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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) - July 24, 1998
DATA RACE, INC.
(Exact name of registrant as specified in its charter)
TEXAS
(State or other jurisdiction of incorporation)
0-20706 74-2272363
(Commission File Number) (I.R.S. Employer Identification No.)
12400 NETWORK BLVD.
SAN ANTONIO, TEXAS 78249
(210) 263-2000
(Address of Principal Executive Offices and
Telephone Number, Including Area Code)
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ITEM 5. OTHER EVENTS.
On July 24, 1998, the Company completed the first closing of a private
placement (the "Private Placement") of its Series D Convertible Preferred Stock
("Series D Preferred Stock") and related Common Stock Purchase Warrants ("Class
A Warrants") to Sovereign Partners L.P. and Dominion Capital Fund, Ltd. (the
"Class A Investors"), for an aggregate price of $1,500,000, and its Series E
Convertible Preferred Stock ("Series E Preferred Stock") and related Common
Stock Purchase Warrants ("Class B Warrants") to First Capital Group of Texas II,
L.P. (the "Class B Investor"), an investment firm managed by the Company's
Chairman of the Board, for a price of $750,000. At such time, the Class A
Investors agreed to purchase at a second closing additional shares of Series D
Preferred Stock and Class A Warrants for an aggregate price of $1,000,000, and
the Class B Investor agreed to purchase at a second closing shares of Series F
Convertible Preferred Stock ("Series F Preferred Stock") and Class B Warrants
for a price of $750,000. The second closing is scheduled to occur on or before
January 31, 1999, and is subject the Company's satisfaction of certain
conditions, including, among others, the following: the average closing bid
price of the Company's Common Stock during the five trading days prior to the
closing is at least $1.50; in the case of the closing with respect to the Class
B Investor, the Company has a minimum of $750,000 in revenue for the quarter
ending September 30, 1998 or December 31, 1998; the shares of the Company's
Common Stock issuable upon conversion of the Preferred Stock ("Conversion
Shares") and upon exercise of the Warrants ("Warrant Shares") are registered for
resale pursuant to the Securities Act of 1933, as amended (the "Securities
Act"); the Company's shareholders approve the potential issuance of the
Conversion Shares and Warrant Shares in excess of certain limits imposed by
Nasdaq Marketplace Rules; the Company is in compliance with Nasdaq listing
requirements; and there is no material adverse change in the Company's financial
condition, business or prospects. The Company intends to use the proceeds from
the private placement primarily to promote its Be There! remote access system
product line and for working capital.
Each of the Series D Preferred Stock, Series E Preferred Stock and Series F
Preferred Stock (the "Preferred Stock") has a stated value of $1,000 per share;
bears an 8% premium payable upon conversion or redemption or in liquidation (in
the case of conversion the Company may elect to pay such premium in Common
Stock); is non-voting except in limited circumstances; ranks senior to the
Common Stock in liquidation (and ranks equally with each other series of
Preferred Stock); and is redeemable at a premium at the option of the holder
under certain circumstances, including the occurrence of certain major corporate
transactions and the failure of the Company to register the Conversion Shares or
Warrant Shares within prescribed time periods.
The Series D Preferred Stock is convertible into Common Stock of the
Company ("Common Stock") at the option of the holder beginning 90 days after the
issuance date (subject to acceleration in certain events), at a conversion price
equal to 80% of the trailing five-day average closing bid price of the Common
Stock on the conversion date, subject to a minimum conversion price equal to the
trailing 15-day average closing bid price of the Common Stock 90 days after the
issuance date and subject to a maximum conversion price equal to the lesser of
$3.00 or the trailing five-day average closing bid price of the Common Stock 90
days after the issuance date. The Series E Preferred Stock is convertible into
Common Stock at the option of the holder beginning one year after the issuance
date (subject to acceleration in certain events), at a conversion price equal to
$1.00 (which represents a premium to the Common Stock closing price of $0.5938
on July 8, 1998 -- the
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date the Company reached an agreement in principle with the Investors regarding
the terms of the Private Placement). The Series F Preferred Stock will be
convertible into Common Stock at the option of the holder beginning one year
after the second closing (subject to acceleration in certain events), at a
conversion price equal to the trailing five-day average closing bid price of the
Common Stock on the date of the second closing. Subject to certain limitations,
all Preferred Stock outstanding five years after the issuance date will convert
automatically into Common Stock at the applicable conversion price. In each
case, the number of shares of Common Stock issuable upon conversion of one share
of Preferred Stock is computed by dividing the share's stated value of $1,000 by
the applicable conversion price. Pursuant to Nasdaq Marketplace Rules, in the
absence of shareholder approval, the aggregate number of shares of Common Stock
that are issued at a discount from the market price pursuant to the Private
Placement may not equal or exceed 20% of the outstanding shares of Common Stock
on July 24, 1998 (i.e., 2,905,782 shares); any Preferred Stock which may not be
converted or Warrants which may not be exercised because of such limitation must
be redeemed at a premium by the Company in cash. The Company intends to seek
shareholder approval at its next annual meeting of the issuance of the Common
Stock pursuant to the Private Placement.
If the Common Stock ceases to be listed on the Nasdaq National Market, the
Company must pay the holders of the Preferred Stock a cash penalty of 1% per
day, for up to 24 days, of the stated value of the Preferred Stock outstanding.
The holders may require the Company to redeem their shares of Preferred Stock if
the Company fails to pay such penalty.
The Class A Warrants are exercisable 90 days after issuance (subject to
acceleration in certain events), at an exercise price equal to 120% of the
average of the three lowest closing bid prices during the 22 trading days prior
to issuance date, up to a maximum price of $.80 per share (the "Class A Warrant
Exercise Price"), to purchase that number of shares of Common Stock equal to 15%
of the stated value of the Series D Preferred Stock issued at each closing,
divided by the Class A Warrant Exercise Price. Based on such formula, the
Company issued at the first closing Class A Warrants to purchase an aggregate of
339,623 shares of Common Stock at an exercise price of $0.6625 per share. The
Class B Warrants are exercisable one year after issuance (subject to
acceleration in certain events), at an exercise price of $0.80 per share (the
"Class B Warrant Exercise Price"), to purchase that number of shares of Common
Stock equal to 15% of the stated value of the Series E Preferred Stock and
Series F Preferred Stock issued at each closing, divided by the Class B Warrant
Exercise Price. Based on such formula, the Company issued at the first closing,
and is obligated to issue at the second closing, Class B Warrants to purchase
140,625 shares of Common Stock at an exercise price of $0.80 per share. On July
8, 1998, the date the Company reached an agreement in principle with the
Investors regarding the terms of the Private Placement, the closing price of the
Common Stock was $0.5938. The Class A Warrants and the Class B Warrants (the
"Warrants") each expire two years after the date of their issuance.
The Company has agreed to file a registration statement under the
Securities Act covering the resale of the Conversion Shares and Warrant Shares.
The failure of such registration statement to be filed and declared effective
within certain prescribed time periods will result in cash penalties payable by
the Company to the holders of Preferred Stock. The Class A Investors and the
Class B Investors (the "Investors") have agreed not to effect any short sales of
Common Stock during the one-year period following each closing.
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A placement agent assisted the Company in arranging the Placement Placement
with the Class A Investors. As compensation for the investment by the Class A
Investors in the first closing, the Company paid a cash fee equal to 6% of the
gross proceeds received from the Class A Investors and issued Class A Warrants
to purchase the same number of shares that may be purchased pursuant to the
Class A Warrants issued to the Class A Investors. As compensation for the
investment by the Class A Investors in the second closing, the Company agreed to
pay a cash fee equal to 3% of the gross proceeds received from the Class A
Investors and to issue Class A Warrants to purchase one-half of the number of
shares that may be purchased pursuant to the Class A Warrants to be issued to
the Class A Investors.
The offer and sale of the Preferred Stock and Warrants were, and, in
connection with the second closing, will be, made in reliance upon Section 4(2)
of the Securities Act, the non-public offering exemption from the registration
requirements of the Securities Act.
THE SUMMARY OF THE PRIVATE PLACEMENT SET FORTH ABOVE IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO THE PURCHASE AGREEMENT AND THE OTHER DOCUMENTS EXECUTED
BY THE COMPANY IN CONNECTION WITH THE PRIVATE PLACEMENT. SUCH DOCUMENTS ARE
FILED AS EXHIBITS TO THIS FORM 8-K.
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ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(c) Exhibits
Exhibit Description
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3.1 Statement of Designation, Preferences and Rights of
Series D Convertible Preferred Stock
3.2 Statement of Designation, Preferences and Rights of
Series E Convertible Preferred Stock
10.1 Purchase Agreement, dated July 24, 1998, between the
Company, Sovereign Partners L.P., Dominion Capital Fund,
Ltd., and First Capital Group of Texas II, L.P.
10.2 Registration Rights Agreement, dated July 24, 1998,
between the Company, Sovereign Partners L.P., Dominion
Capital Fund, Ltd., and First Capital Group of Texas II,
L.P.
10.3 Form of Class A Common Stock Purchase Warrant
10.4 Form of Class B Common Stock Purchase Warrant
10.5 Form of Statement of Designation, Preferences and Rights
of Series F Convertible Preferred Stock
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DATA RACE, Inc.
Date: August 3, 1998 By: /s/ Gregory T. Skalla
---------------------
Gregory T. Skalla,
Vice President-Finance,
Chief Financial Officer,
Treasurer and Secretary
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EXHIBIT INDEX
Exhibit Description
------- -----------
3.1 Statement of Designation, Preferences and Rights of
Series D Convertible Preferred Stock
3.2 Statement of Designation, Preferences and Rights of
Series E Convertible Preferred Stock
10.1 Purchase Agreement, dated July 24, 1998, between the
Company, Sovereign Partners L.P., Dominion Capital Fund,
Ltd., and First Capital Group of Texas II, L.P.
10.2 Registration Rights Agreement, dated July 24, 1998,
between the Company, Sovereign Partners L.P., Dominion
Capital Fund, Ltd., and First Capital Group of Texas II,
L.P.
10.3 Form of Class A Common Stock Purchase Warrant
10.4 Form of Class B Common Stock Purchase Warrant
10.5 Form of Statement of Designation, Preferences and Rights
of Series F Convertible Preferred Stock
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EXHIBIT 3.1
STATEMENT OF DESIGNATION,
PREFERENCES AND RIGHTS
OF
SERIES D CONVERTIBLE PREFERRED STOCK
OF
DATA RACE, INC.
Pursuant to Article 2.13 of the
Texas Business Corporation Act
Data Race, Inc., a corporation organized and existing under the Texas
Business Corporation Act (the "COMPANY"), does hereby certify that the following
resolutions were adopted by the Board of Directors of the Company on July 20,
1998 pursuant to authority of the Board of Directors as required by Article 2.13
of the Texas Business Corporation Act.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Company (the "BOARD OF DIRECTORS" or the
"BOARD") in accordance with the provisions of its Articles of
Incorporation, the Board of Directors hereby authorizes a series of the
Company's previously authorized preferred Stock, no par value (the
"PREFERRED STOCK"), and hereby states the designation and number of shares,
and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:
Series D Convertible Preferred Stock:
1. Designation, Amount and Dividends. The designation of this
series, which consists of 2,500 shares of Preferred Stock, is the Series D
Convertible Preferred Stock (the "PREFERRED SHARES") and the stated value
shall be One Thousand Dollars ($1,000.00) per share (the "STATED VALUE").
The Preferred Shares shall not bear any dividends.
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2. Holder's Conversion of Preferred Shares. A holder of Preferred
Shares shall have the right, at such holder's option, to convert the
Preferred Shares into shares of the Company's common stock, no par value
per share (the "COMMON STOCK"), on the following terms and conditions:
a. Conversion Right. Subject to the provisions of Section 11
below, at any time or times on or after the earliest of ninety (90) days
following the Issuance Date (as defined below), the Mandatory Conversion
Date (as defined below) or the occurrence of a Triggering Event (as defined
below), any holder of Preferred Shares shall be entitled to convert any
whole number of Preferred Shares into fully paid and nonassessable shares
(rounded to the nearest whole share in accordance with Section 2(i) below)
of Common Stock, at the Conversion Rate (as defined below); provided,
however, that in no event shall any holder be entitled to convert Preferred
Shares in excess of that number of Preferred Shares which, upon giving
effect to such conversion, would cause the aggregate number of shares of
Common Stock beneficially owned by the holder and its affiliates to exceed
4.99% of the outstanding shares of the Common Stock following such
conversion. For purposes of the foregoing proviso, the aggregate number of
shares of Common Stock beneficially owned by the holder and its affiliates
shall include the number of shares of Common Stock issuable upon conversion
of the Preferred Shares with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of Common
Stock which would be issuable upon (i) conversion of the remaining,
nonconverted Preferred Shares beneficially owned by the holder and its
affiliates and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company (including,
without limitation, any warrants) subject to a limitation on conversion or
exercise analogous to the limitation contained herein beneficially owned by
the holder and its affiliates. Except as set forth in the preceding
sentence, for purposes of this paragraph, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act
of 1934, as amended. Each holder may waive the foregoing limitation with
respect to its conversions by written notice to the Company upon not less
than 61 days prior notice (with such waiver taking effect only upon the
expiration of such 61 day notice period), and such limitation shall not
apply to conversions as of the Mandatory Conversion Date.
b. Conversion Rate. Subject to the other provisions
hereof, each of the Preferred Shares shall be convertible, at the option of
the holder, into that number of shares of fully paid and nonassessable
shares of Common Stock which is to be derived from dividing the Stated
Value by the Conversion Price (the "Conversion Rate).
For purposes of this Statement of Designation, the following terms shall
have the following meanings:
The "CLOSING BID PRICE" shall mean, for any security as of
any date, the last closing bid price for such security on the Nasdaq National
Market as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the
Nasdaq National Market is not the principal trading market for such security,
the last closing bid price of such security on the principal securities exchange
or trading market where such security is listed or traded as reported by
Bloomberg, or if the foregoing do not apply, the last closing bid price of such
security in the over-the-counter market on the electronic
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bulletin board for such security as reported by Bloomberg, or, if no closing bid
price is reported for such security by Bloomberg, the last closing trade price
of such security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the holders of a majority of the outstanding Preferred
Shares. If the Company and the holders of Preferred Shares are unable to agree
upon the fair market value of the Common Stock, then such dispute shall be
resolved pursuant to Section 2(g)(iii) below with the term "Closing Bid Price"
being substituted for the term "Market Price". For purposes of calculating the
five and fifteen day trading periods with respect to the Fixed Conversion Price
and Floating Conversion Price as set forth below, all such determinations of the
Closing Bid Price shall be appropriately adjusted for any stock dividend, stock
split or other similar transaction during such periods.
"CONVERSION PRICE" means, as of any Conversion Date (as
defined below) or other date of determination, the lower of the Fixed Conversion
Price and the Floating Conversion Price, each in effect as of such date and
subject to adjustment as provided herein.
"FIXED CONVERSION PRICE" means the lesser of (i) Three
($3.00) Dollars, subject to adjustment as provided herein, and (ii) the average
Closing Bid Price of the Common Stock for the five (5) day trading period
immediately preceding the ninetieth (90th) day after the Issuance Date, subject
to adjustment thereafter as provided herein.
"FLOATING CONVERSION PRICE" means, as of any date of
determination, the greater of (i) eighty (80%) percent of the average Closing
Bid Price of the Common Stock during the five (5) day trading period immediately
preceding the Conversion Date, or (ii) the average Closing Bid Price of the
Common Stock over the fifteen (15) day trading period immediately preceding the
ninetieth (90th) day after the Issuance Date, subject to adjustment thereafter
in the same manner as the adjustments to the Fixed Conversion Price as provided
herein.
"ISSUANCE DATE" shall mean, with respect to each Preferred
Share, the date of issuance of the applicable Preferred Share.
"MARKET PRICE" shall mean, with respect to any security for
any date, the arithmetic average of the Closing Bid Price for such security on
each of the five consecutive trading days immediately preceding such date.
c. Premium. The Preferred Shares shall bear a non-compounding
premium at the rate of eight (8%) percent per annum. Accrual of such premium
shall commence on the Issuance Date. The premium on each Preferred Share shall
be payable by the Company upon conversion of the Preferred Share, at the
Company's option, in cash or, subject to the Exchange Cap as provided in Section
11, in shares of Common Stock (valued at the Market Price on the Conversion
Date) which have been previously registered by the Company for resale by the
holder of the Preferred Shares. The premium on each Preferred Share shall be
payable solely in cash by the Company upon redemption thereof or liquidation.
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d. Adjustment to Conversion Price -- Dilution and Other Events.
In order to prevent dilution of the rights granted under this Statement of
Designation, the Conversion Price will be subject to adjustment from time to
time as provided in this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon Issuance of
Common Stock. If and whenever on or after the date of issuance of the Preferred
Shares, the Company issues or sells, or is deemed to have issued or sold, any
shares of Common Stock (other than shares of Common Stock deemed to have been
issued by the Company in connection with Approved Issuances (as defined below))
for a consideration per share less than the Market Price in effect immediately
prior to such time (the "APPLICABLE PRICE"), then immediately after such issue
or sale, the Fixed Conversion Price shall be reduced to an amount equal to the
product of (x) the Fixed Conversion Price in effect immediately prior to such
issue or sale and (y) the quotient determined by dividing (1) the sum of (I) the
product of the Applicable Price and the number of shares of Common Stock Deemed
Outstanding (as defined below) immediately prior to such issue or sale, and (II)
the consideration, if any, received by the Company upon such issue or sale, by
(2) the product of (I) the Applicable Price and (II) the number of shares of
Common Stock Deemed Outstanding immediately after such issue or sale. For
purposes of determining the adjusted Fixed Conversion Price under this Section
2(d)(i), the following shall be applicable:
(A) Issuance of Options. If the Company in any manner
grants any rights or options to subscribe for or to purchase Common Stock
(other than in connection with an Approved Issuance or upon conversion of
the Preferred Shares) or any stock or other securities convertible into or
exchangeable for Common Stock (such rights or options being herein called
"OPTIONS" and such convertible or exchangeable stock or securities being
herein called "CONVERTIBLE SECURITIES") and the price per share for which
Common Stock is issuable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities is less than the
Applicable Price, then the total maximum number of shares of Common Stock
issuable upon the exercise of such Options or upon conversion or exchange
of the total maximum amount of such Convertible Securities issuable upon
the exercise of such Options shall be deemed to be outstanding and to have
been issued and sold by the Company for such price per share. For purposes
of this Section 2(d)(i)(A), the "price per share for which Common Stock is
issuable upon exercise of such Options or upon conversion or exchange of
such Convertible Securities" is determined by dividing (I) the total
amount, if any, received or receivable by the Company as consideration for
the granting of such Options, plus the minimum aggregate amount of
additional consideration payable to the Company upon the exercise of all
such Options, plus in the case of such Options which relate to Convertible
Securities, the minimum aggregate amount of additional consideration, if
any, payable to the Company upon the issuance or sale of such Convertible
Securities and the conversion or exchange thereof, by (II) the total
maximum number of shares of Common Stock issuable upon exercise of such
Options or upon the conversion or exchange of all such Convertible
Securities issuable upon the exercise of such Options. No adjustment of the
Fixed Conversion Price shall be made upon the actual issuance of such
Common Stock or of such Convertible Securities upon the exercise of such
Options or upon the actual issuance of such Common Stock upon conversion or
exchange of such Convertible Securities.
