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EXHIBIT 3.5
CERTIFICATE OF DESIGNATION
OF PREFERENCES, RIGHTS AND LIMITATIONS
OF
SERIES B REDEEMABLE CONVERTIBLE PREFERRED STOCK OF
E.DIGITAL CORPORATION
PURSUANT TO SECTION 151 OF THE GENERAL
CORPORATION LAW OF THE STATE OF DELAWARE
The undersigned, ALFRED H. FALK and ROBERT PUTNAM, do hereby certify
that:
1. They are the President and Secretary, respectively, of
E.DIGITAL CORPORATION, a Delaware corporation (the "Corporation").
2. The Corporation is authorized to issue five million
(5,000,000) shares of preferred stock, 100,300 of which have been issued.
3. The following resolutions were duly adopted by the Board of
Directors:
WHEREAS, the Certificate of Incorporation of the Corporation provides
for a class of its authorized stock known as preferred stock, comprised of five
million (5,000,000) shares, $.001 par value, issuable from time to time in one
or more series;
WHEREAS, the Board of Directors of the Corporation is authorized to fix
the dividend rights, dividend rate, voting rights, conversion rights, rights and
terms of redemption and liquidation preferences of any wholly unissued series of
preferred stock and the number of shares constituting any series and the
designation thereof, of any of them; and
WHEREAS, it is the desire of the Board of Directors of the Corporation,
pursuant to its authority as aforesaid, to fix the rights, preferences,
restrictions and other matters relating to an additional series of the preferred
stock, which shall consist of up to four hundred (400) shares of the 5,000,000
shares of preferred stock which the corporation has the authority to issue, as
follows:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby
provide for the issuance of an additional series of preferred stock for cash or
exchange of other securities, rights or property and does hereby fix and
determine the rights, preferences, restrictions and other matters relating to
such additional series of preferred stock as follows:
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TERMS OF PREFERRED STOCK
Section 1. Designation, Amount and Par Value. The series of
preferred stock shall be designated as its 7% Series C Convertible Preferred
Stock (the "Preferred Stock") and the number of shares so designated shall be
400 (which shall not be subject to increase without the consent of the holders
of the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
share of Preferred Stock shall have a par value of $.001 per share and a stated
value equal to the sum of $10,000 plus all accrued and unpaid dividends to the
date of determination to the extent not previously paid in cash in accordance
with the terms hereof (the "Stated Value").
Section 2. Dividends.
(a) Holders shall be entitled to receive, out of funds legally
available therefor, and the Company shall pay, cumulative dividends at the rate
per share (as a percentage of the Stated Value per share) of 7% per annum,
payable on each Conversion Date (as defined herein) for such share, in cash or
by accretion of the Stated Value. Subject to the terms and conditions herein,
the decision whether to accrete dividends hereunder to the Stated Value or to
pay for dividends in cash shall be at the discretion of the Company. The Company
shall provide the Holders written notice of its intention to accrete dividends
hereunder to the Stated Value or pay dividends in cash not less than ten days
prior to each Conversion Date for so long as shares of Preferred Stock are
outstanding (the Company may indicate in such notice that the election contained
in such notice shall continue for later periods until revised). Failure to
timely provide such written notice shall be deemed (if permitted hereunder) an
election by the Company to accrete dividends hereunder to the Stated Value.
Dividends on the Preferred Stock shall be calculated on the basis of a 360-day
year, shall accrue daily commencing on the Original Issue Date (as defined in
Section 8), and shall be deemed to accrue from such date whether or not earned
or declared and whether or not there are profits, surplus or other funds of the
Company legally available for the payment of dividends. Except as otherwise
provided herein, if at any time the Company pays less than the total amount of
dividends then accrued on account of the Preferred Stock, such payment shall be
distributed ratably among the Holders based upon the number of shares of
Preferred Stock held by each Holder. Any dividends to be paid in cash hereunder
that are not paid within three Trading Days (as defined in Section 8) following
a Conversion Date shall continue to accrue and shall entail a late fee, which
must be paid in cash, at the rate of 18% per annum or the lesser rate permitted
by applicable law (such fees to accrue daily, from the date such dividend is due
hereunder through and including the date of payment).
(b) Notwithstanding anything to the contrary contained herein,
the Company must pay dividends in cash if:
(i) the number of shares of Common Stock (as defined in
Section 8) at the time authorized, unissued and unreserved for all purposes is
insufficient to accrete such dividends to the Stated Value and permit conversion
in full of all outstanding Stated Value;
(ii) after the Dividend Effectiveness Date (as defined
in Section 8),
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Underlying Shares (as defined in Section 8) (x) are not registered for resale
pursuant to an effective Underlying Shares Registration Statement (as defined in
Section 8) and (y) may not be sold without volume restrictions pursuant to Rule
144 promulgated under the Securities Act (as defined in Section 8), as
determined by counsel to the Company pursuant to a written opinion letter,
addressed to the Company's transfer agent in the form and substance acceptable
to the applicable Holder and such transfer agent (if the Company is permitted
and elects to pay dividends in shares of Common Stock under this clause (ii)
prior to the Dividend Effectiveness Date and thereafter an Underlying Shares
Registration Statement shall be declared effective by the Commission (as defined
in Section 8), the Company shall, within three Trading Days after the date of
such declaration of effectiveness, exchange such Underlying Shares for shares of
Common Stock that are free of restrictive legends of any kind);
(iii) the Common Stock is not then listed or quoted on
the OTC Bulletin Board ("OTC") or on the Nasdaq National Market, the New York
Stock Exchange, American Stock Exchange or Nasdaq SmallCap Market (each, a
"Subsequent Market"); or
(iv) the accretion of such dividends to the Stated Value
and subsequent conversions of all then outstanding Stated Value would result in
a violation of Section 5(a)(iii).
