into Series C Preferred Stock.
IN WITNESS WHEREOF, Crown Laboratories, Inc. has caused its corporate
seal to be hereunto affixed and this certificate to be signed by Craig Nash, its
Chief Executive Officer, and attested by Christopher Demetree, its Secretary,
this 11th day of October 1995.
By:/s/Craig Nash CEO
________________________________
Craig Nash,
Chief Executive Officer
Attest:
By:/s/Christopher Demetree
_______________________________
Christopher Demetree, Secretary
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