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(B) Issuance of Convertible Securities. If the Company
in any manner issues or sells any Convertible Securities and the price per
share for which Common Stock is issuable upon such conversion or exchange
is less than the Applicable Price, then the maximum number of shares of
Common Stock issuable upon conversion or exchange of such Convertible
Securities shall be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For the purposes of this
Section 2(d)(i)(B), the "price per share for which Common Stock is issuable
upon such conversion or exchange" is determined by dividing (I) the total
amount received or receivable by the Company as consideration for the issue
or sale of such Convertible Securities, plus the minimum aggregate amount
of additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (II) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities. No adjustment of the Fixed Conversion Price shall
be made upon the actual issue of such Common Stock upon conversion or
exchange of such Convertible Securities, and if any such issue or sale of
such Convertible Securities is made upon exercise of any Options for which
adjustment of the Fixed Conversion Price had been or are to be made
pursuant to other provisions of this Section 2(d)(i), no further adjustment
of the Fixed Conversion Price shall be made by reason of such issue or
sale.
(C) Change in Option Price or Rate of Conversion. If
the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion or exchange of
any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable for Common Stock change at any time,
the Fixed Conversion Price in effect at the time of such change shall be
readjusted to the Fixed Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold; provided that no adjustment shall be made if such
adjustment would result in an increase of the Fixed Conversion Price then
in effect.
(D) Certain Definitions. For purposes of determining
the adjusted Fixed Conversion Price under this Section 2(d)(i), the
following terms have meanings set forth below:
(I) "APPROVED ISSUANCES" shall mean (i) a loan
from a commercial bank, (ii) any transaction involving the Company's
issuances of securities (A) as consideration in a merger or consolidation
or (B) as consideration for the acquisition of a business, product or
license or other assets by the Company, (iii) the issuance of Common Stock
in a firm commitment, underwritten public offering, (iv) the issuance of
securities upon exercise or conversion of the Company's options, warrants
or other convertible securities outstanding as of the date hereof, (v) the
grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option plan, restricted stock plan,
stock purchase plan or other plan or written compensation contract for the
benefit of the Company's employees, consultants or directors, (vi) the
issuance of securities pursuant to the Rights Agreement, dated September
15, 1997, between the Company and ChaseMellon Shareholder Services, L.L.C.,
as amended from time to time in accordance with its terms (the "Rights
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Agreement"), and (vii) the issuance of securities pursuant to the Purchase
Agreement, or in connection with any of the transactions related thereto.
(II) "COMMON STOCK DEEMED OUTSTANDING" means, at
any given time, the number of shares of Common Stock actually outstanding
at such time, plus the number of shares of Common Stock deemed to be
outstanding pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock issuable
upon conversion of the Preferred Shares.
(E) Treatment of Expired Options and Unexercised
Convertible Securities. If, in any case, the total number of shares of
Common Stock issuable upon the exercise of any Option or upon exercise,
conversion or exchange of any Convertible Security is not, in fact, issued
and the rights to exercise such Option or to exercise, convert or exchange
such Convertible Securities shall have expired or terminated, the Fixed
Conversion Price then in effect will be readjusted to the Fixed Conversion
Price which would have been effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination (other than
in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(F) Effect on Fixed Conversion Price of Certain
Events. For purposes of determining the adjusted Fixed Conversion Price
under this Section 2(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If any
Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the amount received by the Company therefor,
before deduction of reasonable commissions, underwriting discounts or
allowances or other reasonable expenses paid or incurred by the Company in
connection with such issuance or sale. In case any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of
consideration received by the Company will be the Market Price of such
security on the date of receipt. In case any Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity
in connection with any merger in which the Company is the surviving entity
the amount of consideration therefor will be deemed to be the fair value of
such portion of the net assets and business of the non-surviving entity as
is attributable to such Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of a
majority of the Preferred Shares then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the "VALUATION EVENT"), the fair value of such
consideration will be determined within forty-eight (48) hours of the tenth
(10th) day following the Valuation Event by an independent, reputable
appraiser
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selected by the Company. The determination of such appraiser shall be
deemed binding upon all parties absent manifest error.
(II) Integrated Transactions. In case any Option
is issued in connection with the issue or sale of other securities of the
Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for a consideration of $.01
for purposes of Section 2(d)(i)(A).
(III) Treasury Shares. The number of shares of
Common Stock outstanding at any given time does not include shares owned or
held by or for the account of the Company, and the disposition of any
shares so owned or held will be considered an issue or sale of Common
Stock.
(IV) Record Date. If the Company takes a record of
the holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Common Stock, Options
or in Convertible Securities or (2) to subscribe for or purchase Common
Stock, Options or Convertible Securities, then such record date will be
deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be (assuming such
issuance ultimately occurs).
(ii) Adjustment of Fixed Conversion Price upon Subdivision
or Combination of Common Stock. If the Company at any time subdivides (by
any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Fixed Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time
combines (by combination, reverse stock split or otherwise) one or more
classes of its outstanding shares of Common Stock into a smaller number of
shares, the Fixed Conversion Price in effect immediately prior to such
combination will be proportionately increased.
(iii) Intentionally omitted.
(iv) Reorganization, Reclassification, Consolidation,
Merger or Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's
assets to another Person (as defined below) or other transaction which is
effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or
assets with respect to or in exchange for Common Stock, other than a Major
Transaction, is referred to herein as "ORGANIC CHANGE." Prior to the
consummation of any Organic Change, the Company will appropriate provision
(in form and substance reasonably satisfactory to the holders of a majority
of the Preferred Shares then outstanding) to insure that each of the
holders of the Preferred Shares will thereafter have the right to acquire
and receive in lieu of or addition to (as the case may be) the shares of
Common Stock otherwise acquirable and receivable upon the conversion of
such holder's Preferred Shares, such shares of stock, securities or assets
that
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would have been issued or payable in such Organic Change with respect to or
in exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the conversion of such holder's Preferred
Shares had such Organic Change not taken place (without taking into account
any limitations or restrictions on the timing or amount of conversions). In
any such case, the Company will make appropriate provision (in form and
substance reasonably satisfactory to the holders of a majority of the
Preferred Shares then outstanding) with respect to such holders' rights and
interests to insure that the provisions of this Section 2(d) and Section
2(e) below will thereafter be applicable to the Preferred Shares
(including, in the case of any such consolidation, merger or sale in which
the successor entity or purchasing entity is other than the Company, an
immediate adjustment of the Fixed Conversion Price to the value for the
Common Stock reflected by the terms of such consolidation, merger or sale,
if the value so reflected is less than the Fixed Conversion Price in effect
immediately prior to such consolidation, merger or sale and an immediate
revision to the Floating Conversion Price to reflect the price of the
common stock of the surviving entity and the market in which such common
stock is traded). The Company will not effect any such consolidation,
merger or sale, other than a Major Transaction, unless prior to the
consummation thereof, the successor entity (if other than the Company)
resulting from consolidation or merger or the entity purchasing such assets
assumes, by written instrument, the obligation to deliver to each holder of
Preferred Shares such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire. "PERSON" shall mean an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(v) Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 2(d) but not expressly
provided for by such provisions (including, without limitation, the
granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company's Board of Directors will make an
appropriate adjustment in the Conversion Price so as to protect the rights
of the holders of the Preferred Shares; provided that no such adjustment
will increase the Conversion Price as otherwise determined pursuant to this
Section 2(d).
(vi) Notices.
(A) Immediately upon any adjustment of the Conversion
Price, the Company will give written notice thereof to each holder of
Preferred Shares, setting forth in reasonable detail and certifying the
calculation of such adjustment.
(B) The Company will give written notice to each
holder of Preferred Shares at least twenty (20) days prior to the date on
which the Company closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, (II) with respect to
any pro rata subscription offer to holders of Common Stock or (III) for
determining rights to vote with respect to any Organic Change, dissolution
or liquidation and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
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(C) The Company will also give written notice to each
holder of Preferred Shares at least twenty (20) days prior to the date on
which any Organic Change, dissolution or liquidation will take place and in
no event shall such notice be provided to such holder prior to such
information being made known to the public.
e. Purchase Rights. In addition to any adjustments of the
Conversion Price pursuant to Section 2(d) above, if at any time after the
Issuance Date the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the "PURCHASE
RIGHTS"), then the holders of Preferred Shares will be entitled to acquire, upon
the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete conversion of the Preferred
Shares (without taking into account any limitations or restrictions on the
timing or amount of conversions) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
f. [Intentionally omitted.]
g. Mechanics of Conversion. Subject to the Company's inability
to fully satisfy its obligations under a Conversion Notice (as defined below) as
provided for in Section 4 below:
(i) Holder's Delivery Requirements. To convert Preferred
Shares into full shares of Common Stock on any date (the "CONVERSION
DATE"), the holder thereof shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., Eastern Time on such date,
a copy of a fully executed notice of conversion in the form attached hereto
as Exhibit I (the "CONVERSION NOTICE"), to the Company, and (B) surrender
to a common carrier for delivery to the Company as soon as practicable
following such date, the original certificates representing the Preferred
Shares being converted (or an indemnification undertaking with respect to
such shares in the case of their loss, theft or destruction) (the
"PREFERRED STOCK CERTIFICATES") and the originally executed Conversion
Notice.
(ii) Company's Response. Upon receipt by the Company of a
facsimile copy of a Conversion Notice, the Company shall immediately send,
via facsimile, a confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Company of the Preferred Stock Certificates to
be converted pursuant to a Conversion Notice, together with the originally
executed Conversion Notice, the Company or its designated transfer agent
(the "TRANSFER AGENT") (as applicable) shall, on the next business day
following the date of receipt of both (or the second business day following
the date of receipt of both if received after 11:00 a.m. local time of the
Company), (I) issue and surrender to a common carrier for overnight
delivery to the address as specified in the Conversion Notice, a
certificate, registered in the name of the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled, or
(II) credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account
with The Depository Trust Company. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion
is greater than the number of Preferred
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Shares being converted, then the Company shall, as soon as practicable and
in no event later than two business days after receipt of the Preferred
Stock Certificate(s) and at its own expense, issue and deliver to the
holder a new Preferred Stock Certificate representing the number of
Preferred Shares not converted.
(iii) Dispute Resolution. In the case of a dispute as to the
determination of the Market Price or the arithmetic calculation of the
Conversion Rate, the Company shall promptly issue to the holder the number
of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via
facsimile as soon as possible, but in no event later than two (2) business
days after receipt of such holder's Conversion Notice. If such holder and
the Company are unable to agree upon the determination of the Market Price
or arithmetic calculation of the Conversion Rate within one (1) business
day of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall within one (1) business day
submit via facsimile (A) the disputed determination of the Market Price to
an independent, reputable investment bank or (B) the disputed arithmetic
calculation of the Conversion Rate to its independent, outside accountant.
The Company shall cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the
Company and the holder of the results no later than forty-eight (48) hours
from the time it receives the disputed determinations or calculations. Such
investment bank's or accountant's determination or calculation, as the case
may be, shall be binding upon all parties absent manifest error. The period
of time in which the Company is required to effect conversions or
redemptions under this Statement of Designations shall be tolled with
respect to the subject conversion or redemption pending resolution of any
dispute by the Company made in good faith and in accordance with this
Section 2(g)(iii).
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within three
(3) business days of the Company's receipt of the Conversion Notice (the
"SHARE DELIVERY PERIOD") the Company shall fail to issue a certificate to a
holder for the number of shares of Common Stock to which such holder is
entitled upon such holder's conversion of Preferred Shares or to issue a
new Preferred Stock Certificate representing the number of Preferred Shares
to which such holder is entitled pursuant to Section 2(g)(ii) (a
"CONVERSION FAILURE"), in addition to all other available remedies which
such holder may pursue hereunder and under the Purchase Agreement between
the Company and the initial holders of the Preferred Shares (the " PURCHASE
AGREEMENT") (including indemnification), the Company shall pay additional
damages to such holder for each business day after such third (3rd)
business day that such conversion is not timely effected in an amount equal
to two (2%) percent per month of the product of (A) the number of shares of
Common Stock not issued to the holder on a timely basis pursuant to Section
2(g)(ii) and to which such holder is entitled, and (B) the Closing Bid
Price of the Common Stock on the last possible date which the Company could
have issued such Common Stock to such holder without violating Section
2(g)(ii). If the Company fails to
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<PAGE>
pay the additional damages set forth in this Section 2(g)(v) within five
business days of the date incurred, then the holder entitled to such
payments shall have the right at any time, so long as the Company continues
to fail to make such payments, to require the Company, upon written notice,
to immediately issue, in lieu of the cash additional damages set forth in
this Section 2(g)(v), the number of shares of Common Stock equal to the
quotient of (X) the aggregate amount of the additional damages payments
described above divided by (Y) the Market Price in effect on such
Conversion Date as is specified by the holder in writing to the Company.
Payment of the additional damages shall not relieve the Company of its
obligation to send the shares of Common Stock to the holder upon
conversion.
h. Mandatory Conversion. Subject to Section 11, if any
Preferred Shares remain outstanding on the Mandatory Conversion Date (as
defined below), then all such Preferred Shares shall be converted as of
such date in accordance with this Section 2 as if the holders of such
Preferred Shares had given the Conversion Notice on the Mandatory
Conversion Date; provided, however, that if a Triggering Event has occurred
and is continuing on the Mandatory Conversion Date, then the Company shall,
within five business days following the Mandatory Conversion Date (unless
otherwise notified in writing by the holder of its request to have the
Preferred Shares converted into Common Stock), pay to each holder of
Preferred Shares then outstanding, in immediately available funds, an
amount equal to the Triggering Event Redemption Price as of the Mandatory
Conversion Date. All holders of Preferred Shares shall thereupon surrender
all Preferred Stock Certificates, duly endorsed for cancellation, to the
Company or the Transfer Agent, provided that the Company has complied with
its obligations under this Section 2(h). Notwithstanding the foregoing,
except in the case of a Major Transaction, if the Common Stock is not
designated for quotation on the Nasdaq National Market or listed on The New
York Stock Exchange, Inc. or The American Stock Exchange, Inc. but such
events do not constitute a Triggering Event, then the Mandatory Conversion
Date shall be extended until the Common Stock is so designated or listed.
"MANDATORY CONVERSION DATE" means the date which is the earlier of five
years after the applicable Issuance Date, subject to extension as described
in the immediately preceding sentence, or immediately prior to a Major
Transaction.
i. Fractional Shares. The Company shall not issue any fraction
of a share of Common Stock upon any conversion. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a
fraction of a share of Common Stock. If, after the aforementioned
aggregation, the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up or down to the nearest whole share.
j. Taxes. The Company shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of Common Stock
upon the conversion of the Preferred Shares.
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3. Redemption at Option of Holders.
a. Redemption Option Upon Major Transaction. In addition to all
other rights of the holders of Preferred Shares contained herein,
simultaneous with the occurrence of a Major Transaction (as defined below),
each holder of Preferred Shares shall have the right, at such holder's
option, to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to 120% of the
Liquidation Preference (as defined in Section 8 below) ("MAJOR TRANSACTION
REDEMPTION PRICE").
b. Redemption Option Upon Triggering Event. In addition to all
other rights of the holders of Preferred Shares contained herein, after a
Triggering Event (as defined below), each holder of Preferred Shares shall
have the right, at such holder's option, to require the Company to redeem
all or a portion of such holder's Preferred Shares at a price per Preferred
Share equal to 120% of the Liquidation Preference ("TRIGGERING EVENT
REDEMPTION PRICE" and, collectively with "MAJOR TRANSACTION REDEMPTION
PRICE," the "REDEMPTION PRICE").
c. "Major Transaction". A "MAJOR TRANSACTION" shall be deemed
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business
combination of the Company with or into another Person which requires or
receives the consent or recommendation of the Company's Board of Directors
(excluding a consolidation, merger or other business combination in which
holders of the Company's voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, the voting
power of the surviving entity or entities necessary to elect a majority of
the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities and excluding a short-form merger
effected without the consent or recommendation of the Company's Board of
Directors) (an "EXEMPT MAJOR TRANSACTION").
(ii) the sale or transfer of all or substantially all of
the Company's assets or rights to the "Be There!" business or product line
other than in connection with a disposition to a subsidiary of the Company;
or
(iii) consummation of a purchase, tender or exchange offer
made to the holders of more than 50% of the outstanding shares of Common
Stock which requires or receives the consent or recommendation of the
Company's Board of Directors.
d. "Triggering Event". A "TRIGGERING EVENT" shall be deemed to
have occurred at such time as any of the following events (other than in
connection with a Major Transaction):
(i) the failure of the Registration Statement to be
declared effective by the SEC on or prior to the date that is 150 days
after the Demand;
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(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Preferred Shares for sale of all of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such
lapse or unavailability continues for a period of thirty (30) consecutive
trading days, provided that the cause of such lapse or unavailability is
not due to factors solely within the control of such holder of Preferred
Shares;
(iii) the Company undertakes any voluntary action to
terminate the quotation or listing of the Common Stock on the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc., unless such action is taken in connection with the
continued quotation or listing of the Common Stock on another of the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc.;
(iv) the Company's failure to deliver shares of Common
Stock within 15 days of its receipt of a Conversion Notice (together with
the Preferred Stock Certificate) or the Company's notice to any holder of
Preferred Shares, including by way of public announcement, at any time, of
its intention not to comply with proper requests for conversion of any
Preferred Shares into shares of Common Stock, other than due to any of the
reasons set forth in Section 4(a) below; or
(v) if the Company pursuant to or within the meaning of
Title 11, U.S. Code, or any similar federal or state law for the relief of
debtors ("BANKRUPTCY LAW"), (I) commences a voluntary case, (II) consents
to the entry of an order for relief against it in any involuntary case,
(III) consents to the appointment of a receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law (a "CUSTODIAN") of
it or for all or substantially all of its property, (IV) makes a general
assignment for the benefit of its creditors, or (V) admits in writing that
it is generally unable to pay its debts as the same become due.
e. Mechanics of Redemption at Option of Buyer Upon Major
Transaction. No sooner than 15 days nor later than 10 days prior to the
consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier ("NOTICE OF MAJOR
TRANSACTION") to each holder of Preferred Shares. At any time after receipt
of a Notice of Major Transaction (or, in the event a Notice of Major
Transaction is not delivered at least 10 days prior to a Major Transaction,
at any time within 10 days prior to a Major Transaction), any holder of
Preferred Shares then outstanding may require the Company to redeem,
effective immediately prior to the consummation of such Major Transaction,
all of the holder's Preferred Shares then outstanding by delivering written
notice thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION
AT OPTION OF BUYER UPON MAJOR TRANSACTION") to the Company, which Notice of
Redemption at Option of Buyer Upon Major Transaction shall indicate (i) the
number of Preferred Shares that such holder is electing to redeem and (ii)
the applicable Major Transaction Redemption Price, as calculated pursuant
to Section 3(a) above. Preferred Shares
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which are not required to be redeemed pursuant to this paragraph are
subject to mandatory conversion as provided herein.
f. Mechanics of Redemption at Option of Buyer Upon Triggering
Event. Within one (1) day after the occurrence of a Triggering Event, the
Company shall deliver written notice thereof via facsimile and overnight
courier ("NOTICE OF TRIGGERING EVENT") to each holder of Preferred Shares.