(c) So long as any Preferred Stock shall remain outstanding,
neither the Company nor any subsidiary thereof shall redeem, purchase or
otherwise acquire directly or indirectly any Junior Securities (as defined in
Section 8), nor shall the Company directly or indirectly pay or declare any
dividend or make any distribution (other than a dividend or distribution
described in Section 5 or dividends due and paid in the ordinary course on
preferred stock of the Company at such times when the Company is in compliance
with its payment and other obligations hereunder) upon, nor shall any
distribution be made in respect of, any Junior Securities, nor shall any monies
be set aside for or applied to the purchase or redemption (through a sinking
fund or otherwise) of any Junior Securities or shares pari passu with the
Preferred Stock.
Section 3. Voting Rights. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding, the
Company shall not, without the affirmative vote of the Holders of a majority of
the shares of the Preferred Stock then outstanding, (a) alter or change
adversely the powers, preferences or rights given to the Preferred Stock or
alter or amend this Certificate of Designation, (b) authorize or create any
class of stock ranking as to dividends or distribution of assets upon a
Liquidation (as defined in Section 4) senior to or otherwise pari passu with the
Preferred Stock, (c) amend its certificate or articles of incorporation or other
charter documents so as to affect adversely any rights of the Holders, (d)
increase the authorized number of shares of Preferred Stock, or (e) enter into
any agreement with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount equal to the Stated Value per share before any distribution or payment
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shall be made to the holders of any Junior Securities, and if the assets of the
Company shall be insufficient to pay in full such amounts, then the entire
assets to be distributed to the Holders shall be distributed among the Holders
ratably in accordance with the respective amounts that would be payable on such
shares if all amounts payable thereon were paid in full. A sale, conveyance or
disposition of 50% or more of the assets of the Company or the effectuation by
the Company of a transaction or series of related transactions in which more
than 33% of the voting power of the Company is disposed of, or a consolidation
or merger of the Company with or into any other company or companies into one or
more companies not wholly-owned by the Company shall not be treated as a
Liquidation, but instead shall be subject to the provisions of Section 5. The
Company shall mail written notice of any such Liquidation, not less than 45 days
prior to the payment date stated therein, to each record Holder.
Section 5. Conversion.
(a)(i) Conversions at Option of Holder. Each share of Preferred
Stock shall be convertible into shares of Common Stock (subject to the
limitations set forth in Section 5(a)(iii)) at the Conversion Ratio (as defined
in Section 8), at the option of the Holder, at any time and from time to time
from and after the Original Issue Date. Holders shall effect conversions by
providing the Company with the form of conversion notice attached hereto as
Exhibit A (a "Conversion Notice"). Each Conversion Notice shall specify the
number of shares of Preferred Stock to be converted, the number of shares of
Preferred Stock owned prior to the conversion at issue, number of shares of
Preferred Stock owned subsequent to the conversion at issue and the date on
which such conversion is to be effected, which date may not be prior to the date
the Holder delivers such Conversion Notice by facsimile (the "Conversion Date").
If no Conversion Date is specified in a Conversion Notice, the Conversion Date
shall be the date that such Conversion Notice is deemed delivered hereunder. To
effect conversions of shares of Preferred Stock, a Holder shall not be required
to surrender the certificate(s) representing such shares of Preferred Stock to
the Company unless all of the shares of Preferred Stock represented thereby are
so converted, in which case the Holder shall deliver the certificate
representing such share of Preferred Stock promptly following the Conversion
Date at issue. The calculations and entries set forth in the Conversion Notice
shall control in the absence of manifest or mathematical error.
(ii) Automatic Conversion. Subject to the terms of this
paragraph, all outstanding shares of Preferred Stock for which Conversion
Notices have not previously been received or for which redemption has not been
made or required hereunder shall be automatically converted on the second
anniversary of the Original Issue Date at the Conversion Ratio (without regard
to Section 5(a)(iii)(C)). The conversion contemplated by this paragraph shall
not occur without the consent of the Holder at such time as (a)(1) an Underlying
Shares Registration Statement is not then effective or (2) the Holder is not
permitted to resell Underlying Shares pursuant to Rule 144(k) promulgated under
the Securities Act; (b) there are not sufficient shares of Common Stock
authorized and reserved for issuance upon such conversion; or (c) the Company
shall be in default of any material respect on its covenants and obligations
hereunder or under the Purchase Agreement or Registration Rights Agreement (each
as defined in Section 8). In addition, the two-year period for automatic
conversion under this Section shall be extended (on a day-for-day basis) for any
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Trading Days after the Dividend Effectiveness Date that a Holder is unable to
resell Underlying Shares under an Underlying Shares Registration Statement due
to (a) the Common Stock not being listed or quoted for trading on the OTC or any
Subsequent Market, (b) the failure of such Underlying Shares Registration
Statement to be declared effective, or if so declared, to remain effective
during the Effectiveness Period (as defined in the Registration Rights
Agreement) as to all Underlying shares, or (c) the suspension of the Holder's
right to resell Underlying Shares thereunder. The provisions of Section
5(a)(iii) shall not apply to any automatic conversion pursuant to this Section
5(a)(ii).