At any time after the earlier of a holder's receipt of a Notice of
Triggering Event and such holder becoming aware of a Triggering Event, any
holder of Preferred Shares then outstanding may require the Company to
redeem all of the Preferred Shares by delivering written notice thereof via
facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER
UPON TRIGGERING EVENT") to the Company, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the number of
Preferred Shares that such holder is electing to redeem and (ii) the
applicable Triggering Event Redemption Price, as calculated pursuant to
Section 3(b) above.
g. Payment of Redemption Price. Upon the Company's receipt of a
Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction from any
holder of Preferred Shares or Pari Passu Shares (as defined in Section 8),
the Company shall immediately notify each holder of Preferred Shares and
Pari Passu Shares by facsimile of the Company's receipt of such Notice(s)
of Redemption at Option of Buyer Upon Triggering Event or Notice(s) of
Redemption at Option of Buyer Upon Major Transaction and each holder which
has sent such a notice shall promptly submit to the Company or its Transfer
Agent such holder's Preferred Stock Certificates which such holder has
elected to have redeemed. The Company shall deliver the applicable
Triggering Event Redemption Price, in the case of a redemption pursuant to
Section 3(f), to such holder within five business days after the Company's
receipt of a Notice of Redemption at Option of Buyer Upon Triggering Event
and, in the case of a redemption pursuant to Section 3(e), the Company
shall deliver the applicable Major Transaction Redemption Price immediately
prior to the consummation of the Major Transaction; provided that a
holder's Preferred Stock Certificates shall have been so delivered to the
Company; provided further that if the Company is unable to redeem all of
the Preferred Shares and Pari Passu Shares to be redeemed (because of
insufficient funds to lawfully effect such redemption), the Company shall
redeem an amount from each holder of Preferred Shares and Pari Passu Shares
being redeemed equal to such holder's pro-rata amount (based on the
relative redemption amounts of all holders of Preferred Shares and Pari
Passu Shares) of all Preferred Shares and Pari Passu Shares being redeemed.
If the Company shall fail to redeem all of the Preferred Shares submitted
for redemption (other than pursuant to a dispute as to the arithmetic
calculation of the Redemption Price), in addition to any remedy such holder
of Preferred Shares may have under this Statement of Designations and the
Purchase Agreement, the applicable Redemption Price payable in respect of
such unredeemed Preferred Shares shall bear interest at the rate of 2.0%
per month (prorated for partial months) until paid in full. Until the
Company pays such unpaid applicable Redemption Price in full to a holder of
Preferred Shares submitted for redemption, such holder shall have the
option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of redemption,
require the Company to promptly return to such holder(s) all of the
Preferred Shares that were submitted for redemption by such holder(s) under
this Section 3 and for which the applicable Redemption Price has not been
paid, by sending written notice thereof
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to the Company via facsimile (the "VOID OPTIONAL REDEMPTION NOTICE"). Upon
the Company's receipt of such Void Optional Redemption Notice(s) and prior
to payment of the full applicable Redemption Price to such holder, (i) the
Notice(s) of Redemption at Option of Buyer Upon Triggering Event or the
Notice(s) of Redemption at Option of Buyer Upon Major Transaction, as the
case may be, shall be null and void with respect to those Preferred Shares
submitted for redemption and for which the applicable Redemption Price has
not been paid, and (ii) the Company shall immediately return any Preferred
Shares submitted to the Company by each holder for redemption under this
Section 3(g) and for which the applicable Redemption Price has not been
paid. Notwithstanding the foregoing, in the event of a dispute as to the
determination of the Closing Bid Price or the arithmetic calculation of the
Redemption Price, such dispute shall be resolved pursuant to Section
2(g)(iii) above with the term "Closing Bid Price" being substituted for the
term "Average Market Price" and the term "Redemption Price" being
substituted for the term "Conversion Rate". A holder's delivery of a Void
Optional Redemption Notice and exercise of its rights following such notice
shall not affect the Company's obligations to make any payments which have
accrued prior to the date of such notice. Payments provided for in this
Section 3 shall have priority to payments to other stockholders, other than
any required payments with respect to shares of the Company's Series A
Convertible Preferred Stock which were outstanding on the Issuance Date, in
connection with a Major Transaction.
4. Inability to Fully Convert.
a. Holder's Option if Company Cannot Fully Convert. If, upon
the Company's receipt of a Conversion Notice or on the Mandatory Conversion
Date, the Company can not issue shares of Common Stock registered for
resale under the Registration Statement for any reason, including, without
limitation, because the Company (x) does not have a sufficient number of
shares of Common Stock authorized and available, (y) is otherwise
prohibited by applicable law or by the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or its Securities,
including without limitation the Exchange Cap, from issuing all of the
Common Stock which is to be issued to a holder of Preferred Shares pursuant
to a Conversion Notice or (z) fails to have a sufficient number of shares
of Common Stock registered for resale under the Registration Statement,
then the Company shall issue as many shares of Common Stock as it is able
to issue in accordance with such holder's Conversion Notice and pursuant to
Section 2(g) above and, with respect to the unconverted Preferred Shares,
the holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at
a price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
Triggering Event Redemption Price as of such Conversion Date;
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(z) above, require the Company to issue
restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(g) above;
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(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were
to be converted pursuant to such holder's Conversion Notice (provided that
a holder's voiding its Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of
such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(y) above,
and the issuance of additional Conversion Shares at a Conversion Price
equal to the Market Price would not violate the rules or regulations of The
Nasdaq Stock Market, Inc., then, subject to Section 11, require the Company
to issue shares of Common Stock in accordance with such holder's Conversion
Notice and pursuant to Section 2(g) above at a Conversion Price equal to
the Market Price of the Common Stock on the date of such holder's Notice in
Response to Inability to Convert (as defined below).
b. Mechanics of Fulfilling Holder's Election. The Company shall
immediately send via facsimile to a holder of Preferred Shares, upon
receipt of a facsimile copy of a Conversion Notice from such holder which
cannot be fully satisfied as described in Section 4(a) above, a notice of
the Company's inability to fully satisfy such holder's Conversion Notice
(the "INABILITY TO FULLY CONVERT NOTICE"). Such Inability to Fully Convert
Notice shall indicate (i) the reason why the Company is unable to fully
satisfy such holder's Conversion Notice, (ii) the number of Preferred
Shares which cannot be converted and (iii) the applicable Mandatory
Redemption Price. Such holder shall notify the Company of its election
pursuant to Section 4(a) above by delivering written notice via facsimile
to the Company ("NOTICE IN RESPONSE TO INABILITY TO CONVERT").
c. Payment of Redemption Price. If such holder shall elect to
have its shares redeemed pursuant to Section 4(a)(i) above, the Company
shall pay the Mandatory Redemption Price in cash to such holder within
thirty (30) days of the Company's receipt of the holder's Notice in
Response to Inability to Convert, provided that prior to the Company's
receipt of the holder's Notice in Response to Inability to Convert the
Company has not delivered a notice to such holder stating, to the
satisfaction of the holder, that the event or condition resulting in the
Mandatory Redemption has been cured and all Conversion Shares issuable to
such holder can and will be delivered to the holder in accordance with the
terms of Section 2(g). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in
this Section 4(c) (other than pursuant to a dispute as to the determination
of the arithmetic calculation of the Redemption Price), in addition to any
remedy such holder of Preferred Shares may have under this Statement of
Designations and the Securities Purchase Agreement, such unpaid amount
shall bear interest at the rate of 2.0% per month (prorated for partial
months) until paid in full. Until the full Mandatory Redemption Price is
paid in full to such holder, such holder may void the Mandatory Redemption
with respect to those Preferred Shares for which the full Mandatory
Redemption Price has not been paid and receive back such Preferred Shares.
Notwithstanding the foregoing, if the Company fails to pay the applicable
Mandatory Redemption Price within such thirty (30) days time period due to
a dispute as to the determination of the arithmetic
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calculation of the Redemption Rate, such dispute shall be resolved pursuant
to Section 2(g)(iii) above with the term "Redemption Price" being
substituted for the term "Conversion Rate".
d. Pro-rata Conversion and Redemption. In the event the Company
receives a Conversion Notice from more than one holder of Preferred Shares
or Pari Passu Shares on the same day and the Company can convert and redeem
some, but not all, of the Preferred Shares or Pari Passu Shares pursuant to
this Section 4, the Company shall convert and redeem from each holder of
Preferred Shares or Pari Passu Shares electing to have Preferred Shares or
Pari Passu Shares converted and redeemed at such time an amount equal to
such holder's pro-rata amount (based on the relative redemption amounts of
all holders of Preferred Shares and Pari Passu shares) of all Preferred
Shares and Pari Passu Shares being converted and redeemed at such time.
e. Involuntary Delisting. In the event the Common Stock at any
time is not designated for quotation on the Nasdaq National Market or
listed on The New York Stock Exchange, Inc. or The American Stock Exchange,
Inc. but such events do not constitute a Triggering Event and are not in
connection with a Major Transaction, then in addition to any other remedies
the holders of Preferred Shares may have at law or in equity, the Company
shall pay to each holder of Preferred Shares an amount in cash per
Preferred Share on each day that the Common Stock is not so designated or
listed equal to the product of the Liquidation Preference multiplied by
1.0%, provided that the Company shall not be required to make such payments
for more than 24 consecutive days. The Company's failure to pay such
amounts on each day they are due shall constitute a Triggering Event for
purposes of Section 3.
5. Reissuance of Certificates. In the event of a conversion or
redemption pursuant to this Statement of Designations of less than all of
the Preferred Shares represented by a particular Preferred Stock
Certificate, the Company shall promptly cause to be issued and delivered to
the holder of such Preferred Shares a preferred stock certificate
representing the remaining Preferred Shares which have not been so
converted or redeemed.
6. Reservation of Shares. Subject to the Exchange Cap in Section 11,
the Company shall, so long as any of the Preferred Shares are outstanding,
reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversion of the Preferred Shares,
such number of shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all of the Preferred Shares then
outstanding; provided that the number of shares of Common Stock so reserved
shall at no time be less than 200% of the number of shares of Common Stock
for which the Preferred Shares are at any time convertible (subject to the
Exchange Cap if lower). The initial number of shares of Common Stock
reserved for conversions of the Preferred Shares and each increase in the
number of shares so reserved shall be allocated pro rata among the holders
of the Preferred Shares based on the number of Preferred Shares held by
each holder at the time of issuance of the Preferred Shares or increase in
the number of reserved shares, as the case may be. In the event a holder
shall sell or otherwise transfer any of such holder's Preferred Shares,
each transferee shall be allocated a pro rata portion of the number of
reserved shares of Common Stock reserved for such transferor. Any shares of
Common Stock reserved and which remain allocated to any person or entity
which does not hold any Preferred Shares shall be allocated to
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the remaining holders of Preferred Shares, pro rata based on the number of
Preferred Shares then held by such holder.
7. Voting Rights. Holders of Preferred Shares shall have no voting
rights (including with respect to a Major Transaction), except as expressly
required by law, including but not limited to the Texas Business
Corporation Act, and as expressly provided in this Statement of
Designations.
8. Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Preferred Shares shall be entitled to receive
in cash out of the assets of the Company, whether from capital or from
earnings available for distribution to its stockholders (the "PREFERRED
FUNDS"), after all required payments with respect to shares of the
Company's Series A Convertible Preferred Stock which were outstanding on
the Issuance Date, but before any amount shall be paid to the holders of
any of the capital stock of the Company of any class junior in rank to the
Preferred Shares in respect of the preferences as to the distributions and
payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the Stated Value plus all accrued and
unpaid premium thereon (such sum being referred to as the "LIQUIDATION
PREFERENCE"); provided that, if the Preferred Funds are insufficient to pay
the full amount due to the holders of Preferred Shares and holders of the
Company's Series E Convertible Preferred Stock and Series F Convertible
Preferred Stock (the "Pari Passu Shares"), which are of equal rank with the
Preferred Shares as to payments of Preferred Funds (and redemption
amounts), then each holder of Preferred Shares and Pari Passu Shares shall
receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Statement of Designations, Preferences and
Rights, as a percentage of the full amount of Preferred Funds payable to
all holders of Preferred Shares and Pari Passu Shares. The purchase or
redemption by the Company of stock of any class, in any manner permitted by
law, shall not, for the purposes hereof, be regarded as a liquidation,
dissolution or winding up of the Company. Neither the consolidation or
merger of the Company with or into any other Person, nor the sale or
transfer by the Company of less than substantially all of its assets,
shall, for the purposes hereof, be deemed to be a liquidation, dissolution
or winding up of the Company. No holder of Preferred Shares shall be
entitled to receive any amounts with respect thereto upon any liquidation,
dissolution or winding up of the Company other than the amounts provided
for herein; provided that a holder of Preferred Shares shall be entitled to
all amounts previously accrued with respect to amounts owed hereunder.
9. Preferred Rank; Participation. (i) All shares of Common Stock
shall be of junior rank to all Preferred Shares and Pari Passu Shares in
respect to the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company. The rights of the
shares of Common Stock shall be subject to the preferences and relative
rights of the Preferred Shares and Pari Passu Shares. Without the prior
express written consent of the holders of not less than three-fourths (3/4)
of the then outstanding Preferred Shares and Pari Passu Shares, the Company
shall not hereafter authorize or issue additional or other capital stock
that is of senior or equal rank to the Preferred Shares and Pari Passu
Shares in respect of the preferences as to distributions and payments upon
the liquidation, dissolution and winding
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up of the Company. Without the prior express written consent of the holders
of not less than three-fourths (3/4) of the then outstanding Preferred
Shares and Pari Passu Shares, the Company shall not hereafter authorize or
make any amendment to the Company's Articles of Incorporation or bylaws, or
file any resolution of the board of directors of the Company with the Texas
Secretary of State containing any provisions, which would adversely affect
or otherwise impair the rights or relative priority of the holders of the
Preferred Shares and Pari Passu Shares relative to the holders of the
Common Stock or the holders of any other class of capital stock; provided
that the foregoing shall not affect the Company's ability to effect a Major
Transaction. In the event of the merger or consolidation of the Company
with or into another corporation (other than a Major Transaction), the
Preferred Shares and Pari Passu Shares shall maintain their relative
powers, designations and preferences provided for herein and no merger
shall result inconsistent therewith.
(ii) Subject to the rights of the holders, if any, of the Parri Passu
Shares, the holders of the Preferred Shares shall, as holders of Preferred
Stock, be entitled to such dividends paid and distributions made to the
holders of Common Stock to the same extent as if such holders of Preferred
Shares had converted the Preferred Shares into Common Stock (without regard
to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common
Stock; provided that the holders of the Preferred Shares shall be entitled
to such dividends and distributions only to the extent that they exceed an
amount per Preferred Share equal to $1,000, plus the accrued premium
thereon.
10. Restriction on Redemption and Cash Dividends with respect to
Other Capital Stock. Until all of the Preferred Shares have been converted
or redeemed as provided herein, except as permitted in the Rights
Agreement, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or cash distribution on, its Common Stock
without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares.
11. Limitation on Number of Conversion Shares. Notwithstanding any
other provision herein, the Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Preferred Shares and Pari
Passu Shares if the issuance of such shares of Common Stock would exceed
that number of shares of Common Stock which the Company may issue upon
Conversion of the Preferred Shares and Pari Passu Shares (the "EXCHANGE
CAP") without breaching the Company's obligations under the rules or
regulations of The Nasdaq Stock Market, Inc., except that such limitation
shall not apply in the event that the Company (a) obtains the approval of
its stockholders as required by NASD Rule 4460 (or any successor rule or
regulation) for issuances of Common Stock in excess of such amount or (ii)
obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to
the holders of a majority of the Preferred Shares then outstanding. Until
such approval or written opinion is obtained, no purchaser of Preferred
Shares and Pari Passu Shares pursuant to the Purchase Agreement (the
"PURCHASERS") shall be issued, upon conversion of Preferred Shares and Pari
Passu Shares, shares of Common Stock in an amount greater than the product
of (i) the Exchange Cap
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amount multiplied by (ii) a fraction, the numerator of which is the number
of Preferred Shares and Pari Passu Shares issued to such Purchaser pursuant
to the Purchase Agreement and the denominator of which is the aggregate
amount of all the Preferred Shares and Pari Passu Shares issued to the
Purchasers pursuant to the Purchase Agreement (the "CAP ALLOCATION
AMOUNT"). In the event that any Purchaser shall sell or otherwise transfer
any of such Purchaser's Preferred Shares and Pari Passu Shares, the
transferee shall be allocated a pro rata portion of such Purchaser's Cap
Allocation Amount. In the event that any holder of Preferred Shares and
Pari Passu Shares shall convert all of such holder's Preferred Shares and
Pari Passu Shares into a number of shares of Common Stock which, in the
aggregate, is less than such holder's Cap Allocation Amount, then the
difference between such holder's Cap Allocation Amount and the number of
shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares and Pari Passu Shares on a pro rata basis in proportion to the
number of Preferred Shares then held by each such holder.
12. Vote to Change the Terms of Preferred Shares. The affirmative
vote at a meeting duly called for such purpose or the written consent
without a meeting, of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares and Pari Passu Shares, shall be required
for any change to this Statement of Designations or the Company's
Certificate of Incorporation which would amend, alter, change or repeal any
of the powers, designations, preferences and rights of the Preferred
Shares.
13. Lost or Stolen Certificates. Upon receipt by the Company of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case
of mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall
not be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares
into Common Stock.
14. Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Statement of Designations
shall be cumulative and in addition to all other remedies available under
this Statement of Designations, at law or in equity (including a decree of
specific performance and/or other injunctive relief), no remedy contained
herein shall be deemed a waiver of compliance with the provisions giving
rise to such remedy and nothing herein shall limit a holder's right to
pursue actual damages for any failure by the Company to comply with the
terms of this Statement of Designations. The Company covenants to each
holder of Preferred Shares that there shall be no characterization
concerning this instrument other than as expressly provided herein. Amounts
set forth or provided for herein with respect to payments, conversion and
the like (and the computation thereof) shall be the amounts to be received
by the holder thereof and shall not, except as expressly provided herein,
be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holders of the Preferred
Shares and that the remedy at law for any such breach may
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<PAGE>
be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the holders of the Preferred Shares shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
15. Specific Shall Not Limit General; Construction. No specific
provision contained in this Statement of Designations shall limit or modify
any more general provision contained herein. This Statement of Designations
shall be deemed to be jointly drafted by the Company and all holders of
Preferred Shares and shall not be construed against any person as the
drafter hereof.
16. Failure or Indulgence Not Waiver. No failure or delay on the part
of a holder of Preferred Shares in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Statement of Designations
to be signed on behalf of the Company, as of the 23rd day of July, 1998.
DATA RACE, INC.
By: /s/ Gregory T. Skalla
--------------------------
Gregory T. Skalla
Vice President-Finance
Chief Financial Officer
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EXHIBIT 3.2
STATEMENT OF DESIGNATION,
PREFERENCES AND RIGHTS
OF
SERIES E CONVERTIBLE PREFERRED STOCK
OF
DATA RACE, INC.
Pursuant to Article 2.13 of the
Texas Business Corporation Act
Data Race, Inc., a corporation organized and existing under the Texas
Business Corporation Act (the "COMPANY"), does hereby certify that the following
resolutions were adopted by the Board of Directors of the Company on July 20,
1998 pursuant to authority of the Board of Directors as required by Article 2.13
of the Texas Business Corporation Act.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Company (the "BOARD OF DIRECTORS" or the
"BOARD") in accordance with the provisions of its Articles of
Incorporation, the Board of Directors hereby authorizes a series of the
Company's previously authorized preferred Stock, no par value (the
"PREFERRED STOCK"), and hereby states the designation and number of shares,
and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:
Series E Convertible Preferred Stock:
17. Designation, Amount and Dividends. The designation of this
series, which consists of 750 shares of Preferred Stock, is the Series E
Convertible Preferred Stock (the "PREFERRED SHARES") and the stated value
shall be One Thousand Dollars ($1,000.00) per share (the "STATED VALUE").
The Preferred Shares shall not bear any dividends.
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18. Holder's Conversion of Preferred Shares. A holder of Preferred
Shares shall have the right, at such holder's option, to convert the
Preferred Shares into shares of the Company's common stock, no par value
per share (the "COMMON STOCK"), on the following terms and conditions:
a. Conversion Right. Subject to the provisions of Section 11
below, at any time or times on or after the earliest of the first
anniversary of the Issuance Date (as defined below), the Mandatory
Conversion Date (as defined below) or the occurrence of a Triggering Event
(as defined below), any holder of Preferred Shares shall be entitled to
convert any whole number of Preferred Shares into fully paid and
nonassessable shares (rounded to the nearest whole share in accordance with
Section 2(i) below) of Common Stock, at the Conversion Rate (as defined
below); provided, however, that in no event shall any holder be entitled to
convert Preferred Shares in excess of that number of Preferred Shares
which, upon giving effect to such conversion, would cause the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such conversion. For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock beneficially owned by the holder
and its affiliates shall include the number of shares of Common Stock
issuable upon conversion of the Preferred Shares with respect to which the
determination of such proviso is being made, but shall exclude the number
of shares of Common Stock which would be issuable upon (i) conversion of
the remaining, nonconverted Preferred Shares beneficially owned by the
holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
(including, without limitation, any warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by the holder and its affiliates. Except as set forth in
the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. Each holder may waive the
foregoing limitation with respect to its conversions by written notice to
the Company upon not less than 61 days prior notice (with such waiver
taking effect only upon the expiration of such 61 day notice period), and
such limitation shall not apply to conversions as of the Mandatory
Conversion Date.
b. Conversion Rate. Subject to the other provisions hereof,
each of the Preferred Shares shall be convertible, at the option of the
holder, into that number of shares of fully paid and nonassessable shares
of Common Stock which is to be derived from dividing the Stated Value by
the Conversion Price (the "Conversion Rate).
For purposes of this Statement of Designation, the following terms shall
have the following meanings:
The "CLOSING BID PRICE" shall mean, for any security as of any
date, the last closing bid price for such security on the Nasdaq National Market
as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the Nasdaq
National Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market on the electronic bulletin board for such security
as reported by Bloomberg, or, if no closing bid price is reported for
2
<PAGE>
such security by Bloomberg, the last closing trade price of such security as
reported by Bloomberg, or, if no last closing trade price is reported for such
security by Bloomberg, the average of the bid prices of any market makers for
such security as reported in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Bid Price cannot be calculated for such security on such
date on any of the foregoing bases, the Closing Bid Price of such security on
such date shall be the fair market value as mutually determined by the Company
and the holders of a majority of the outstanding Preferred Shares. If the
Company and the holders of Preferred Shares are unable to agree upon the fair
market value of the Common Stock, then such dispute shall be resolved pursuant
to Section 2(g)(iii) below with the term "Closing Bid Price" being substituted
for the term "Market Price". To the extent required hereunder, all such
determinations of the Closing Bid Price shall be appropriately adjusted for any
stock dividend, stock split or other similar transaction.
"CONVERSION PRICE" means, as of any Conversion Date (as
defined below) or other date of determination, the Fixed Conversion Price.
"FIXED CONVERSION PRICE" means One ($1.00) Dollar, subject
to adjustment as provided herein.
"ISSUANCE DATE" shall mean, with respect to each Preferred
Share, the date of issuance of the applicable Preferred Share.
"MARKET PRICE" shall mean, with respect to any security for
any date, the arithmetic average of the Closing Bid Price for such security on
each of the five consecutive trading days immediately preceding such date.
c. Premium. The Preferred Shares shall bear a non-compounding
premium at the rate of eight (8%) percent per annum. Accrual of such premium
shall commence on the Issuance Date. The premium on each Preferred Share shall
be payable by the Company upon conversion of the Preferred Share, at the
Company's option, in cash or, subject to the Exchange Cap as provided in Section
11, in shares of Common Stock (valued at the Market Price on the Conversion
Date) which have been previously registered by the Company for resale by the
holder of the Preferred Shares. The premium on each Preferred Share shall be
payable solely in cash by the Company upon redemption thereof or liquidation.
d. Adjustment to Conversion Price -- Dilution and Other Events.
In order to prevent dilution of the rights granted under this Statement of
Designation, the Conversion Price will be subject to adjustment from time to
time as provided in this Section 2(d).
(i) Adjustment of Fixed Conversion Price upon Issuance of
Common Stock. If and whenever on or after the date of issuance of the Preferred
Shares, the Company issues or sells, or is deemed to have issued or sold, any
shares of Common Stock (other than shares of Common Stock deemed to have been
issued by the Company in connection with Approved Issuances (as defined below))
for a consideration per share less than the Market Price in effect immediately
prior to such time (the "APPLICABLE PRICE"), then immediately after such issue
or sale, the Fixed Conversion Price shall be reduced to an amount equal to the
product of (x) the Fixed Conversion Price in effect immediately prior to such
issue or sale and (y) the quotient determined by dividing (1) the sum of
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(I) the product of the Applicable Price and the number of shares of Common Stock
Deemed Outstanding (as defined below) immediately prior to such issue or sale,
and (II) the consideration, if any, received by the Company upon such issue or
sale, by (2) the product of (I) the Applicable Price and (II) the number of
shares of Common Stock Deemed Outstanding immediately after such issue or sale.
For purposes of determining the adjusted Fixed Conversion Price under this
Section 2(d)(i), the following shall be applicable:
(A) Issuance of Options. If the Company in any
manner grants any rights or options to subscribe for or to purchase Common
Stock (other than in connection with an Approved Issuance or upon
conversion of the Preferred Shares) or any stock or other securities
convertible into or exchangeable for Common Stock (such rights or options
being herein called "OPTIONS" and such convertible or exchangeable stock or
securities being herein called "CONVERTIBLE SECURITIES") and the price per
share for which Common Stock is issuable upon the exercise of such Options
or upon conversion or exchange of such Convertible Securities is less than
the Applicable Price, then the total maximum number of shares of Common
Stock issuable upon the exercise of such Options or upon conversion or
exchange of the total maximum amount of such Convertible Securities
issuable upon the exercise of such Options shall be deemed to be
outstanding and to have been issued and sold by the Company for such price
per share. For purposes of this Section 2(d)(i)(A), the "price per share
for which Common Stock is issuable upon exercise of such Options or upon
conversion or exchange of such Convertible Securities" is determined by
dividing (I) the total amount, if any, received or receivable by the
Company as consideration for the granting of such Options, plus the minimum
aggregate amount of additional consideration payable to the Company upon
the exercise of all such Options, plus in the case of such Options which
relate to Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the issuance
or sale of such Convertible Securities and the conversion or exchange
thereof, by (II) the total maximum number of shares of Common Stock
issuable upon exercise of such Options or upon the conversion or exchange
of all such Convertible Securities issuable upon the exercise of such
Options. No adjustment of the Fixed Conversion Price shall be made upon the
actual issuance of such Common Stock or of such Convertible Securities upon
the exercise of such Options or upon the actual issuance of such Common
Stock upon conversion or exchange of such Convertible Securities.
(B) Issuance of Convertible Securities. If the
Company in any manner issues or sells any Convertible Securities and the
price per share for which Common Stock is issuable upon such conversion or
exchange is less than the Applicable Price, then the maximum number of
shares of Common Stock issuable upon conversion or exchange of such
Convertible Securities shall be deemed to be outstanding and to have been
issued and sold by the Company for such price per share. For the purposes
of this Section 2(d)(i)(B), the "price per share for which Common Stock is
issuable upon such conversion or exchange" is determined by dividing (I)
the total amount received or receivable by the Company as consideration for
the issue or sale of such Convertible Securities, plus the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the conversion or exchange thereof, by (II) the total maximum
number of shares of Common Stock issuable upon the conversion or exchange
of all such Convertible Securities. No adjustment of the Fixed Conversion
Price shall be made upon the actual issue of such Common Stock upon
conversion
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<PAGE>
or exchange of such Convertible Securities, and if any such issue or sale
of such Convertible Securities is made upon exercise of any Options for
which adjustment of the Fixed Conversion Price had been or are to be made
pursuant to other provisions of this Section 2(d)(i), no further adjustment
of the Fixed Conversion Price shall be made by reason of such issue or
sale.
(C) Change in Option Price or Rate of Conversion.
If the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion or exchange of
any Convertible Securities, or the rate at which any Convertible Securities
are convertible into or exchangeable for Common Stock change at any time,
the Fixed Conversion Price in effect at the time of such change shall be
readjusted to the Fixed Conversion Price which would have been in effect at
such time had such Options or Convertible Securities still outstanding
provided for such changed purchase price, additional consideration or
changed conversion rate, as the case may be, at the time initially granted,
issued or sold; provided that no adjustment shall be made if such
adjustment would result in an increase of the Fixed Conversion Price then
in effect.
(D) Certain Definitions. For purposes of
determining the adjusted Fixed Conversion Price under this Section 2(d)(i),
the following terms have meanings set forth below:
(I) "APPROVED ISSUANCES" shall mean (i) a loan
from a commercial bank, (ii) any transaction involving the Company's
issuances of securities (A) as consideration in a merger or consolidation
or (B) as consideration for the acquisition of a business, product or
license or other assets by the Company, (iii) the issuance of Common Stock
in a firm commitment, underwritten public offering, (iv) the issuance of
securities upon exercise or conversion of the Company's options, warrants
or other convertible securities outstanding as of the date hereof, (v) the
grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option plan, restricted stock plan,
stock purchase plan or other plan or written compensation contract for the
benefit of the Company's employees, consultants or directors, (vi) the
issuance of securities pursuant to the Rights Agreement, dated September
15, 1997, between the Company and ChaseMellon Shareholder Services, L.L.C.,
as amended from time to time in accordance with its terms (the "Rights
Agreement"), and (vii) the issuance of securities pursuant to the Purchase
Agreement, or in connection with any of the transactions related thereto.
(II) "COMMON STOCK DEEMED OUTSTANDING" means, at
any given time, the number of shares of Common Stock actually outstanding
at such time, plus the number of shares of Common Stock deemed to be
outstanding pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock issuable
upon conversion of the Preferred Shares.
(E) Treatment of Expired Options and Unexercised
Convertible Securities. If, in any case, the total number of shares of
Common Stock issuable upon the exercise of any Option or upon exercise,
conversion or exchange of any Convertible Security is not, in fact, issued
and the rights to exercise such Option or to exercise, convert or
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<PAGE>
exchange such Convertible Securities shall have expired or terminated, the
Fixed Conversion Price then in effect will be readjusted to the Fixed
Conversion Price which would have been effect at the time of such
expiration or termination had such Option or Convertible Securities, to the
extent outstanding immediately prior to such expiration or termination
(other than in respect of the actual number of shares of Common Stock
issued upon exercise or conversion thereof), never been issued.
(F) Effect on Fixed Conversion Price of Certain
Events. For purposes of determining the adjusted Fixed Conversion Price
under this Section 2(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If
any Common Stock, Options or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the amount received by the Company therefor,
before deduction of reasonable commissions, underwriting discounts or
allowances or other reasonable expenses paid or incurred by the Company in
connection with such issuance or sale. In case any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of
consideration received by the Company will be the Market Price of such
security on the date of receipt. In case any Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity
in connection with any merger in which the Company is the surviving entity
the amount of consideration therefor will be deemed to be the fair value of
such portion of the net assets and business of the non-surviving entity as
is attributable to such Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of a
majority of the Preferred Shares then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the "VALUATION EVENT"), the fair value of such
consideration will be determined within forty-eight (48) hours of the tenth
(10th) day following the Valuation Event by an independent, reputable
appraiser selected by the Company. The determination of such appraiser
shall be deemed binding upon all parties absent manifest error.
(II) Integrated Transactions. In case any
Option is issued in connection with the issue or sale of other securities
of the Company, together comprising one integrated transaction in which no
specific consideration is allocated to such Options by the parties thereto,
the Options will be deemed to have been issued for a consideration of $.01
for purposes of Section 2(d)(i)(A).
(III) Treasury Shares. The number of shares of
Common Stock outstanding at any given time does not include shares owned or
held by or for the account of the Company, and the disposition of any
shares so owned or held will be considered an issue or sale of Common
Stock.
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(IV) Record Date. If the Company takes a
record of the holders of Common Stock for the purpose of entitling them (1)
to receive a dividend or other distribution payable in Common Stock,
Options or in Convertible Securities or (2) to subscribe for or purchase
Common Stock, Options or Convertible Securities, then such record date will
be deemed to be the date of the issue or sale of the shares of Common Stock
deemed to have been issued or sold upon the declaration of such dividend or
the making of such other distribution or the date of the granting of such
right of subscription or purchase, as the case may be (assuming such
issuance ultimately occurs).
(ii) Adjustment of Fixed Conversion Price upon Subdivision
or Combination of Common Stock. If the Company at any time subdivides (by
any stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Fixed Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any time
combines (by combination, reverse stock split or otherwise) one or more
classes of its outstanding shares of Common Stock into a smaller number of
shares, the Fixed Conversion Price in effect immediately prior to such
combination will be proportionately increased.
(iii) Intentionally omitted.
(iv) Reorganization, Reclassification, Consolidation,
Merger or Sale. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company's
assets to another Person (as defined below) or other transaction which is
effected in such a way that holders of Common Stock are entitled to receive
(either directly or upon subsequent liquidation) stock, securities or
assets with respect to or in exchange for Common Stock, other than a Major
Transaction, is referred to herein as "ORGANIC CHANGE." Prior to the
consummation of any Organic Change, the Company will appropriate provision
(in form and substance reasonably satisfactory to the holders of a majority
of the Preferred Shares then outstanding) to insure that each of the
holders of the Preferred Shares will thereafter have the right to acquire
and receive in lieu of or addition to (as the case may be) the shares of
Common Stock otherwise acquirable and receivable upon the conversion of
such holder's Preferred Shares, such shares of stock, securities or assets
that would have been issued or payable in such Organic Change with respect
to or in exchange for the number of shares of Common Stock which would have
been acquirable and receivable upon the conversion of such holder's
Preferred Shares had such Organic Change not taken place (without taking
into account any limitations or restrictions on the timing or amount of
conversions). In any such case, the Company will make appropriate provision
(in form and substance reasonably satisfactory to the holders of a majority
of the Preferred Shares then outstanding) with respect to such holders'
rights and interests to insure that the provisions of this Section 2(d) and
Section 2(e) below will thereafter be applicable to the Preferred Shares
(including, in the case of any such consolidation, merger or sale in which
the successor entity or purchasing entity is other than the Company, an
immediate adjustment of the Fixed Conversion Price to the value for the
Common Stock reflected by the terms of such consolidation, merger or sale,
if the value so reflected is less than the Fixed Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Company will
not effect any such consolidation, merger or sale, other than a Major
Transaction, unless prior to the
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<PAGE>
consummation thereof, the successor entity (if other than the Company)
resulting from consolidation or merger or the entity purchasing such assets
assumes, by written instrument, the obligation to deliver to each holder of
Preferred Shares such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
acquire. "PERSON" shall mean an individual, a limited liability company, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a government or any department or agency thereof.
(v) Certain Events. If any event occurs of the type
contemplated by the provisions of this Section 2(d) but not expressly
provided for by such provisions (including, without limitation, the
granting of stock appreciation rights, phantom stock rights or other rights
with equity features), then the Company's Board of Directors will make an
appropriate adjustment in the Conversion Price so as to protect the rights
of the holders of the Preferred Shares; provided that no such adjustment
will increase the Conversion Price as otherwise determined pursuant to this
Section 2(d).
(vi) Notices.
(A) Immediately upon any adjustment of the
Conversion Price, the Company will give written notice thereof to each
holder of Preferred Shares, setting forth in reasonable detail and
certifying the calculation of such adjustment.
(B) The Company will give written notice to each
holder of Preferred Shares at least twenty (20) days prior to the date on
which the Company closes its books or takes a record (I) with respect to
any dividend or distribution upon the Common Stock, (II) with respect to
any pro rata subscription offer to holders of Common Stock or (III) for
determining rights to vote with respect to any Organic Change, dissolution
or liquidation and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(C) The Company will also give written notice to
each holder of Preferred Shares at least twenty (20) days prior to the date
on which any Organic Change, dissolution or liquidation will take place and
in no event shall such notice be provided to such holder prior to such
information being made known to the public.
e. Purchase Rights. In addition to any adjustments of the
Conversion Price pursuant to Section 2(d) above, if at any time after the
Issuance Date the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or other property
pro rata to the record holders of any class of Common Stock (the "PURCHASE
RIGHTS"), then the holders of Preferred Shares will be entitled to acquire, upon
the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete conversion of the Preferred
Shares (without taking into account any limitations or restrictions on the
timing or amount of conversions) immediately before the date on which a record
is taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
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f. [Intentionally omitted.]
g. Mechanics of Conversion. Subject to the Company's inability
to fully satisfy its obligations under a Conversion Notice (as defined below) as
provided for in Section 4 below:
(i) Holder's Delivery Requirements. To convert Preferred
Shares into full shares of Common Stock on any date (the "CONVERSION
DATE"), the holder thereof shall (A) transmit by facsimile (or otherwise
deliver), for receipt on or prior to 11:59 p.m., Eastern Time on such date,
a copy of a fully executed notice of conversion in the form attached hereto
as Exhibit I (the "CONVERSION NOTICE"), to the Company, and (B) surrender
to a common carrier for delivery to the Company as soon as practicable
following such date, the original certificates representing the Preferred
Shares being converted (or an indemnification undertaking with respect to
such shares in the case of their loss, theft or destruction) (the
"PREFERRED STOCK CERTIFICATES") and the originally executed Conversion
Notice.