(iii) Certain Conversion Restrictions.
(A) A Holder may not convert shares of Preferred Stock
or receive shares of Common Stock as payment of dividends hereunder to the
extent such conversion or receipt of such dividend payment would result in the
Holder, together with any affiliate thereof, beneficially owning (as determined
in accordance with Section 13(d) of the Exchange Act (as defined in Section 8)
and the rules promulgated thereunder) in excess of 4.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon conversion
of, and payment of dividends on, the shares of Preferred Stock held by such
Holder after application of this Section. Since the Holder will not be obligated
to report to the Company the number of shares of Common Stock it may hold at the
time of a conversion hereunder, unless the conversion at issue would result in
the issuance of shares of Common Stock in excess of 4.999% of the then
outstanding shares of Common Stock without regard to any other shares which may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the shares of Preferred Stock are
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for shares of Preferred Stock that,
without regard to any other shares that the Holder or its affiliates may
beneficially own, would result in the issuance in excess of the permitted amount
hereunder, the Company shall notify the Holder of this fact and shall honor the
conversion for the maximum number of shares of Preferred Stock permitted to be
converted on such Conversion Date in accordance with the periods described in
Section 5(b) and, at the option of the Holder, either retain shares of Preferred
Stock tendered for conversion in excess of the permitted amount hereunder for
future conversions or return such excess shares of Preferred Stock permitted to
the Holder. The provisions of this Section may be waived by a Holder (but only
as to itself and not to any other Holder) upon not less than 61 days prior
notice to the Company. Other Holders shall be unaffected by any such waiver.
(B) A Holder may not convert shares of Preferred Stock
or receive shares of Common Stock as payment of dividends hereunder to the
extent such conversion or receipt of such dividend payment would result in the
Holder, together with any affiliate thereof, beneficially owning (as determined
in accordance with Section 13(d) of the Exchange Act and the rules promulgated
thereunder) in excess of 9.999% of the then issued and outstanding shares of
Common Stock, including shares issuable upon conversion of, and payment of
dividends on, the shares of Preferred Stock held by such Holder after
application of this Section. Since the Holder will not be obligated
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to report to the Company the number of shares of Common Stock it may hold at the
time of a conversion hereunder, unless the conversion at issue would result in
the issuance of shares of Common Stock in excess of 9.999% of the then
outstanding shares of Common Stock without regard to any other shares which may
be beneficially owned by the Holder or an affiliate thereof, the Holder shall
have the authority and obligation to determine whether the restriction contained
in this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the shares of Preferred Stock are
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for shares of Preferred Stock that,
without regard to any other shares that the Holder or its affiliates may
beneficially own, would result in the issuance in excess of the permitted amount
hereunder, the Company shall notify the Holder of this fact and shall honor the
conversion for the maximum number of shares of Preferred Stock permitted to be
converted on such Conversion Date in accordance with the periods described in
Section 5(b) and, at the option of the Holder, either retain shares of Preferred
Stock tendered for conversion in excess of the permitted amount hereunder for
future conversions or return such excess shares of Preferred Stock permitted to
the Holder. The provisions of this Section may be waived by a Holder (but only
as to itself and not to any other Holder) upon not less than 61 days prior
notice to the Company. Other Holders shall be unaffected by any such waiver.
(C) Subject to the terms of this Section and Section
5(a)(ii), the maximum number of shares of Common Stock that the Company shall be
required to issue upon conversions of Preferred Stock and payment of dividends
thereon in shares of Common Stock is 2,666,666 (such number of shares, the
"Issuable Maximum"). The Issuable Maximum is subject to adjustment in accordance
with the following, all such calculations to be cumulative:
- If the Effective Date shall not have occurred by the 75th day
following the Closing Date, then on the 76th day following the
Closing Date and, at the option of the Holder, on the Effective
Date, the Issuable Maximum shall be reset to the higher of (1)
the Issuable Maximum in effect on (x) the 75th day after the
Original Issue Date or (y) the Effective Date, whichever is more
and (2) the quotient obtained by dividing (I) $4,000,000 divided
by (II) 65% of the average of the five lowest Per Share Market
Values during the twenty consecutive Trading Days immediately
preceding (x) the the 75th day after the Original Issue Date or
(y) the Effective Date, whichever is lower (assuming for such
purpose that more than 90 days had elapsed since the Original
Issue Date).
- Each time the Conversion Price (including the Fixed Conversion
Price) is adjusted downward in accordance with Section 5(c), the
Issuable Maximum will be adjusted to equal the sum of (1) the
Issuable Maximum in effect on the Trading Day immediately
preceding the date that the adjustment of the Conversion Price
is required to be made plus (2) the difference between (A) the
quotient obtained by dividing (I) $4,000,000 by (II) 75% of the
adjusted Conversion Price and (B) 2,666,666.
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- If any portion of a Put Price under Section 6 is not paid on or
prior to its Put Exercise Date (a "Put Default Date"), then the Company shall be
deemed to have elected to pay such Put Price in shares of Common Stock (as set
forth in Section 6(a) below) and from and after the Put Default Date for such
Put Price the Issuable Maximum shall only restrict the Company=s obligation to
issue Underlying Shares upon conversion of shares of Preferred Stock to that
portion of the aggregate outstanding Stated Value not subject to such Put
Notices.