(ii) Company's Response. Upon receipt by the Company of a
facsimile copy of a Conversion Notice, the Company shall immediately send,
via facsimile, a confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Company of the Preferred Stock Certificates to
be converted pursuant to a Conversion Notice, together with the originally
executed Conversion Notice, the Company or its designated transfer agent
(the "TRANSFER AGENT") (as applicable) shall, on the next business day
following the date of receipt of both (or the second business day following
the date of receipt of both if received after 11:00 a.m. local time of the
Company), (I) issue and surrender to a common carrier for overnight
delivery to the address as specified in the Conversion Notice, a
certificate, registered in the name of the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled, or
(II) credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account
with The Depository Trust Company. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion
is greater than the number of Preferred Shares being converted, then the
Company shall, as soon as practicable and in no event later than two
business days after receipt of the Preferred Stock Certificate(s) and at
its own expense, issue and deliver to the holder a new Preferred Stock
Certificate representing the number of Preferred Shares not converted.
(iii) Dispute Resolution. In the case of a dispute as to
the determination of the Market Price or the arithmetic calculation of the
Conversion Rate, the Company shall promptly issue to the holder the number
of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via
facsimile as soon as possible, but in no event later than two (2) business
days after receipt of such holder's Conversion Notice. If such holder and
the Company are unable to agree upon the determination of the Market Price
or arithmetic calculation of the Conversion Rate within one (1) business
day of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall within one (1) business day
submit via facsimile (A) the disputed determination of the Market Price to
an independent, reputable investment bank or (B) the disputed arithmetic
calculation of the Conversion Rate to its independent, outside
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<PAGE>
accountant. The Company shall cause the investment bank or the accountant,
as the case may be, to perform the determinations or calculations and
notify the Company and the holder of the results no later than forty-eight
(48) hours from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
manifest error. The period of time in which the Company is required to
effect conversions or redemptions under this Statement of Designations
shall be tolled with respect to the subject conversion or redemption
pending resolution of any dispute by the Company made in good faith and in
accordance with this Section 2(g)(iii).
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of
such shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within three
(3) business days of the Company's receipt of the Conversion Notice (the
"SHARE DELIVERY PERIOD") the Company shall fail to issue a certificate to a
holder for the number of shares of Common Stock to which such holder is
entitled upon such holder's conversion of Preferred Shares or to issue a
new Preferred Stock Certificate representing the number of Preferred Shares
to which such holder is entitled pursuant to Section 2(g)(ii) (a
"CONVERSION FAILURE"), in addition to all other available remedies which
such holder may pursue hereunder and under the Purchase Agreement between
the Company and the initial holders of the Preferred Shares (the " PURCHASE
AGREEMENT") (including indemnification), the Company shall pay additional
damages to such holder for each business day after such third (3rd)
business day that such conversion is not timely effected in an amount equal
to two (2%) percent per month of the product of (A) the number of shares of
Common Stock not issued to the holder on a timely basis pursuant to Section
2(g)(ii) and to which such holder is entitled, and (B) the Closing Bid
Price of the Common Stock on the last possible date which the Company could
have issued such Common Stock to such holder without violating Section
2(g)(ii). If the Company fails to pay the additional damages set forth in
this Section 2(g)(v) within five business days of the date incurred, then
the holder entitled to such payments shall have the right at any time, so
long as the Company continues to fail to make such payments, to require the
Company, upon written notice, to immediately issue, in lieu of the cash
additional damages set forth in this Section 2(g)(v), the number of shares
of Common Stock equal to the quotient of (X) the aggregate amount of the
additional damages payments described above divided by (Y) the Market Price
in effect on such Conversion Date as is specified by the holder in writing
to the Company. Payment of the additional damages shall not relieve the
Company of its obligation to send the shares of Common Stock to the holder
upon conversion.
h. Mandatory Conversion. Subject to Section 11, if any
Preferred Shares remain outstanding on the Mandatory Conversion Date (as
defined below), then all such Preferred Shares shall be converted as of
such date in accordance with this Section 2 as if the holders of such
Preferred Shares had given the Conversion Notice on the Mandatory
Conversion Date; provided, however, that if a Triggering Event has occurred
and is continuing on the Mandatory Conversion Date, then the Company shall,
within five business days
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following the Mandatory Conversion Date (unless otherwise notified in
writing by the holder of its request to have the Preferred Shares converted
into Common Stock), pay to each holder of Preferred Shares then
outstanding, in immediately available funds, an amount equal to the
Triggering Event Redemption Price as of the Mandatory Conversion Date. All
holders of Preferred Shares shall thereupon surrender all Preferred Stock
Certificates, duly endorsed for cancellation, to the Company or the
Transfer Agent, provided that the Company has complied with its obligations
under this Section 2(h). Notwithstanding the foregoing, except in the case
of a Major Transaction, if the Common Stock is not designated for quotation
on the Nasdaq National Market or listed on The New York Stock Exchange,
Inc. or The American Stock Exchange, Inc. but such events do not constitute
a Triggering Event, then the Mandatory Conversion Date shall be extended
until the Common Stock is so designated or listed. "MANDATORY CONVERSION
DATE" means the date which is the earlier of five years after the
applicable Issuance Date, subject to extension as described in the
immediately preceding sentence, or immediately prior to a Major
Transaction.
i. Fractional Shares. The Company shall not issue any fraction
of a share of Common Stock upon any conversion. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a
fraction of a share of Common Stock. If, after the aforementioned
aggregation, the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up or down to the nearest whole share.
j. Taxes. The Company shall pay any and all taxes which may be
imposed upon it with respect to the issuance and delivery of Common Stock
upon the conversion of the Preferred Shares.
19. Redemption at Option of Holders.
a. Redemption Option Upon Major Transaction. In addition to
all other rights of the holders of Preferred Shares contained herein,
simultaneous with the occurrence of a Major Transaction (as defined below),
each holder of Preferred Shares shall have the right, at such holder's
option, to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to 120% of the
Liquidation Preference (as defined in Section 8 below) ("MAJOR TRANSACTION
REDEMPTION PRICE").
b. Redemption Option Upon Triggering Event. In addition to all
other rights of the holders of Preferred Shares contained herein, after a
Triggering Event (as defined below), each holder of Preferred Shares shall
have the right, at such holder's option, to require the Company to redeem
all or a portion of such holder's Preferred Shares at a price per Preferred
Share equal to 120% of the Liquidation Preference ("TRIGGERING EVENT
REDEMPTION PRICE" and, collectively with "MAJOR TRANSACTION REDEMPTION
PRICE," the "REDEMPTION PRICE").
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c. "Major Transaction". A "MAJOR TRANSACTION" shall be deemed
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business
combination of the Company with or into another Person which requires or
receives the consent or recommendation of the Company's Board of Directors
(excluding a consolidation, merger or other business combination in which
holders of the Company's voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, the voting
power of the surviving entity or entities necessary to elect a majority of
the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities and excluding a short-form merger
effected without the consent or recommendation of the Company's Board of
Directors) (an "EXEMPT MAJOR TRANSACTION").
(ii) the sale or transfer of all or substantially all of
the Company's assets or rights to the "Be There!" business or product line
other than in connection with a disposition to a subsidiary of the Company;
or
(iii) consummation of a purchase, tender or exchange offer
made to the holders of more than 50% of the outstanding shares of Common
Stock which requires or receives the consent or recommendation of the
Company's Board of Directors.
d. "Triggering Event". A "TRIGGERING EVENT" shall be deemed to
have occurred at such time as any of the following events (other than in
connection with a Major Transaction):
(i) the failure of the Registration Statement to be
declared effective by the SEC on or prior to the date that is 150 days
after the Demand;
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Preferred Shares for sale of all of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such
lapse or unavailability continues for a period of thirty (30) consecutive
trading days, provided that the cause of such lapse or unavailability is
not due to factors solely within the control of such holder of Preferred
Shares;
(iii) the Company undertakes any voluntary action to
terminate the quotation or listing of the Common Stock on the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc., unless such action is taken in connection with the
continued quotation or listing of the Common Stock on another of the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc.;
(iv) the Company's failure to deliver shares of Common
Stock within 15 days of its receipt of a Conversion Notice (together with
the Preferred Stock
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Certificate) or the Company's notice to any holder of Preferred Shares,
including by way of public announcement, at any time, of its intention not
to comply with proper requests for conversion of any Preferred Shares into
shares of Common Stock, other than due to any of the reasons set forth in
Section 4(a) below; or
(v) if the Company pursuant to or within the meaning of
Title 11, U.S. Code, or any similar federal or state law for the relief of
debtors ("BANKRUPTCY LAW"), (I) commences a voluntary case, (II) consents
to the entry of an order for relief against it in any involuntary case,
(III) consents to the appointment of a receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law (a "CUSTODIAN") of
it or for all or substantially all of its property, (IV) makes a general
assignment for the benefit of its creditors, or (V) admits in writing that
it is generally unable to pay its debts as the same become due.
e. Mechanics of Redemption at Option of Buyer Upon Major
Transaction. No sooner than 15 days nor later than 10 days prior to the
consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier ("NOTICE OF MAJOR
TRANSACTION") to each holder of Preferred Shares. At any time after receipt
of a Notice of Major Transaction (or, in the event a Notice of Major
Transaction is not delivered at least 10 days prior to a Major Transaction,
at any time within 10 days prior to a Major Transaction), any holder of
Preferred Shares then outstanding may require the Company to redeem,
effective immediately prior to the consummation of such Major Transaction,
all of the holder's Preferred Shares then outstanding by delivering written
notice thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION
AT OPTION OF BUYER UPON MAJOR TRANSACTION") to the Company, which Notice of
Redemption at Option of Buyer Upon Major Transaction shall indicate (i) the
number of Preferred Shares that such holder is electing to redeem and (ii)
the applicable Major Transaction Redemption Price, as calculated pursuant
to Section 3(a) above. Preferred Shares which are not required to be
redeemed pursuant to this paragraph are subject to mandatory conversion as
provided herein.
f. Mechanics of Redemption at Option of Buyer Upon Triggering
Event. Within one (1) day after the occurrence of a Triggering Event, the
Company shall deliver written notice thereof via facsimile and overnight
courier ("NOTICE OF TRIGGERING EVENT") to each holder of Preferred Shares.
At any time after the earlier of a holder's receipt of a Notice of
Triggering Event and such holder becoming aware of a Triggering Event, any
holder of Preferred Shares then outstanding may require the Company to
redeem all of the Preferred Shares by delivering written notice thereof via
facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER
UPON TRIGGERING EVENT") to the Company, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the number of
Preferred Shares that such holder is electing to redeem and (ii) the
applicable Triggering Event Redemption Price, as calculated pursuant to
Section 3(b) above.
g. Payment of Redemption Price. Upon the Company's receipt of
a Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction from any
holder of Preferred Shares or Pari Passu Shares (as defined in Section 8),
the Company shall immediately notify each
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<PAGE>
holder of Preferred Shares and Pari Passu Shares by facsimile of the
Company's receipt of such Notice(s) of Redemption at Option of Buyer Upon
Triggering Event or Notice(s) of Redemption at Option of Buyer Upon Major
Transaction and each holder which has sent such a notice shall promptly
submit to the Company or its Transfer Agent such holder's Preferred Stock
Certificates which such holder has elected to have redeemed. The Company
shall deliver the applicable Triggering Event Redemption Price, in the case
of a redemption pursuant to Section 3(f), to such holder within five
business days after the Company's receipt of a Notice of Redemption at
Option of Buyer Upon Triggering Event and, in the case of a redemption
pursuant to Section 3(e), the Company shall deliver the applicable Major
Transaction Redemption Price immediately prior to the consummation of the
Major Transaction; provided that a holder's Preferred Stock Certificates
shall have been so delivered to the Company; provided further that if the
Company is unable to redeem all of the Preferred Shares and Pari Passu
Shares to be redeemed (because of insufficient funds to lawfully effect
such redemption), the Company shall redeem an amount from each holder of
Preferred Shares and Pari Passu Shares being redeemed equal to such
holder's pro-rata amount (based on the relative redemption amounts of all
holders of Preferred Shares and Pari Passu Shares) of all Preferred Shares
and Pari Passu Shares being redeemed. If the Company shall fail to redeem
all of the Preferred Shares submitted for redemption (other than pursuant
to a dispute as to the arithmetic calculation of the Redemption Price), in
addition to any remedy such holder of Preferred Shares may have under this
Statement of Designations and the Purchase Agreement, the applicable
Redemption Price payable in respect of such unredeemed Preferred Shares
shall bear interest at the rate of 2.0% per month (prorated for partial
months) until paid in full. Until the Company pays such unpaid applicable
Redemption Price in full to a holder of Preferred Shares submitted for
redemption, such holder shall have the option (the "VOID OPTIONAL
REDEMPTION OPTION") to, in lieu of redemption, require the Company to
promptly return to such holder(s) all of the Preferred Shares that were
submitted for redemption by such holder(s) under this Section 3 and for
which the applicable Redemption Price has not been paid, by sending written
notice thereof to the Company via facsimile (the "VOID OPTIONAL REDEMPTION
NOTICE"). Upon the Company's receipt of such Void Optional Redemption
Notice(s) and prior to payment of the full applicable Redemption Price to
such holder, (i) the Notice(s) of Redemption at Option of Buyer Upon
Triggering Event or the Notice(s) of Redemption at Option of Buyer Upon
Major Transaction, as the case may be, shall be null and void with respect
to those Preferred Shares submitted for redemption and for which the
applicable Redemption Price has not been paid, and (ii) the Company shall
immediately return any Preferred Shares submitted to the Company by each
holder for redemption under this Section 3(g) and for which the applicable
Redemption Price has not been paid. Notwithstanding the foregoing, in the
event of a dispute as to the determination of the Closing Bid Price or the
arithmetic calculation of the Redemption Price, such dispute shall be
resolved pursuant to Section 2(g)(iii) above with the term "Closing Bid
Price" being substituted for the term "Average Market Price" and the term
"Redemption Price" being substituted for the term "Conversion Rate". A
holder's delivery of a Void Optional Redemption Notice and exercise of its
rights following such notice shall not affect the Company's obligations to
make any payments which have accrued prior to the date of such notice.
Payments provided for in this Section 3 shall have priority to payments to
other stockholders, other than any required payments with respect to shares
of the Company's Series A Convertible Preferred Stock which were
outstanding on the Issuance Date, in connection with a Major Transaction.
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<PAGE>
20. Inability to Fully Convert.
a. Holder's Option if Company Cannot Fully Convert. If, upon
the Company's receipt of a Conversion Notice or on the Mandatory Conversion
Date, the Company can not issue shares of Common Stock registered for
resale under the Registration Statement for any reason, including, without
limitation, because the Company (x) does not have a sufficient number of
shares of Common Stock authorized and available, (y) is otherwise
prohibited by applicable law or by the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or its Securities,
including without limitation the Exchange Cap, from issuing all of the
Common Stock which is to be issued to a holder of Preferred Shares pursuant
to a Conversion Notice or (z) fails to have a sufficient number of shares
of Common Stock registered for resale under the Registration Statement,
then the Company shall issue as many shares of Common Stock as it is able
to issue in accordance with such holder's Conversion Notice and pursuant to
Section 2(g) above and, with respect to the unconverted Preferred Shares,
the holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at
a price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
Triggering Event Redemption Price as of such Conversion Date;
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(z) above, require the Company to issue
restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(g) above;
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were
to be converted pursuant to such holder's Conversion Notice (provided that
a holder's voiding its Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of
such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(y) above,
and the issuance of additional Conversion Shares at a Conversion Price
equal to the Market Price would not violate the rules or regulations of The
Nasdaq Stock Market, Inc., then, subject to Section 11, require the Company
to issue shares of Common Stock in accordance with such holder's Conversion
Notice and pursuant to Section 2(g) above at a Conversion Price equal to
the Market Price of the Common Stock on the date of such holder's Notice in
Response to Inability to Convert (as defined below).
b. Mechanics of Fulfilling Holder's Election. The Company
shall immediately send via facsimile to a holder of Preferred Shares, upon
receipt of a facsimile copy of a Conversion Notice from such holder which
cannot be fully satisfied as described in Section
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<PAGE>
4(a) above, a notice of the Company's inability to fully satisfy such
holder's Conversion Notice (the "INABILITY TO FULLY CONVERT NOTICE"). Such
Inability to Fully Convert Notice shall indicate (i) the reason why the
Company is unable to fully satisfy such holder's Conversion Notice, (ii)
the number of Preferred Shares which cannot be converted and (iii) the
applicable Mandatory Redemption Price. Such holder shall notify the Company
of its election pursuant to Section 4(a) above by delivering written notice
via facsimile to the Company ("NOTICE IN RESPONSE TO INABILITY TO
CONVERT").
c. Payment of Redemption Price. If such holder shall elect to
have its shares redeemed pursuant to Section 4(a)(i) above, the Company
shall pay the Mandatory Redemption Price in cash to such holder within
thirty (30) days of the Company's receipt of the holder's Notice in
Response to Inability to Convert, provided that prior to the Company's
receipt of the holder's Notice in Response to Inability to Convert the
Company has not delivered a notice to such holder stating, to the
satisfaction of the holder, that the event or condition resulting in the
Mandatory Redemption has been cured and all Conversion Shares issuable to
such holder can and will be delivered to the holder in accordance with the
terms of Section 2(g). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in
this Section 4(c) (other than pursuant to a dispute as to the determination
of the arithmetic calculation of the Redemption Price), in addition to any
remedy such holder of Preferred Shares may have under this Statement of
Designations and the Securities Purchase Agreement, such unpaid amount
shall bear interest at the rate of 2.0% per month (prorated for partial
months) until paid in full. Until the full Mandatory Redemption Price is
paid in full to such holder, such holder may void the Mandatory Redemption
with respect to those Preferred Shares for which the full Mandatory
Redemption Price has not been paid and receive back such Preferred Shares.
Notwithstanding the foregoing, if the Company fails to pay the applicable
Mandatory Redemption Price within such thirty (30) days time period due to
a dispute as to the determination of the arithmetic calculation of the
Redemption Rate, such dispute shall be resolved pursuant to Section
2(g)(iii) above with the term "Redemption Price" being substituted for the
term "Conversion Rate".
d. Pro-rata Conversion and Redemption. In the event the
Company receives a Conversion Notice from more than one holder of Preferred
Shares or Pari Passu Shares on the same day and the Company can convert and
redeem some, but not all, of the Preferred Shares or Pari Passu Shares
pursuant to this Section 4, the Company shall convert and redeem from each
holder of Preferred Shares or Pari Passu Shares electing to have Preferred
Shares or Pari Passu Shares converted and redeemed at such time an amount
equal to such holder's pro-rata amount (based on the relative redemption
amounts of all holders of Preferred Shares and Pari Passu shares) of all
Preferred Shares and Pari Passu Shares being converted and redeemed at such
time.
e. Involuntary Delisting. In the event the Common Stock at any
time is not designated for quotation on the Nasdaq National Market or
listed on The New York Stock Exchange, Inc. or The American Stock Exchange,
Inc. but such events do not constitute a Triggering Event and are not in
connection with a Major Transaction, then in addition to any other remedies
the holders of Preferred Shares may have at law or in equity, the Company
shall pay to each holder of Preferred Shares an amount in cash per
Preferred Share on each day that
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the Common Stock is not so designated or listed equal to the product of the
Liquidation Preference multiplied by 1.0%, provided that the Company shall
not be required to make such payments for more than 24 consecutive days.
The Company's failure to pay such amounts on each day they are due shall
constitute a Triggering Event for purposes of Section 3.
21. Reissuance of Certificates. In the event of a conversion or
redemption pursuant to this Statement of Designations of less than all of
the Preferred Shares represented by a particular Preferred Stock
Certificate, the Company shall promptly cause to be issued and delivered to
the holder of such Preferred Shares a preferred stock certificate
representing the remaining Preferred Shares which have not been so
converted or redeemed.
22. Reservation of Shares. Subject to the Exchange Cap in Section
11, the Company shall, so long as any of the Preferred Shares are
outstanding, reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of effecting the conversion of the
Preferred Shares, such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all of the Preferred
Shares then outstanding; provided that the number of shares of Common Stock
so reserved shall at no time be less than 200% of the number of shares of
Common Stock for which the Preferred Shares are at any time convertible
(subject to the Exchange Cap if lower). The initial number of shares of
Common Stock reserved for conversions of the Preferred Shares and each
increase in the number of shares so reserved shall be allocated pro rata
among the holders of the Preferred Shares based on the number of Preferred
Shares held by each holder at the time of issuance of the Preferred Shares
or increase in the number of reserved shares, as the case may be. In the
event a holder shall sell or otherwise transfer any of such holder's
Preferred Shares, each transferee shall be allocated a pro rata portion of
the number of reserved shares of Common Stock reserved for such transferor.
Any shares of Common Stock reserved and which remain allocated to any
person or entity which does not hold any Preferred Shares shall be
allocated to the remaining holders of Preferred Shares, pro rata based on
the number of Preferred Shares then held by such holder.
23. Voting Rights. Holders of Preferred Shares shall have no voting
rights (including with respect to a Major Transaction), except as expressly
required by law, including but not limited to the Texas Business
Corporation Act, and as expressly provided in this Statement of
Designations.
24. Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Preferred Shares shall be entitled to receive
in cash out of the assets of the Company, whether from capital or from
earnings available for distribution to its stockholders (the "PREFERRED
FUNDS"), after all required payments with respect to shares of the
Company's Series A Convertible Preferred Stock which were outstanding on
the Issuance Date, but before any amount shall be paid to the holders of
any of the capital stock of the Company of any class junior in rank to the
Preferred Shares in respect of the preferences as to the distributions and
payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the Stated Value plus all accrued and
unpaid premium thereon (such sum being referred to as the "LIQUIDATION
PREFERENCE"); provided that, if the Preferred Funds are insufficient to pay
the
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full amount due to the holders of Preferred Shares and holders of the
Company's Series D Convertible Preferred Stock and Series F Convertible
Preferred Stock (the "Pari Passu Shares"), which are of equal rank with
the Preferred Shares as to payments of Preferred Funds (and redemption
amounts), then each holder of Preferred Shares and Pari Passu Shares shall
receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Statement of Designations, Preferences and
Rights, as a percentage of the full amount of Preferred Funds payable to
all holders of Preferred Shares and Pari Passu Shares. The purchase or
redemption by the Company of stock of any class, in any manner permitted by
law, shall not, for the purposes hereof, be regarded as a liquidation,
dissolution or winding up of the Company. Neither the consolidation or
merger of the Company with or into any other Person, nor the sale or
transfer by the Company of less than substantially all of its assets,
shall, for the purposes hereof, be deemed to be a liquidation, dissolution
or winding up of the Company. No holder of Preferred Shares shall be
entitled to receive any amounts with respect thereto upon any liquidation,
dissolution or winding up of the Company other than the amounts provided
for herein; provided that a holder of Preferred Shares shall be entitled to
all amounts previously accrued with respect to amounts owed hereunder.
25. Preferred Rank; Participation. (i) All shares of Common Stock
shall be of junior rank to all Preferred Shares and Pari Passu Shares in
respect to the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company. The rights of the
shares of Common Stock shall be subject to the preferences and relative
rights of the Preferred Shares and Pari Passu Shares. Without the prior
express written consent of the holders of not less than three-fourths (3/4)
of the then outstanding Preferred Shares and Pari Passu Shares, the Company
shall not hereafter authorize or issue additional or other capital stock
that is of senior or equal rank to the Preferred Shares and Pari Passu
Shares in respect of the preferences as to distributions and payments upon
the liquidation, dissolution and winding up of the Company. Without the
prior express written consent of the holders of not less than three-fourths
(3/4) of the then outstanding Preferred Shares and Pari Passu Shares, the
Company shall not hereafter authorize or make any amendment to the
Company's Articles of Incorporation or bylaws, or file any resolution of
the board of directors of the Company with the Texas Secretary of State
containing any provisions, which would adversely affect or otherwise impair
the rights or relative priority of the holders of the Preferred Shares and
Pari Passu Shares relative to the holders of the Common Stock or the
holders of any other class of capital stock; provided that the foregoing
shall not affect the Company's ability to effect a Major Transaction. In
the event of the merger or consolidation of the Company with or into
another corporation (other than a Major Transaction), the Preferred Shares
and Pari Passu Shares shall maintain their relative powers, designations
and preferences provided for herein and no merger shall result inconsistent
therewith.
(ii) Subject to the rights of the holders, if any, of the Parri Passu
Shares, the holders of the Preferred Shares shall, as holders of Preferred
Stock, be entitled to such dividends paid and distributions made to the
holders of Common Stock to the same extent as if such holders of Preferred
Shares had converted the Preferred Shares into Common Stock (without regard
to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence
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shall be made concurrently with the dividend or distribution to the holders
of Common Stock; provided that the holders of the Preferred Shares shall be
entitled to such dividends and distributions only to the extent that they
exceed an amount per Preferred Share equal to $1,000, plus the accrued
premium thereon.
26. Restriction on Redemption and Cash Dividends with respect to
Other Capital Stock. Until all of the Preferred Shares have been converted
or redeemed as provided herein, except as permitted in the Rights
Agreement, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or cash distribution on, its Common Stock
without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares.
27. Limitation on Number of Conversion Shares. Notwithstanding any
other provision herein, the Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Preferred Shares and Pari
Passu Shares if the issuance of such shares of Common Stock would exceed
that number of shares of Common Stock which the Company may issue upon
Conversion of the Preferred Shares and Pari Passu Shares (the "EXCHANGE
CAP") without breaching the Company's obligations under the rules or
regulations of The Nasdaq Stock Market, Inc., except that such limitation
shall not apply in the event that the Company (a) obtains the approval of
its stockholders as required by NASD Rule 4460 (or any successor rule or
regulation) for issuances of Common Stock in excess of such amount or (ii)
obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to
the holders of a majority of the Preferred Shares then outstanding. Until
such approval or written opinion is obtained, no purchaser of Preferred
Shares and Pari Passu Shares pursuant to the Purchase Agreement (the
"PURCHASERS") shall be issued, upon conversion of Preferred Shares and Pari
Passu Shares, shares of Common Stock in an amount greater than the product
of (i) the Exchange Cap amount multiplied by (ii) a fraction, the numerator
of which is the number of Preferred Shares and Pari Passu Shares issued to
such Purchaser pursuant to the Purchase Agreement and the denominator of
which is the aggregate amount of all the Preferred Shares and Pari Passu
Shares issued to the Purchasers pursuant to the Purchase Agreement (the
"CAP ALLOCATION AMOUNT"). In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser's Preferred Shares and Pari Passu
Shares, the transferee shall be allocated a pro rata portion of such
Purchaser's Cap Allocation Amount. In the event that any holder of
Preferred Shares and Pari Passu Shares shall convert all of such holder's
Preferred Shares and Pari Passu Shares into a number of shares of Common
Stock which, in the aggregate, is less than such holder's Cap Allocation
Amount, then the difference between such holder's Cap Allocation Amount and
the number of shares of Common Stock actually issued to such holder shall
be allocated to the respective Cap Allocation Amounts of the remaining
holders of Preferred Shares and Pari Passu Shares on a pro rata basis in
proportion to the number of Preferred Shares then held by each such holder.
28. Vote to Change the Terms of Preferred Shares. The affirmative
vote at a meeting duly called for such purpose or the written consent
without a meeting, of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares and Pari Passu Shares, shall be required
for any change to this Statement of Designations or the Company's
Certificate
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of Incorporation which would amend, alter, change or repeal any of the
powers, designations, preferences and rights of the Preferred Shares.
29. Lost or Stolen Certificates. Upon receipt by the Company of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case
of mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall
not be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares
into Common Stock.
30. Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Statement of Designations
shall be cumulative and in addition to all other remedies available under
this Statement of Designations, at law or in equity (including a decree of
specific performance and/or other injunctive relief), no remedy contained
herein shall be deemed a waiver of compliance with the provisions giving
rise to such remedy and nothing herein shall limit a holder's right to
pursue actual damages for any failure by the Company to comply with the
terms of this Statement of Designations. The Company covenants to each
holder of Preferred Shares that there shall be no characterization
concerning this instrument other than as expressly provided herein. Amounts
set forth or provided for herein with respect to payments, conversion and
the like (and the computation thereof) shall be the amounts to be received
by the holder thereof and shall not, except as expressly provided herein,
be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holders of the Preferred
Shares and that the remedy at law for any such breach may be inadequate.
The Company therefore agrees that, in the event of any such breach or
threatened breach, the holders of the Preferred Shares shall be entitled,
in addition to all other available remedies, to an injunction restraining
any breach, without the necessity of showing economic loss and without any
bond or other security being required.
31. Specific Shall Not Limit General; Construction. No specific
provision contained in this Statement of Designations shall limit or modify
any more general provision contained herein. This Statement of Designations
shall be deemed to be jointly drafted by the Company and all holders of
Preferred Shares and shall not be construed against any person as the
drafter hereof.
32. Failure or Indulgence Not Waiver. No failure or delay on the
part of a holder of Preferred Shares in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Statement of Designations
to be signed on behalf of the Company, as of the 23rd day of July, 1998.
DATA RACE, INC.
By: /s/ Gregory T. Skalla
-----------------------------------------
Gregory T. Skalla
Vice President-Finance
Chief Financial Officer
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EXHIBIT 10.1
THESE SECURITIES HAVE NOT BEEN REGISTERED WITH THE UNITED STATES SECURITIES AND
EXCHANGE COMMISSION (THE "COMMISSION") OR THE SECURITIES COMMISSION OF ANY STATE
AND HAVE BEEN ISSUED PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"). THIS PURCHASE AGREEMENT
SHALL NOT CONSTITUTE AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY THE
SECURITIES IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE
UNLAWFUL. THE SECURITIES MAY NOT BE SOLD, PLEDGED, TRANSFERRED OR ASSIGNED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT
AND UNDER APPLICABLE STATE SECURITIES LAWS, OR IN A TRANSACTION WHICH IS EXEMPT
FROM REGISTRATION UNDER THE PROVISIONS OF THE SECURITIES ACT AND UNDER
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS.
PURCHASE AGREEMENT
DATA RACE, INC.
THIS AGREEMENT is executed in reliance upon the transaction exemption
afforded by Regulation D as promulgated by the Securities and Exchange
Commission ("SEC"), under the Securities Act of 1933, as amended (the "Act").
This Agreement has been executed by the undersigned in connection with the
private placement of up to Two Million Five Hundred Thousand ($2,500,000)
Dollars aggregate principal amount of Series D Preferred Stock (with the terms
and conditions contained in the Series D Preferred Stock Statement of
Designation annexed hereto as Exhibit A), up to Seven Hundred Fifty Thousand
($750,000) Dollars aggregate principal amount of Series E Preferred Stock (with
the terms and conditions contained in the Series E Preferred Stock Statement of
Designation annexed hereto as Exhibit B), and up to Seven Hundred Fifty Thousand
($750,000) Dollars aggregate principal amount Series F Preferred Stock (with the
terms and conditions contained in the Series F Preferred Stock Statement of
Designation annexed hereto as Exhibit C) of the Company (collectively referred
to as the "Preferred Stock") of DATA RACE, INC. (Nasdaq National Market System
symbol "RACE"), located at 12400 Network Boulevard, San Antonio, Texas 78249, a
corporation organized under the laws of Texas, USA (hereinafter referred to as
the "Company") in two separate closings as described below. The Company will
also sell to the Purchasers listed on Schedule A annexed hereto ("A
Purchasers"), a Class A Warrant (the "Class A Warrant") to purchase up to
566,038 shares of Common Stock of the Company (the "Common Stock") for a period
of two (2) years from the issuance date of the Class A Warrants, as per the
terms of a separate Class A Warrant (Exhibit D annexed hereto). The Company
will sell to the Purchasers listed on Schedule B annexed hereto (the "B
Purchasers" and along with the A Purchasers referred to as the "Purchasers") a
Class B Warrant (the "Class B Warrant" in the form of Exhibit E annexed hereto),
to purchase up to 281,250 shares of Common Stock of the Company for a period of
two (2) years from the issuance date of the Class B Warrants (as defined
herein), as per the terms of a separate Class B Warrant (Exhibit E annexed
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<PAGE>
hereto) The Class A and B Warrants are hereinafter referred to as the
"Warrants". This Purchase Agreement and, if accepted by the Company, the offer
and sale of the Preferred Stock, Warrants and the Common Stock underlying the
Preferred Stock and Warrants (collectively the "Securities"), are being made in
reliance upon the provisions of Regulation D under the Act.
The Closing Date shall be Friday, July 24, 1998, as determined in
accordance with Sections 1.1 and 12 herein.
The Purchasers hereby represent and warrant to, and agree with the
Company as follows:
Section 1. Agreement to Subscribe; Purchase Price.
1.1 Closing. The Company will sell and the Purchasers will buy, upon
the execution of this Agreement, and in reliance upon the representations and
warranties contained in this Agreement and Statement of Designation for the
Series D Preferred Stock and the Series E Preferred Stock, and the Class A
Warrants to purchase339,623 shares of Common Stock, and Class B Warrants to
purchase 140,625 shares of Common Stock, and upon the terms and satisfaction of
each of the conditions set forth in Sections 13 and 14 below, One Million Five
Hundred Thousand ($1,500,000) Dollars of Series D Preferred Stock (and Class A
Warrants) to be purchased by the A Purchasers and Seven Hundred Fifty Thousand
($750,000) Dollars of Series E Preferred Stock (and Class B Warrants) to be
purchased by the B Purchasers as set forth next to their names on Schedule A and
Schedule B for an aggregate purchase price of Two Million Two Hundred Fifty
Thousand ($2,250,000) U.S. Dollars (the "Purchase Price").
1.2 Form of Payment. The A Purchasers shall pay their portion of the
Purchase Price by delivering good funds in United States Dollars by wire
transfer to Goldstein, Goldstein & Reis, LLP, the Escrow Agent, against delivery
of the original Series D and Class A Warrants as per a separate Escrow
Agreement, (annexed hereto as Exhibit F), as payment in full for their portion
of the Securities. The B Purchasers shall pay their portion of the Purchase
Price by delivering good funds in United States Dollars by wire transfer to the
Company, against delivery of the original Series E Preferred Stock and Class B
Warrant, as payment in full for their portion of the Securities. The Securities
shall not be deemed issued unless the Company has received the Purchase Price
therefor.
1.3 Wire Instructions. Wire instructions for Goldstein, Goldstein &
Reis, LLP are as follows:
Chase Manhattan Bank, N.A.
ABA No. 021000021
For the Account of:
United States Trust Company of New York
Account No. 920-1-073195
In favor of:
Goldstein, Goldstein & Reis, LLP Attorney Escrow Account
Account No. 59-01383
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Section 2. Representations, Covenants, and Warranties of the
Purchasers. Each of the Purchasers severally, and not jointly, acknowledges,
represents, warrants and agrees as follows:
2.1 Organization and Authorization. Each of the Purchasers are duly
incorporated or organized and validly existing in the state or country of their
incorporation or organization and have all requisite power and authority to
purchase and hold the Securities. The decision to invest and the execution and
delivery of this Agreement by the Purchasers, the performance by the Purchasers
of their obligations hereunder and the consummation by the Purchasers of the
transactions contemplated hereby have been duly authorized and requires no other
proceedings on the part of the Purchasers. Each of the Purchasers signatory's
below has all right, power and authority to execute and deliver this Agreement
on behalf of each of the Purchasers. This Agreement has been duly authorized,
validly executed and delivered on behalf of each of the Purchasers and is a
valid and binding agreement in accordance with its terms, subject to general
principles of equity and to bankruptcy or other laws affecting the enforcement
of creditors' rights generally. Each Purchaser represents it was not formed for
the purpose of making an investment in the Company.
2.2 Evaluation of Risks. Each of the Purchasers has such knowledge
and experience in financial and business matters as to be capable of evaluating
the merits and risks of, and bearing the economic risks entailed by, an
investment in the Company and of protecting its interests in connection with
this transaction. They recognize that their investment in the Company involves
a high degree of risk and each of the Purchasers can afford the complete loss of
their investment.
2.3 Independent Counsel. Each of the Purchasers acknowledges that
they have been advised to consult with their own attorney regarding legal
matters concerning the Company and to consult with their tax advisor regarding
the tax consequences of acquiring the Securities.
2.4 Disclosure Documentation. Each of the Purchasers has received
and reviewed copies of the Company's reports filed under the Securities Exchange
Act of 1934, as amended (the "1934 Act"), and the Act, including its 10-Ks, 10-
Qs, 8-K's, proxy and registration statements, filed by the Company since July 1,
1997 (collectively, the "Reports"). Except for the Reports, and this Agreement
(including all Exhibits annexed hereto) the Purchasers are not relying on any
other information relating to the offer and sale of the Securities. Each of the
Purchasers acknowledges that the Company has offered to make available any
additional public information that each of the Purchasers may reasonably
request, including technical information, and other material information about
the Company and each of the Purchasers has been offered the Company's full and
unconditional cooperation in making such information available to each of the
Purchasers and acknowledges that the Company has recommended that the Purchasers
request and review such information prior to making an investment decision. No
oral or written representations have been made, or oral or written information
furnished to the undersigned or its advisors, if any, in connection with the
offering of the Securities which were or are in any way inconsistent with the
Reports as of their respective dates.