For example: if (1) the Effective Date shall not occur until the 89th
day following the Original Issue Date, (2) the Issuable Maximum shall
have remained fixed at 2,666,666 shares on the 75th day following the
Original Issue Date and on the Effective Date, (3) the average of the
five lowest Per Share Market Values during the twenty consecutive
Trading Days immediately preceding the Effective Date equals $1.35, then
the Issuable Maximum shall be adjusted to 4,558,405 = ($4,000,000/(1.35
x 0.65).
Each Holder shall be entitled to a portion of the Issuable Maximum equal to the
quotient obtained by dividing (x) the number of shares of Preferred Stock issued
and sold to such Holder under the Purchase Agreement by (y) the number of shares
of Preferred Stock issued and sold by the Company to all Purchasers under the
Purchase Agreement. If any Holder shall no longer hold shares of Preferred
Stock, then such Holder's remaining portion of the Issuable Maximum shall be
allocated pro-rata among the remaining Holders.
(b)(i) Not later than three Trading Days after each Conversion
Date, the Company will deliver to the Holder (A) a certificate or certificates
which, after the Effective Date, shall be free of restrictive legends and
trading restrictions (other than those required by Section 3.1(b) of the
Purchase Agreement) representing the number of shares of Common Stock being
acquired upon the conversion of shares of Preferred Stock, and (B) a bank check
in the amount of accrued and unpaid dividends (if the Company has elected or is
required to pay accrued dividends in cash). The Company shall, upon request of
the Holder, if available, use its best efforts to deliver any certificate or
certificates required to be delivered by the Company under this Section
electronically through the Depository Trust Corporation or another established
clearing corporation performing similar functions. If in the case of any
Conversion Notice such certificate or certificates are not delivered to or as
directed by the applicable Holder by the third Trading Day after the Conversion
Date, the Holder shall be entitled to elect by written notice to the Company at
any time on or before its receipt of such certificate or certificates
thereafter, to rescind such conversion, in which event the Company shall
immediately return the certificates representing the shares of Preferred Stock
tendered for conversion.
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 5(b)(i), by the third Trading
Day after the Conversion Date, the Company shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, $3,000 for each Trading Day after such
third Trading Day until such certificates are delivered. Nothing herein shall
limit a Holder's right to pursue actual damages for the Company's failure to
deliver certificates representing shares of Common Stock upon conversion within
the period specified herein and such Holder shall have the right to pursue all
remedies available to it hereunder, at law or in equity
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including, without limitation, a decree of specific performance and/or
injunctive relief.
(iii) In addition to any other rights available to the
Holder, if the Company fails to deliver to the Holder such certificate or
certificates pursuant to Section 5(b)(i), by the third Trading Day after the
Conversion Date, and if after such third Trading Day the Holder purchases (in an
open market transaction or otherwise) Common Stock to deliver in satisfaction of
a sale by such Holder of the Underlying Shares which the Holder was entitled to
receive upon such conversion (a "Buy-In"), then the Company shall (A) pay in
cash to the Holder the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the Common Stock so purchased
exceeds (y) the product of (1) the aggregate number of shares of Common Stock
that such Holder was entitled to receive from the conversion at issue multiplied
by (2) the market price of the Common Stock at the time of the sale giving rise
to such purchase obligation and (B) at the option of the Holder, either return
the shares of Preferred Stock for which such conversion was not honored or
deliver to such Holder the number of shares of Common Stock that would have been
issued had the Company timely complied with its conversion and delivery
obligations under Section 5(b)(i). For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of shares of Preferred Stock with respect to which the
market price of the Underlying Shares on the date of conversion totaled $10,000,
under clause (A) of the immediately preceding sentence the Company shall be
required to pay the Holder $1,000. The Holder shall provide the Company written
notice indicating the amounts payable to the Holder in respect of the Buy-In.
Nothing herein shall limit a Holder's right to pursue any other remedies
available to it hereunder, at law or in equity including, without limitation, a
decree of specific performance and/or injunctive relief with respect to the
Company's failure to timely deliver certificates representing shares of Common
Stock upon conversion of the shares of Preferred Stock as required pursuant to
the terms hereof.
(c)(i) The conversion price for each share of Preferred Stock
(the "Conversion Price") shall, (1) during the first 90 days following the
Original Issue Date equal $4.33 (the "Fixed Conversion Price"), and (2)
commencing the 90th day following the Original Issue Date, the Conversion Price
shall equal the lower of (i) the Fixed Conversion Price and (ii) 90% of the
average of the five lowest Per Share Market Values during the twenty consecutive
Trading Days immediately preceding the Conversion Date. Such twenty Trading Day
measurement period shall be extended for the number of Trading Days during such
period in which (A) trading in the Common Stock is suspended by the OTC or a
Subsequent Market on which the Common Stock is then listed, or (B) after the
date declared effective by the Commission, the Underlying Shares Registration
Statement is either not effective or the Prospectus included in the Underlying
Shares Registration Statement may not be used by the Holder for the resale of
Underlying Shares.