2.5 Opportunity to Ask Questions. Each of the Purchasers has had a
reasonable
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<PAGE>
opportunity to ask questions of and receive answers from the Company concerning
the Company and the offering, and all such questions, if any, have been answered
to the full satisfaction of each of the Purchasers.
2.6 Reports Constitute Sole Representations. Except as set forth in
the Reports, and this Agreement (including all Exhibits annexed hereto) no
representations or warranties have been made to the Purchasers by (a) the
Company or any agent, employee or affiliate of the Company or (b) any other
person, and in entering into this transaction the Purchasers are not relying
upon any information, other than that contained in the Reports and the results
of independent investigation by Purchasers.
2.7 Each of the Purchasers is Accredited Investor. Each of the
Purchasers is an "Accredited Investor" as defined below who represents and
warrants it is included within one or more of the following categories of
"Accredited Investors."
(i) Any bank as defined in Section 3(a)(2) of the Act, or any
savings and loan associated or other institution as defined in Section
3(a)(5)A of the Act whether acting in its individual or fiduciary capacity;
any broker or dealer registered pursuant to Section 15 of the 1934 Act; any
insurance company as defined in Section 2(13) of the Act; any investment
company registered under the Investment Company Act of 1940 or a business
development company as defined in Section 2(a)(48) of that Act; any Small
Business Investment Company licensed by the U.S. Small Business
Administration under Section 301(c) or (d) of the Small Business Act of
1958; any plan established and maintained by a state, its political
subdivisions, or any agency or instrumentality of a state or its political
subdivision, for the benefits of its employees if such plan has total
assets in excess of $5,000,000; and employee benefit plan within the
meaning of Title I of the Employee Retirement Income Security Act of 1974
if the investment decision is made by a plan fiduciary, as defined in
Section 3(21) of such Act, which is either a bank, savings and loan
association, insurance company, or registered investment advisor, or if the
employee benefit plan has total assets in excess of $5,000,000;
(ii) Any private business development company as defined in
Section 202(a)(22) of the Investment Advisers Act of 1940;
(iii) Any organization described in Section 501(c)(3) of the
Internal Revenue Code, corporation, Massachusetts or similar business
trust, or partnership, not formed for the specific purpose of acquiring the
securities offered, with total assets in excess of $5,000,000;
(iv) Any director, executive officer, or general partner of
the issuer of the securities being offered or sold, or any director,
executive officer, or general partner of a general partner of that issuer;
(v) Any natural person whose individual net worth, or joint
net worth with that person's spouse, at the time of his purchase exceeds
$1,000,000;
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(vi) Any natural person who had an individual income in excess
of $200,000 in each of the two (2) most recent years or joint income with
that person's spouse in excess of $300,000 in each of those years and has a
reasonable expectation of reaching that same income level in the current
year;
(vii) Any trust, with total assets in excess of $5,000,000, not
formed for the specific purpose of acquiring the securities offered, whose
purchase is directed by a sophisticated person as described in Section
230.506(b)(2)(ii) of Regulation D under the Act;
(viii) Any entity in which all of the equity owners are
accredited investors; and
(ix) Any self-directed employee benefit plan with investment
decisions made solely by persons that are accredited investors within the
meaning of Rule 501 of Regulation D promulgated under the Act.
2.8 No Registration, Review or Approval. Each of the Purchasers
acknowledges and understands that the limited private offering and sale of
Securities pursuant to this Agreement has not been reviewed or approved by the
SEC or by any state securities commission, authority or agency, and is not
registered under the Act or under the securities or "blue sky" laws, rules or
regulations of any state. Each of the Purchasers acknowledges, understands and
agrees that the Securities are being offered and sold hereunder pursuant to (i)
a private placement exemption to the registration provisions of the Act pursuant
to Section 3(b) or Section 4(2) of such Act and Regulation D promulgated under
such Act, and (ii) a similar exemption to the registration provisions of
applicable state securities laws. Each of the Purchasers understands that the
Company is relying upon the truth and accuracy of the representations,
warranties, agreements, acknowledgments and understandings of the Purchasers set
forth herein in order to determine the applicability of such exemptions and the
suitability of the Purchasers to acquire the Securities.
2.9 Investment Intent. Without limiting their ability to resell
the Securities pursuant to an effective registration statement, each of the
Purchasers is acquiring the Securities solely for its own account and not with a
view to the distribution, assignment or resale to others. Each of the Purchasers
understands and agrees that it may bear the economic risk of its investment in
the Securities for an indefinite period of time. The Purchasers do not now have
any short position, put option or other similar instrument or position
(collectively, a "short position") in the Common Stock and will make all sales
of the Common Stock in accordance with the Act and shall take no action
prohibited under the Exchange Act (including Section 10(b) thereof). No
Purchaser will enter into any short position in the Common Stock at any time
within one year after the Closing Date, and one year after the closing of the
Call. Further, as a condition to any transfer of any Preferred Stock or
Warrants issued hereunder, the transferee shall agree in writing to be bound by
the restrictions and covenants contained in this Agreement.
2.10 No Advertisements. The Purchasers are not subscribing for the
Securities as a result of or subsequent to any advertisement, article, notice or
other communication published in any newspaper, magazine, or similar media or
broadcast over television or radio, or presented at any seminar or meeting.
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2.11 Registration Rights. The parties have entered into a
Registration Rights Agreement (Exhibit G).
2.12 B Purchasers; Disclosure. The B Purchaser hereby represents that
a General Partner of an affiliate of the B Purchaser is the Chairman of the
Board of the Company.
2.13 No-Conflict. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default (with or without notice
or lapse of time, or both), or give rise to a right of termination, cancellation
or acceleration of any obligation or to a loss of a material benefit, under, any
provision of the Certificate of Incorporation or other organizational document,
and any amendments thereto, bylaws and any amendments thereto of Purchasers or
any material mortgage, indenture, lease or other agreement or instrument,
permit, concession, franchise, license, judgment, order, decree statute, law,
ordinance, rule or regulation applicable to each of the Purchasers, its
properties or assets.
2.14 Domicile. The Purchasers are domiciled in the jurisdiction set
forth on Schedule A and B.
2.15 No Brokers. Each Purchaser represents that it has had no
dealings with any broker or finder in connection with the transactions
contemplated by this Agreement, except as described in Section 15.6.
Section 3. Representations and Warranties of the Company. The Company
acknowledges, covenants, represents, warrants and agrees as follows:
3.1 Organization/Qualification. The Company is a corporation duly
organized and validly existing under the laws of the State of Texas and is in
good standing under such laws. The Company has all requisite corporate power
and authority to own, lease and operate its properties and assets, and to carry
on its business as presently conducted. The Company is qualified to do business
as a foreign corporation in each jurisdiction in which the ownership of its
property or the nature of its business requires such qualification, except where
failure to so qualify would not have (i) a material adverse effect on the
condition (financial or otherwise) or on the earnings, business affairs,
properties or assets of the Company, or (ii) a material and adverse affect on
the ability of the Company to perform its obligations pursuant to this Agreement
and all Exhibits annexed hereto.
3.2 Accuracy of Reports and Information. The Company is in material
compliance, to the extent applicable, with all reporting obligations under
either Section 12(b), 12(g) or 15(d) of the 1934 Act, and shall maintain such
status on a timely basis. The Company has registered its Common Stock pursuant
to Section 12 of the 1934 Act and the Common Stock is listed and trades on the
Nasdaq National Market System. The Company has filed all material documentation
required to be filed pursuant to all reporting obligations, under either Section
13(a) or 15(d) of the 1934 Act for a period of at least twelve (12) months
immediately preceding the offer and sale of the Securities.
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3.3 SEC Filings/Full Disclosure. For a period of at least twelve
(12) months immediately preceding this offer and sale, (i) none of the Company's
filings with the Securities and Exchange Commission contained any untrue
statement of a material fact or omitted to state any material fact required to
be stated therein or necessary to make the statements therein in light of the
circumstances under which they were made, not misleading, and (ii) the Company
has timely filed all requisite forms, reports and exhibits thereto with the
Securities and Exchange Commission. There is no fact known to the Company
(other than general economic conditions known to the public generally) that has
not been publicly disclosed by the Company or disclosed in writing to the
Purchasers which (i) could reasonably be expected to have a material adverse
effect on the condition (financial or otherwise) or on the closing bid price of
the Common Stock, the trading volume of the Common Stock, the earnings, business
affairs, properties or assets of the Company, or (ii) could reasonably be
expected to materially and adversely affect the ability of the Company to
perform its obligations pursuant to this Agreement and all Exhibits annexed
hereto.
3.4 Authorization. The Company has all requisite corporate right,
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. All corporate action on the part of the
Company, its directors and stockholders (other than Nasdaq Marketplace Rule
4460(i)) necessary for the authorization, execution, delivery and performance of
this Agreement by the Company, the authorization, sale, issuance and delivery of
the Securities and the performance of the Company's obligations hereunder has
been taken. This Agreement has been duly executed and delivered by the Company
and constitutes a legal, valid and binding obligation of the Company enforceable
in accordance with its terms, subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies, and to
limitations of public policy as they may apply to the indemnification provisions
set forth in this Agreement. Upon their issuance and delivery pursuant to this
Agreement and their respective governing documents, the Securities will be
validly issued, fully paid and nonassessable and will be free of any liens or
encumbrances; provided, however, that the Securities are subject to restrictions
on transfer under state and/or federal securities laws. The issuance and sale
of the Securities will not give rise to any preemptive right or right of first
refusal or right of participation on behalf of any person that has not been
waived in writing.
3.5 No Conflict. The execution and delivery of this Agreement do
not, and the consummation of the transactions contemplated hereby will not,
conflict with, or result in any violation of, or default, or give rise to a
right of termination, cancellation or acceleration of any material obligation or
to a loss of a material benefit, under, any provision of the Articles of
Incorporation, and any amendments thereto, bylaws, stockholders agreements and
any amendments thereto of the Company or any material mortgage, indenture, lease
or other agreement or instrument, or any permit, concession, franchise, license,
judgment, order, decree statute, law, ordinance, rule or regulation applicable
to the Company, its properties or assets and which (i) could reasonably be
expected to have a material adverse effect on the condition (financial or
otherwise) or on the closing bid price of the Common Stock, the trading volume
of the Common Stock, the earnings, business affairs, properties or assets of the
Company, or (ii) could reasonably be expected to materially and adversely affect
the ability of the Company to perform its obligations pursuant to this Agreement
and all Exhibits annexed hereto.
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Purchasers acknowledge that the issuance of the Securities may result
in customary anti-dilution adjustments to outstanding warrants, and possible
acceleration of employee options upon a change of control.
3.6 No Undisclosed Liabilities or Events. The Company has no
material liabilities or obligations other than those disclosed in the Reports,
this Agreement or those incurred in the ordinary course of the Company's
business since July 1, 1997, which individually or in the aggregate, do not or
(i) could not reasonably be expected to have a material adverse effect on the
condition (financial or otherwise) or on the closing bid price of the Common
Stock, the trading volume of the Common Stock, the earnings, business affairs,
properties or assets of the Company, or (ii) could not reasonably be expected to
materially and adversely affect the ability of the Company to perform its
obligations pursuant to this Agreement and all Exhibits annexed hereto. No
event or circumstances has occurred or exists with respect to the Company or its
properties, business, condition (financial or otherwise), results of operations,
prospects, trading volume of the Common Stock, or the closing bid price of the
Common Stock, which, under applicable law, rule or regulation, requires public
disclosure or announcement prior to the date hereof by the Company but which has
not been so publicly announced or disclosed. Notwithstanding anything herein to
the contrary, the Purchasers acknowledge that the Company may be required to
redeem outstanding Series A Preferred Stock for approximately $167,000.
3.7 No Default. The Company is not in default in the performance or
observance of any material obligation, agreement, covenant or condition
contained in any indenture, mortgage, deed of trust or other material instrument
or agreement to which it is a party or by which it is or its property is bound,
and neither the execution, nor the delivery by the Company, nor the performance
by the Company of its obligations under this Agreement, including the conversion
or exercise provision of the Securities, will conflict with or result in the
breach or violation of any of the terms or provisions of, or constitute a
default or result in the creation or imposition of any lien or charge on any
assets or properties of the Company under, any material indenture, mortgage,
deed of trust or other material agreement applicable to the Company or
instrument to which the Company is a party or by which it is bound or the
Certificate of Incorporation or by-laws of the Company, or any decree, judgment,
order, rule or regulation of any court or governmental agency or body having
jurisdiction over the Company or its properties, or the Company's listing
agreement for its Common Stock.
3.8 Absence of Events of Default. Except as set forth in the Reports
and this Agreement, no default, as defined in the respective agreement to which
the Company is a party, and no event which, with the giving of notice or the
passage of time or both, would become a default, has occurred and is continuing
under any agreement to which the Company is a party, which (i) could reasonably
be expected to have a material adverse effect on the condition (financial or
otherwise) or on the closing bid price of the Common Stock, the trading volume
of the Common Stock, the earnings, business affairs, properties or assets of the
Company, or (ii) could reasonably be expected to materially and adversely affect
the ability of the Company to perform its obligations pursuant to this Agreement
and all Exhibits annexed hereto.
3.9 Governmental Consent, etc. No material consent, approval or
authorization of or designation, declaration or filing with any governmental
authority on the part of the Company is required in connection with the valid
execution and delivery of this Agreement, or the offer, sale
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or issuance of the Securities, or the consummation of any other transaction
contemplated hereby, except as may be required by applicable securities laws
including, but not limited to, SEC and Nasdaq regulations.
3.10 Intellectual Property Rights. Except as disclosed in the
Reports, the Company has sufficient trademarks, trade names, patent rights,
copyrights and licenses to conduct its business as presently conducted in the
Reports. To the best of the Company's knowledge, neither the Company, nor its
products is infringing or will infringe any trademark, trade name, patent right,
copyright, license, trade secret or other similar right of others currently in
existence; and there is no claim being made against the Company regarding any
trademark, trade name, patent, copyright, license, trade secret or other
intellectual property right which (i) could reasonably be expected to have a
material adverse effect on the condition (financial or otherwise) or on the
closing bid price of the Common Stock, the trading volume of the Common Stock,
the earnings, business affairs, properties or assets of the Company, or (ii)
could reasonably be expected to materially and adversely affect the ability of
the Company to perform its obligations pursuant to this Agreement and all
Exhibits annexed hereto.
3.11 Material Contracts. Except as set forth in the Reports, the
agreements to which the Company is a party described in the Reports are valid
agreements, in full force and effect, to the extent not expired by their terms,
and the Company is not in material breach or material default under any of such
agreements.
3.12 Litigation. Except as disclosed in the Reports, there is no
action, proceeding or investigation pending, or threatened, against the Company
which could reasonably be expected to result, either individually or in the
aggregate, in any (i) material adverse effect on the condition (financial or
otherwise) or on the closing bid price of the Common Stock, the trading volume
of the Common Stock, the earnings, business affairs, properties or assets of the
Company, or (ii) material and adverse effect on the ability of the Company to
perform its obligations pursuant to this Agreement and all Exhibits annexed
hereto. The Company is not a party to or subject to the provisions of any
order, writ, injunction, judgment or decree of any court or government agency or
instrumentality.
3.13 Title to Assets. Except as set forth in Reports, the Company
has good and marketable title to all properties and material assets described in
the Reports as owned by it, free and clear of any pledge, lien, security
interest, encumbrance, claim or equitable interest other than such as do not
materially affect the value or use of such assets and other than leasehold
improvements pursuant to the Company's facility lease (and the landlord's lien
on assets related thereto).
3.14 Subsidiaries. Except as disclosed in the Reports, the Company
does not presently own or control, directly or indirectly, any interest in any
other corporation, partnership, association or other business entity with
material activities, assets or liabilities.
3.15 Required Governmental Permits. The Company is in possession of
and operating in material compliance with all authorizations, licenses,
certificates, consents, orders and permits from state, federal and other
regulatory authorities which are material to the conduct of its business, all of
which are valid and in full force and effect.
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3.16 Listing. The Company shall secure the listing of the Common
Stock issuable upon conversion of the Preferred Stock and exercise of the
Warrants upon each national securities exchange and automated quotation system
(including the Nasdaq National Market and Small Cap Market), if any, upon which
the shares of Common Stock are then listed (subject to official notice of
issuance) and shall use its best efforts to maintain , so long as any other
shares of Common Stock shall be so listed, such listing of all such shares of
Common Stock. The Company will use its best efforts to maintain the Common
Stock's authorization for quotation on the Nasdaq National Market, Nasdaq Small
Cap, The New York Stock Exchange, or The American Stock Exchange, Inc. The
Company has not received any notice, oral or written, regarding continued
listing (except that the Company has received a letter from Nasdaq dated July
15, 1998 stating that the closing bid price of the Common Stock was below One
Dollar for more than thirty consecutive trading days, and if, within ninety
trading days after July 15, 1998 the closing bid price of the Common Stock is
not greater than One Dollar for ten consecutive trading days the Company faces
delisting from the Nasdaq National Market) and, as long as the Preferred Stock
and Warrants are outstanding, the Company will take no action which would
materially or adversely impact their continued listing or eligibility of the
Company for such listing. The Company does not currently meet the "net tangible
assets" Nasdaq NMS maintenance requirement, but except for the redemption
obligations resulting from the Nasdaq 20% Limitation (which will not be
applicable depending upon the Series D Convertible Price Floor or if shareholder
approval is obtained) the Company would have met such requirement immediately
after the Closing Date.
3.17 Other Outstanding Securities/Financing Restrictions. Except as
disclosed in the Reports, the Company has no outstanding restricted shares, or
shares of Common Stock sold under Regulation S, Regulation D or outstanding
under any other exemption from registration, which are available for sale as
unrestricted ("free trading") stock. The Company agrees that it will only issue
the Preferred Stock to the Purchasers herein pursuant to the terms and
conditions of this Agreement and the Statement of Designations.
3.18 Registration Alternative. The Company covenants and agrees that
for so long as any of the Securities remain outstanding and continue to be
"restricted securities" within the meaning of Rule 144 under the Act, the
Company shall permit resales of the underlying Common Stock pursuant to Rule 144
under the Act. The Company and the Purchasers shall provide the Transfer Agent
any and all papers necessary to complete the transfer under Rule 144, including,
but not limited to, opinions of counsel to the Transfer Agent, and the Company
shall continue to file all material required to be filed pursuant to Sections
13(a) or 15(d) of the 1934 Act.
3.19 Capitalization. As of July 17, 1998 the outstanding capital
stock of the Company consists of 175 shares of Series A Preferred Stock and
14,398,820 shares of Common Stock (including shares issued to Liviakis Financial
Communications). All issued and outstanding shares of Common Stock and
preferred stock have been duly authorized and validly issued and are fully paid
and nonassessable. The Company represents that it has a sufficient number of
authorized and reserved shares of preferred stock for the purposes of
consummating this transaction and, assuming the conversion on the Closing Date
of all shares of Preferred Stock and Warrants to be issued at such closing, a
sufficient number of authorized and reserved shares of Common Stock.