(ii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall (a) pay a stock dividend or otherwise
make a distribution or distributions on shares of its Junior Securities or pari
passu securities payable in shares of Common Stock, (b) subdivide outstanding
shares of Common Stock into a larger number of shares, (c) combine (including by
way of reverse stock split) outstanding shares of Common Stock into a smaller
number of shares, or (d) issue by reclassification and exchange of the Common
Stock any shares of capital stock of the
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Company, then the Fixed Conversion Price shall be multiplied by a fraction of
which the numerator shall be the number of shares of Common Stock (excluding
treasury shares, if any) outstanding before such event and of which the
denominator shall be the number of shares of Common Stock outstanding after such
event. Any adjustment made pursuant to this Section 5(c)(ii) shall become
effective immediately after the record date for the determination of
stockholders entitled to receive such dividend or distribution and shall become
effective immediately after the effective date in the case of a subdivision,
combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights, warrants or options to all
holders of Common Stock (and not to Holders) entitling them to subscribe for or
purchase shares of Common Stock at a price per share less than the Per Share
Market Value at the record date mentioned below, then the Conversion Price shall
be multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
rights, warrants or options, plus the number of shares of Common Stock which the
aggregate offering price of the total number of shares so offered would purchase
at such Per Share Market Value, and the denominator of which shall be the sum of
the number of shares of Common Stock outstanding immediately prior to such
issuance plus the number of shares of Common Stock offered for subscription or
purchase. Such adjustment shall be made whenever such rights or warrants are
issued, and shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants.
However, upon the expiration of any right, warrant or option to purchase shares
of Common Stock the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this Section 5(c)(iii), if any such right, warrant
or option shall expire and shall not have been exercised, the Conversion Price
shall immediately upon such expiration shall be recomputed and effective
immediately upon such expiration shall be increased to the price which it would
have been (but reflecting any other adjustments in the Conversion Price made
pursuant to the provisions of this Section 5 upon the issuance of other rights
or warrants) had the adjustment of the Conversion Price made upon the issuance
of such rights, warrants, or options been made on the basis of offering for
subscription or purchase only that number of shares of Common Stock actually
purchased upon the exercise of such rights, warrants or options actually
exercised.
(iv) If at any time while shares of Preferred Stock are
outstanding the Company or any Subsidiary (with respect to Common Stock
Equivalents) shall offer, sell, grant any option to purchase, or otherwise
dispose of (or announce any offer, sale, grant or any option to purchase or
other disposition) any of shares of Common Stock or Common Stock Equivalents at
a price that is, at the issuance thereof, or at any later time due to
adjustment, reset, additional issuances or otherwise, less than the Conversion
Price, then, at the option of the Holder for such conversions as such Holder
shall indicate in its Conversion Notices (including on conversion pursuant to
section 5(a)(ii)), the Conversion Price shall be adjusted to mirror the
conversion, exchange or purchase price for such Common Stock or Common Stock
Equivalents (including any reset provisions thereof) at issue. Such adjustment
shall be made whenever such Common Stock or Common Stock Equivalents are issued.
If the holder of the Common Stock or Common Stock Equivalent so issued shall at
any time, whether by operation of purchase price adjustments, reset provisions,
floating conversion, exercise or exchange prices or otherwise, or due to
warrants, options or rights issued in connection
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with such issuance, be entitled to receive shares of Common Stock at a price
less than the Conversion Price, such issuance shall be deemed to have occurred
for less than the Conversion Price. A "Common Stock Equivalent" means any equity
or equity equivalent securities (including debt or any other instrument that is
at any time over the life thereof convertible into or exchangeable for Common
Stock) issued by the Company or a subsidiary thereof that provide the holder
thereof to receive shares of Common Stock. The Company shall notify the Holder
in writing, no later than the Trading Day following the issuance of any Common
Stock or Common Stock Equivalent subject to this section, indicating therein the
applicable issuance price, or of applicable reset price, exchange price,
conversion price and other pricing terms.
(v) If the Company, at any time while shares of
Preferred Stock are outstanding, shall distribute to all holders of Common Stock
(and not to Holders) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security (excluding those referred to
in Sections 5(c)(ii)-(iv) above), then in each such case the Conversion Price at
which each share of Preferred Stock shall thereafter be convertible shall be
determined by multiplying the Conversion Price in effect immediately prior to
the record date fixed for determination of stockholders entitled to receive such
distribution by a fraction of which the denominator shall be the Per Share
Market Value determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value on such record date less the then
fair market value at such record date of the portion of such assets or evidence
of indebtedness so distributed applicable to one outstanding share of Common
Stock as determined by the Board of Directors in good faith. In either case the
adjustments shall be described in a statement provided to the Holders of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(vi) All calculations under this Section 5 shall be made
to the nearest cent or the nearest 1/100th of a share, as the case may be. The
number of shares of Common Stock outstanding at any given time shall not include
shares owned or held by or for the account of the Company, and the disposition
of any such shares shall be considered an issue or sale of Common Stock.
(vii) Whenever the Fixed Conversion Price or the
Conversion Price is adjusted pursuant to Section 5(c)(ii),(iii), (iv) or (v) the
Company shall promptly mail to each Holder, a notice setting forth the Fixed
Conversion Price or the Conversion Price (as applicable) after such adjustment
and setting forth a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common
Stock, or any compulsory share exchange pursuant to which the Common Stock is
converted into other securities, cash or property (other than compulsory share
exchanges which constitute Change of Control Transactions), the Holders of the
Preferred Stock then outstanding shall have the right thereafter to convert such
shares only into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
reclassification or share exchange, and the Holders of the Preferred Stock shall
be entitled upon such event to receive such
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<PAGE> 11
amount of securities, cash or property as a holder of the number of shares of
Common Stock of the Company into which such shares of Preferred Stock could have
been converted immediately prior to such reclassification or share exchange
would have been entitled. This provision shall similarly apply to successive
reclassifications or share exchanges.
(ix) In case of any merger or consolidation of the
Company with or into another Person, or sale by the Company of more than
one-half of the assets of the Company (on an as valued basis) in one or a series
of related transactions, a Holder shall have the right thereafter to (A) convert
its shares of Preferred Stock into the shares of stock and other securities,
cash and property receivable upon or deemed to be held by holders of Common
Stock following such merger, consolidation or sale, and such Holder shall be
entitled upon such event or series of related events to receive such amount of
securities, cash and property as the shares of Common Stock into which such
shares of Preferred Stock could have been converted immediately prior to such
merger, consolidation or sales would have been entitled or (B) in the case of a
merger or consolidation, (x) require the surviving entity to issue shares of
convertible preferred stock or convertible debentures with such aggregate stated
value or in such face amount, as the case may be, equal to the Stated Value of
the shares of Preferred Stock then held by such Holder, plus all accrued and
unpaid dividends and other amounts owing thereon, which newly issued shares of
preferred stock or debentures shall have terms identical (including with respect
to conversion) to the terms of the Preferred Stock (except, in the case of
debentures, as may be required to reflect the differences between debt and
equity) and shall be entitled to all of the rights and privileges of a Holder of
Preferred Stock set forth herein and the agreements pursuant to which the
Preferred Stock was issued (including, without limitation, as such rights relate
to the acquisition, transferability, registration and listing of such shares of
stock other securities issuable upon conversion thereof), and (y) simultaneously
with the issuance of such convertible preferred stock or convertible debentures,
shall have the right to convert such instrument only into shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such merger, consolidation or sale. In the
case of clause (B), the conversion price applicable for the newly issued shares
of convertible preferred stock or convertible debentures shall be based upon the
amount of securities, cash and property that each share of Common Stock would
receive in such transaction, the Conversion Ratio immediately prior to the
effectiveness or closing date for such transaction and the Conversion Price
stated herein. The terms of any such merger, sale or consolidation shall include
such terms so as continue to give the Holders the right to receive the
securities, cash and property set forth in this Section upon any conversion or
redemption following such event. This provision shall similarly apply to
successive such events. The rights set forth in this Section 5(c)(ix) shall not
alter the rights of a Holder set forth in Section 7, provided, that, a Holder
may only exercise the rights set forth in this Section 5(c)(ix) or the rights
set forth in Section 7 with respect to a single event giving rise to such
rights.
(x) If (a) the Company shall declare a dividend (or any
other distribution) on the Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock, (c) the
Company shall authorize the granting to all holders of Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of any class
or of any rights, (d) the approval of any stockholders of the Company shall be
required in
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<PAGE> 12
connection with any reclassification of the Common Stock, any consolidation or
merger to which the Company is a party, any sale or transfer of all or
substantially all of the assets of the Company, or any compulsory share of
exchange whereby the Common Stock is converted into other securities, cash or
property, or (e) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company; then the
Company shall notify the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange. Holders are entitled to convert shares of
Preferred Stock during the 20-day period commencing the date of such notice to
the effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve and
keep available out of its authorized and unissued shares of Common Stock solely
for the purpose of issuance upon conversion of Preferred Stock, each as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holders, not less than such number of shares of
Common Stock as shall be issuable (taking into account the provisions of Section
5(a) and Section 5(c)) upon the conversion of all outstanding shares of
Preferred Stock. The Company covenants that all shares of Common Stock that
shall be so issuable shall, upon issue, be duly and validly authorized, issued
and fully paid and nonassessable.
(e) Upon a conversion hereunder the Company shall not be
required to issue stock certificates representing fractions of shares of Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the Per Share Market Value at such time. If
any fraction of an Underlying Share would, except for the provisions of this
Section, be issuable upon a conversion hereunder, the Company shall pay an
amount in cash equal to the Conversion Ratio multiplied by such fraction.
(f) The issuance of certificates for Common Stock on conversion
of Preferred Stock shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder of such shares of Preferred Stock so converted.
(g) Shares of Preferred Stock converted into Common Stock or
redeemed in accordance with the terms hereof shall be canceled and may not be
reissued.
(h) Any and all notices or other communications or deliveries to
be provided by
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<PAGE> 13
the Holders of the Preferred Stock hereunder, including, without limitation, any
Conversion Notice, shall be in writing and delivered personally, by facsimile or
sent by a nationally recognized overnight courier service, addressed to the
attention of the Chief Executive Officer of the Company addressed to 13114
Evening Creek Drive South, San Diego, California 92128 Facsimile No.: (858)
486-3922, attention Chief Executive Officer, or to such other address or
facsimile number as shall be specified in writing by the Company for such
purpose. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to each Holder at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 6:30 p.m. (New York City time) (with
confirmation of transmission), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 6:30 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date
(with confirmation of transmission), (iii) upon receipt, if sent by a nationally
recognized overnight courier service, or (iv) upon actual receipt by the party
to whom such notice is required to be given.
Section 6. Put Option. (a) At any time and from time to time commencing
the 450th calender day after the Original Issue Date for such share the Holder
shall have the right (the "Put Right") to request that the Company prepay
Preferred Stock at a price equal to the Stated Value set forth in the Put Notice
(as defined below) plus all accrued and unpaid dividends and other amounts owing
thereon (the "Put Price"); provided, that, (i) from the 450th day through the
480th day following the Original Issue Date not more than 25% of all such Stated
Value may be subject to the Put Right, (ii) from the 481st through the 510th day
following the Original Issue Date not more than 50% of all such Stated Value may
be subject to the Put Right, (iii) from the 511st through the 540th day
following the Original Issue Date not more than 75% of all such Stated Value may
be subject to the Put Right, and (iv) from and after the 541st day following the
Original Issue Date the entire Stated Value may put under this section. To
effect a put under this section, the Holder shall deliver to the Company a
written notice (a "Put Notice") specifying (i) the Stated Value of the Preferred
Stock subject to the Put Right and the amount of all accrued and unpaid
dividends thereon and the amount of liquidated damages (if any) then owing in
respect of such Stated Value. By the tenth calender day following the date of
the delivery of the Put Notice (such tenth calender day, the "Put Exercise
Date"), the Company shall deliver to the Holder, in immediately available funds,
the Put Price for such put. At the Company= s option, the Put Price may be paid
in shares of Common Stock through conversions of the Preferred Stock subject to
the Put Notice at issue, which conversions may be made from time to time
following the Default Date therefor at the option of the Holder in accordance
with the terms and at the Conversion Price set forth herein.
(b) If for twenty consecutive Trading Days following the
Effective Date the Per Share Market Value exceeds 175% of the Fixed Conversion
Price and the Underlying Shares Registration Statement is effective and
available for use by the Holder to resell Underlying Shares for each of
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<PAGE> 14
such twenty Trading Days, then the Holder shall no longer be permitted to
exercise its Put Right, provided, that any prior exercised Put Right shall be
unaffected.
Section 7. Redemption Upon Triggering Events.
(a) Upon the occurrence of a Triggering Event, each Holder shall
(in addition to all other rights it may have hereunder or under applicable law),
have the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock and such shares of
Common Stock as described below then held by such Holder for a redemption price,
in cash, equal to the sum of (i) the Redemption Amount (as defined in Section 8)
plus (ii) the product of (A) the number of Underlying Shares issued in respect
of conversions of shares of Preferred Stock hereunder not more than thirty
Trading Days prior to the date of the Holder's demand for redemption pursuant to
this Section 7, and then held by the Holder and (B) the Per Share Market Value
on the date such redemption is demanded or the date the redemption price
hereunder is paid in full, whichever is greater (such sum, the "Redemption
Price"). The Redemption Price shall be due and payable within five Trading Days
of the date on which the notice for the payment therefor is provided by a
Holder. If the Company fails to pay the Redemption Price hereunder in full
pursuant to this Section on the date such amount is due in accordance with this
Section, the Company will pay interest thereon at a rate of 18% per annum (or
the lesser amount permitted by applicable law), accruing daily from such date
until the Redemption Price, plus all such interest thereon, is paid in full. For
purposes of this Section, a share of Preferred Stock is outstanding until such
date as the Holder shall have received Underlying Shares upon a conversion (or
attempted conversion) thereof that meets the requirements hereof.
A "Triggering Event" means any one or more of the following
events (whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(i) the failure of an Underlying Shares Registration
Statement to be declared effective by the Commission on or prior to the 180th
day after the Original Issue Date;
(ii) if, during the Effectiveness Period, the
effectiveness of the Underlying Shares Registration Statement lapses for any
reason for more than an aggregate of ten calendar days (which need not be
consecutive days), or the Holder shall not be permitted to resell Registrable
Securities under the Underlying Shares Registration Statement for more than an
aggregate of ten calendar days (which need not be consecutive days);
(iii) the Company shall fail to deliver certificates
representing Underlying Shares issuable upon a conversion hereunder that comply
with the provisions hereof prior to the tenth day after the Conversion Date or
the Company shall provide notice to any Holder, including by way of public
announcement, at any time, of its intention not to comply with requests for
conversion of any shares of Preferred Stock in accordance with the terms hereof;
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<PAGE> 15
(iv) the Company shall be a party to any Change of
Control Transaction, shall agree to sell (in one or a series of related
transactions) all or substantially all of its assets or shall redeem more than a
de minimis number of Common Stock or other Junior Securities (other than
redemptions of Underlying Shares);
(v) an Event (as defined in the Registration Rights
Agreement) shall not have been cured to the satisfaction of the Holders prior to
the expiration of 60 days from the Event Date (as defined in the Registration
Rights Agreement) relating thereto (other than an Event resulting from a failure
of an Underlying Shares Registration Statement to be declared effective by the
Commission on or prior to the 180th day after the Original Issue Date, which
shall be covered by Section 7(a)(i));
(vi) the Company shall fail for any reason to pay in
full the amount of cash due pursuant to a Buy-In within seven days after notice
therefor is delivered hereunder or shall fail to pay all amounts owed on account
of an Event within seven days of the date due;
(vii) the Company shall fail to have available a
sufficient number of authorized and unreserved shares of Common Stock to issue
to such Holder upon a conversion hereunder; or
(viii) the Company shall fail to observe or perform any
other covenant, agreement or warranty contained in, or otherwise commit any
breach of the Transaction Documents (as defined in Section 8), and such failure
or breach shall not, if subject to the possibility of a cure by the Company,
have been remedied within ten calendar days after the date on which written
notice of such failure or breach shall have been given.
Definitions. For the purposes hereof, the following terms shall
have the following meanings:
"Change of Control Transaction" means the occurrence of any of
(i) an acquisition after the date hereof by an individual or legal entity or
"group" (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 40% of the
voting securities of the Company, (ii) a replacement at one time or over time of
more than one-half of the members of the Company's board of directors which is
not approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), (iii) the merger of the Company with or into
another entity that is not wholly-owned by the Company, consolidation or sale of
all or substantially all of the assets of the Company in one or a series of
related transactions, or (iv) the execution by the Company of an agreement to
which the Company is a party or by which it is bound, providing for any of the
events set forth above in (i), (ii) or (iii).
"Commission" means the Securities and Exchange Commission.
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<PAGE> 16
"Common Stock" means the Company's common stock, par value $.001
per share, and stock of any other class into which such shares may hereafter
have been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, the numerator
of which is Stated Value (or Excess Stated Value, as the case may be) and the
denominator of which is the Conversion Price at such time.
"Dividend Effectiveness Date" means the earlier to occur of (x)
the Effectiveness Date (as defined in the Registration Rights Agreement) and (y)
the Effective Date.
"Effective Date" means the date that the Underlying Shares
Registration Statement is declared effective by the Commission.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Junior Securities" means the Common Stock and all other equity
or equity equivalent securities of the Company other than those securities that
are outstanding on the Original Issue Date and which are explicitly senior in
rights or liquidation preference to the Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance
of any shares of the Preferred Stock regardless of the number of transfers of
any particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the
lowest sale price for a share of the Common Stock (other than a sale by the
Holder) on such date on the Subsequent Market on which the Common Stock is then
listed or quoted, or if there is no such price on such date, then the lowest
sale price of the Common Stock (other than a sale by the Holder) on the
Subsequent Market on the date nearest preceding such date, or (b) if the Common
Stock is not then listed or quoted on a Subsequent Market, the lowest sale price
of the Common Stock (other than a sale by the Holder) in the OTC, as reported by
the National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding to
its functions of reporting prices), then the lowest "Pink Sheet" quotes for the
relevant conversion period, as determined in good faith by the Holder, or (d) if
the Common Stock are not then publicly traded the fair market value of a share
of Common Stock as determined by an Appraiser selected in good faith by the
Holders of a majority of the shares of the Preferred Stock.
"Person" means a corporation, an association, a partnership, an
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Convertible Preferred Stock
Purchase Agreement, dated as of the Original Issue Date, to which the Company
and the original Holders are parties, as
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<PAGE> 17
amended, modified or supplemented from time to time in accordance with its
terms.
"Redemption Amount" for each share of Preferred Stock means the
sum of (i) the greater of (A) 110% of the Stated Value and (B) the product of
(a) the Per Share Market Value on the Trading Day immediately preceding (x) the
date of the Triggering Event or the Conversion Date, as the case may be, or (y)
the date of payment in full by the Company of the applicable redemption price,
whichever is greater, and (b) the Conversion Ratio (without regard to the
limitation set forth in Section 5(a)(iii)(C)) calculated on the date of the
Triggering Event, or the Conversion Date, as the case may be, and (ii) all other
amounts, costs, expenses and liquidated damages due in respect of such share of
Preferred Stock.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, to which the Company and the
original Holders are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"Securities Act" means the Securities Act of 1933, as amended.
"Trading Day" means (a) a day on which the Common Stock is
traded on a Subsequent Market on which the Common Stock is then listed or
quoted, as the case may be, or (b) if the Common Stock is not listed on a
Subsequent Market, a day on which the Common Stock is traded in the
over-the-counter market, as reported by the OTC, or (c) if the Common Stock is
not quoted on the OTC, a day on which the Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); provided, however, that in the event that the Common Stock is
not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a legal
holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"Transaction Documents" shall have the meaning set forth in the
Purchase Agreement.
"Underlying Shares" means, collectively, the shares of Common
Stock into which the shares of Preferred Stock are convertible in accordance
with the terms hereof.
"Underlying Shares Registration Statement" means a registration
statement that meets the requirements of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the Holder, who shall be named
as a "selling stockholder" thereunder.
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<PAGE> 18
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder in order to Convert shares of Preferred
Stock)
The undersigned hereby elects to convert the number of shares of 7% Series C
Convertible Preferred Stock indicated below, into shares of common stock, par
value $.001 per share (the "Common Stock"), of e.Digital Corporation, a Delaware
corporation (the "Company"), according to the conditions hereof, as of the date
written below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
Holder for any conversion, except for such transfer taxes, if any.
Conversion calculations: -----------------------------------------
Date to Effect Conversion
-----------------------------------------
Number of shares of Preferred Stock
owned prior to Conversion
-----------------------------------------
Number of shares of Preferred Stock to be
Converted
-----------------------------------------
Stated Value of shares of Preferred
Stock to be Converted
-----------------------------------------
Number of shares of Common Stock to be
Issued
-----------------------------------------
Applicable Conversion Price
-----------------------------------------
Number of shares of Preferred Stock
subsequent to Conversion
-----------------------------------------
Signature
-----------------------------------------
Name
-----------------------------------------
Address
Accepted and Agreed:
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<PAGE> 19
e.Digital Corporation
By:
---------------------------------
Name:
Title:
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<PAGE> 20
RESOLVED, FURTHER, that the Chairman, the president or any vice-president, and
the secretary or any assistant secretary, of the Corporation be and they hereby
are authorized and directed to prepare and file a Certificate of Designation of
Preferences, Rights and Limitations in accordance with the foregoing resolution
and the provisions of Delaware law.
IN WITNESS WHEREOF, the undersigned have executed this Certificate this
3rd day of October, 2000.
-----------------------------------------
ALFRED H. FALK, President
-----------------------------------------
ROBERT PUTNAM, Secretary
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