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3.20 Dilution. The Company is aware and acknowledges that conversion
of the conversion of the Preferred Stock, and/or the exercise of the Warrants,
would cause dilution to existing Shareholders and could significantly increase
the outstanding number of shares of Common Stock.
3.21 Employee Relations. The Company is not involved in any labor
dispute, nor, to the knowledge of the Company, is any such dispute threatened.
None of the Company's employees is a member of a union and the Company believes
that its relations with its employees are good.
3.22 Environmental Laws. The Company is (i) in compliance with any
and all foreign, federal, state and local laws and regulations relating to the
protection of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants and which the Company know is
applicable to them ("Environmental Laws"), (ii) has received all permits,
licenses or other approvals required under applicable Environmental Laws to
conduct its business, and (iii) is in compliance with all terms and conditions
of any such permit, license or approval.
3.23 Insurance. The Company is insured by insurers of recognized
financial responsibility against such losses and risks and in such amounts as
management of the Company believes to be prudent and customary in the businesses
in which the Company is engaged. The Company has no reason to believe that it
will not be able to renew its existing insurance coverage as and when such
coverage expires, or obtain similar coverage from similar insurers as may be
necessary to continue its business at a cost that would not materially and
adversely affect the condition, financial or otherwise, or the earnings,
business or operation, of the Company.
3.24 Conversion and Exercise. The Company will permit the Purchasers
to exercise their right to convert the Preferred Stock into shares of Common
Stock, with all of the rights and privileges as set forth in the Series D
Preferred Stock Statement of Designation annexed hereto as Exhibit A, the Series
E Statement of Designation annexed hereto as Exhibit B and the Series F
Statement of Designation annexed hereto as Exhibit C. The Company will permit
the Purchasers to exercise their right to exercise the Warrants pursuant to the
terms of the Class A Warrant, and Class B Warrant annexed hereto.
3.25 Right of First Refusal. In the event the Company wishes to
enter into a transaction for debt or equity financing which is convertible into
shares of Common Stock of the Company within the earlier of three months after
the closing of the Call or February 1, 1999, the Company will give each
Purchaser written notice of the terms and conditions of such offer (the "ROFR
Notice"). Each Purchaser shall have a pro rata right of first refusal to
participate in such offering. Each Purchaser shall have three (3) business days
to reply in writing after receipt of the ROFR Notice from the Company. Such
reply may be sent via facsimile. In the event such written reply is not
received by the Company within such three (3) business day period, it will be
deemed a refusal by such Purchaser. The Purchasers shall have the right to
review all final documentation regarding such placements and such documentation
shall be delivered to each Purchaser with the ROFR Notice. The right of first
refusal shall not apply to (i) a loan from a commercial bank, (ii) any
transaction involving the issuance of the Company's securities (A) as
consideration in a merger,
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consolidation or other business combination, (B) in connection with any
strategic partnership or joint venture or (C) as consideration for the
acquisition of a business, product or license or other assets by the Company,
(iii) the issuance of Common Stock in a firm commitment, underwritten public
offering, (iv) the issuance of securities upon exercise or conversion of the
Company's options, warrants or other convertible securities outstanding as of
the date hereof, (v) the grant of additional options or warrants, or the
issuance of additional securities, under any Company stock option plan,
restricted stock plan, stock purchase plan or other plan or written compensation
contract for the benefit of the Company's employees, directors or consultants,
or (vi) the issuance of securities pursuant to the Rights Agreement, dated
September 15, 1997, between the Company and ChaseMellon Shareholder Services,
L.L.C. (the "Rights Agreement").
3.26 20% Rule Limitation. The Company agrees that it shall call a
stockholders meeting on or before November 20, 1998 for the purpose of, among
other things, approving below market price issuances of Common Stock to the
Purchasers and in excess of 19.99% of the number of shares of Common Stock
outstanding as of the Closing Date as required by Section 4460(i)(1)(D) of the
Nasdaq Marketplace Rules. In the event that the aforementioned proposal is not
ratified by the stockholders and the number of shares issuable under the
Statement of Designations and/or exercise of the Warrants would exceed 19.99% of
the number of shares of Common Stock outstanding as of the Closing Date, the
Company will seek a waiver from the Nasdaq Stock Market (or other applicable
market or exchange) to permit such issuances.
3.27 No Brokers. Each Purchaser represents that it has had no
dealings with any broker or finder in connection with the transactions
contemplated by this Agreement, except as described in Section 15.6.
Section 4. Representations and Warranties of the Company and
Purchasers. Each of the Purchasers and the Company represent to, and agree
with, the other the following with respect to itself:
4.1 Mandatory Call. The Company shall make a mandatory "Call" (the
"Call") upon the Purchasers as follows: (i) upon the A Purchasers, to fund up to
an additional One Million ($1,000,000) Dollars aggregate principal amount of
Series D Preferred Stock , and Class A Warrants to purchase 226,415 shares of
Common Stock pursuant to the terms of this Agreement, the Class A Warrant, and
the Statement of Designation for the Series D Preferred Stock, and/or (ii) upon
the B Purchaser, to fund up to an additional Seven Hundred Fifty Thousand
($750,000) Dollars aggregate principal amount of Series F Preferred Stock, and
Class B Warrants to purchase 140,625 shares of Common Stock pursuant to the
terms of this Agreement, the Class B Warrant, and the Statement of Designation
for the Series F Preferred Stock. The Call may only be made by the Company
after all of the conditions below are satisfied (or waived in writing by all
interested parties). The Company has the right to make the Call up to and
including January 31, 1999. The Call upon the A Purchasers and the Call upon
the B Purchasers may be made independently of each other. The closing for the
Call shall be ten (10) business days after receipt by the Purchasers of a
written notice from the Company stating the applicable party's intention to
Call, and that each of the following conditions have been satisfied:
(i) the Purchasers shall have received written proof that the
Registration
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Statement (which includes all shares of Common Stock
underlying the Preferred Stock and Warrants required to
be registered pursuant to the Registration Rights
Agreement) has previously become effective and remains
effective during the ten (10) Trading Days immediately
prior to the closing of the Call, and (A) neither the
Company nor any of the Purchasers shall have received
notice that the SEC has issued or intends to issue a stop
order with respect to the Registration Statement or that
the SEC otherwise has suspended or withdrawn the
effectiveness of the Registration Statement, either
temporarily or permanently (that has not been cured), or
intends or has threatened to do so (unless the SEC's
concerns have been addressed and the Purchasers are
reasonably satisfied that the SEC no longer is
considering or intends to take such action), and (B) no
other suspension of the use or withdrawal of the
effectiveness of the Registration Statement or related
prospectus shall exist;
(ii) the Common Stock shall be listed on the Nasdaq National
Market and, as a result of the Call, the Company will be
in compliance with Nasdaq listing requirements
immediately upon the Closing of the Call;
(iii) the Purchasers shall have received an opinion of counsel
of the Company as set forth in Exhibit H annexed to this
Agreement, dated on the closing for the Call;
(iv) the average closing bid prices of the Common Stock for
the five trading days immediately preceding the date the
Company serves the Call notice upon the Purchasers was at
least One and 50/100 ($1.50) Dollar;
(v) As to the B Purchasers only, the Company shall have a
minimum of Seven Hundred fifty Thousand ($750,000)
Dollars in revenues for the fiscal quarter ended
September 30, 1998, or the fiscal quarter ended December
31, 1998, according to unaudited internally prepared
statements, even in the event such revenues are achieved
prior to the end of said fiscal quarter;
(vi) the Purchasers shall have received certification that the
Company has obtained shareholder approval for the
Company's issuance of more than twenty (20%) percent of
its Common Stock in connection with the transactions
contemplated hereby, if necessary, as required by Section
3.26 above;
(vii) the Purchasers shall have received written certification
from the Company that the representations and warranties
of the Company contained in this Agreement and all
Exhibits annexed hereto are true and correct in all
material respects as of the closing of the Call as though
made at each such time (except for representations and
warranties specifically made as of a particular date)
with respect to all periods, and as to all events and
circumstances occurring or existing to and including the
closing of the Call;
(viii) the Company shall have performed, satisfied and complied
in all material respects with all covenants, agreements
and conditions required by this Agreement, and all
Exhibits annexed hereto, to be performed, satisfied or
complied with by the Company at or prior to the closing
for the Call
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(except for breaches that have been cured or waived in
writing by all of the Purchasers);
(ix) since the Closing Date no event, that had or is likely to
have a material adverse effect on the properties,
business, condition (financial or otherwise), operations
or prospects of the Company has occurred, which has not
been remedied or cured by the Company or waived in
writing by all of the Purchasers;
(x) the Purchasers shall receive certification that the
Series D and Series E Statements of Designation remain in
full force and effect as in the form annexed hereto and
have not been amended except as provided in the Statement
of Designations; and
(xi) the B Purchasers shall receive written certification that
the Company has filed the Statement of Designation for
the Series F Preferred Stock.
Section 5. Opinion of Counsel. Each of the Purchasers shall, upon
the Closing, and upon the closing of the Company's Call, receive an opinion
letter from counsel to the Company as is set forth in Exhibit H.
Section 6. Opinion of Counsel Upon Conversion. Except as otherwise
provided herein, or in the Exhibits annexed herein, the Company will obtain for
each Purchaser, at the Company's expense, any and all opinions of counsel which
may be reasonably required in order to convert the Preferred Stock into Common
Stock, and exercise the Warrants, including, but not limited to, obtaining for
each Purchaser an opinion of counsel, subject only to receipt of a Notice of
Conversion in the form of Exhibit I and receipt by Counsel of such
representations, warranties, and documents as are determined to be necessary to
comply with applicable securities laws, duly executed by the Purchaser which
shall be satisfactory to the Transfer Agent, directing the Transfer Agent to
remove the legend from the certificate.
Section 7. Rule 144 Reporting. With a view to making available the
benefits of certain rules and regulations of the SEC which may at any time
permit the sale of the Securities to the public without registration, the
Company agrees to:
(i) make and keep public information available, as those
terms are understood and defined in Rule 144 under the Act, at all times
after the effective date on which the Company becomes subject to the
reporting requirements of the Act or the 1934 Act;
(ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the Act and the 1934 Act;
(iii) furnish to each Purchaser forthwith, upon request, a
written statement by the Company as to its compliance with the reporting
requirements of said Rule 144, and of the Act and the 1934 Act, a copy of
the most recent annual or quarterly report of the Company, and such other
reports and documents of the Company and other information in the
possession of or reasonably obtainable by the Company as each Purchaser may
reasonably request in availing itself of any rule or regulation of the SEC
allowing any
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Purchaser to sell any such Securities without registration.
Section 8. Indemnification. Each of the Company, and all key
operating subsidiaries, and each of the Purchasers agrees to indemnify the other
and to hold the other harmless from and against any and all losses, damages,
liabilities, costs and expenses (including reasonable attorneys' fees) which the
other may sustain or incur in connection with the breach by the indemnifying
party of any representation, warranty or covenant made by it in this Agreement.
Section 9. Registration or Exemption Requirements. Each of the
Purchasers acknowledges and understands that the Securities may not be resold or
otherwise transferred except in a transaction registered under the Act and any
applicable state securities laws or unless an exemption from such registration
is available. Each of the Purchasers understands that the Securities will be
imprinted with a legend that prohibits the transfer of the Securities unless (i)
they are registered or such registration is not required, and (ii) if the
transfer is pursuant to an exemption from registration other than Rule 144 under
the Act and, if the Company shall so request in writing, an opinion of counsel
reasonably satisfactory to the Company is obtained to the effect that the
transaction is so exempt.
Section 10. Legend.
(a) The certificates representing the Securities shall be
subject to a legend restricting transfer under the Act, such legend to be
substantially as follows:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH
SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE ABSENCE OF
SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT, EXCEPT IN THE
CASE OF AN EXEMPTION PURSUANT TO RULE 144 UNDER SAID ACT."
The certificates representing these Securities, and each certificate
issued in transfer thereof, will also bear any legend required under any
applicable state securities law.
Section 11. Stock Delivery Instructions. The Preferred Stock and
Warrants shall be delivered to the Purchasers on a delivery versus payment
basis.
Section 12. Closing Date. The date the Escrow Agent receives the
Series D Preferred Stock in the aggregate principal amount of $1,500,000, and
the Class A Warrants to purchase an aggregate of 339,623 shares of Common Stock,
and the B Purchaser receives the Series E Preferred Stock in the aggregate
principal amount of $750,000, and Class B Warrants to purchase an aggregate of
140,625 shares of Common Stock, and the Purchase Price therefor is paid to the
Company by the Purchasers, and the conditions set forth in Sections 13 and 14,
and the terms and conditions of the Escrow Agreement, for the Company and the A
Purchasers, (Exhibit F) herein are satisfied, or waived in writing, shall be the
Closing (the "Closing Date").
Section 13. Conditions to the Company's Obligation to Sell. Each of
the Purchasers
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understands that the Company's obligation to sell the Series D and Series E
Preferred Stock and the Class A and Class B Warrants set forth in Section 12
above, and file the Statement of Designations for the Series D and Series E
Preferred Stock, are conditioned upon:
(i) The receipt and acceptance by the Company of a duly
executed copy of this Agreement and all duly executed all other parties
thereto;
(ii) Delivery into escrow by each of the Purchasers of good
cleared funds as payment in full for the purchase of the Securities;
(iii) All representations and warranties of each of the
Purchasers contain herein shall remain true and correct in all material
respects as of each Closing Date; and
(iv) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the
Preferred Stock and Warrants, or shall have the availability of exemptions
therefrom. At each Closing Date, the sale and issuance of the Preferred
Stock, Warrants, and the proposed issuance of the Common Stock underlying
the Preferred Stock, and Warrants shall be legally permitted by all laws
and regulations to which the Purchasers each of the Purchasers and the
Company are subject.
Section 14. Conditions to Purchaser's Obligation to Purchase. The
Company understands that each Purchaser's obligation to purchase the Series D
and Series E Preferred Stock, and Warrants as set forth in Section 12 above, is
conditioned upon:
(i) Acceptance by each of the Purchasers of a duly executed
Purchase Agreement and all duly executed Exhibits hereto for the sale of
the Securities;
(ii) Delivery of the original Series D and Series E Preferred
Stock and Warrants as set forth in Section 12 above;
(iii) All representations and warranties of the Company
contained herein shall remain true and correct as of the Closing Date;
(iv) Receipt of opinion of counsel and proof that both
Statement of Designations have been filed;
(v) The Company shall have obtained all permits and
qualifications required by any state for the offer and sale of the Series
D and Series E Preferred Stock and Warrants (as set forth in Section 12
above), or shall have the availability of exemptions therefrom. At the
Closing Date, the sale and issuance of the Series D and Series E Preferred
Stock and Warrants (as set forth in Section 12 above) shall be legally
permitted by all laws and regulations to which the Company and Purchasers
are subject;
(vi) Payment of fees as set forth in Section 15.6 below; and
(vii) Receipt of proof that the Statement of Designation for
the Series D
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<PAGE>
Preferred Stock and the Series E Preferred Stock has been filed with the
State of Texas.
Section 15. Miscellaneous.
15.1 Governing Law/Jurisdiction. This Agreement will be construed
and enforced in accordance with and governed by the laws of the State of New
York, except for matters arising under the Act, without reference to principles
of conflicts of law. Each of the parties consents to the jurisdiction of the
Southern District of the State of New York in connection with any dispute
arising under this Agreement and hereby waives, to the maximum extent permitted
by law, any objection, including any objection based on forum non conveniens, to
the bringing of any such proceeding in such jurisdictions. Each party hereby
agrees that if another party to this Agreement obtains a judgment against it in
such a proceeding, the party which obtained such judgment may enforce same by
summary judgment in the courts of any state or country having jurisdiction over
the party against whom such judgment was obtained, and each party hereby waives
any defenses available to it under local law and agrees to the enforcement of
such a judgment. Each party to this Agreement irrevocably consents to the
service of process in any such proceeding by the mailing of copies thereof by
registered or certified mail, postage prepaid, to such party at its address set
forth herein. Nothing herein shall affect the right of any party to serve
process in any other manner permitted by law.
15.2 Facsimile/Counterparts/Entire Agreement. Except as otherwise
stated herein, in lieu of the original, a facsimile transmission or copy of the
original shall be as effective and enforceable as the original. This Agreement
may be executed in counterparts which shall be considered an original document
and which together shall be considered a complete document. This Agreement and
Exhibits hereto constitute the entire agreement between the Purchaser and the
Company with respect to the subject matter hereof. This Agreement may be
amended only by a writing executed by all parties.
15.3 Severability. In the event that any provision of this Agreement
becomes or is declared by a court of competent jurisdiction to be illegal,
unenforceable or void, this Agreement shall continue in full force and effect
without said provision; provided that no such severability shall be effective if
it materially changes the economic benefit of this Agreement to any party.
15.4 Reliance by Company. Each Purchaser represents to the
Company that the representations and warranties of the Purchaser contained
herein are complete and accurate and may be relied upon by the Company in
determining the availability of an exemption from registration under federal and
state securities laws in connection with a private offering of securities.
15.5 Confidentiality. Except as required by the Company pursuant to
securities laws, each of the Company and each of the Purchaser agrees to keep
confidential and not to disclose to or use for the benefit of any third party
the terms of this Agreement or any other information which at any time is
communicated by or obtained from the other party as being confidential without
the prior written approval of the other party; provided, however, that this
provision shall not apply to information which, at the time of disclosure, is
already part of the public domain (except by breach of this Agreement) and
information which is required to be disclosed by law.
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<PAGE>
15.6 Legal Fees and Expenses. Each of the parties shall pay its own
fees and expenses (including the fees of any attorneys, accountants, appraisers
or others engaged by such party) in connection with this Agreement and the
transactions contemplated hereby except that the Company agrees to pay to (i)
Goldstein, Goldstein & Reis, LLP Twenty Five Thousand ($25,000) Dollars, in cash
out of escrow from the proceeds of the Closing of the initial Series D and
Series E Preferred Stock and Warrant Purchases and Five Thousand ($5,000)
Dollars, in cash, payable out of escrow from the proceeds of the Closing of the
Call provision as set forth in Section 4.1 herein, for administrative, and
escrow fees, (ii) the placement agents, Class A Warrants to purchase an
aggregate of 339,623 shares of Common Stock on the Closing of the initial Series
D Preferred Stock and Ninety Thousand ($90,000) Dollars, in cash, payable out of
escrow from the proceeds from the Closing of the initial Series D Preferred
Stock, and Warrant Purchases, and Class A Warrants to purchase 113,208 shares of
Common Stock on the Closing of the Call for additional Series D Preferred Stock,
and Thirty Thousand ($30,000) Dollars, in cash, payable out of escrow from the
proceeds on the Closing of the Call for additional Series D Preferred Stock as
set forth in Section 4.1,all of which shall be payable pursuant to the Escrow
Agreement. If for any reason the transactions contemplated by this Agreement
are not consummated, each of the parties hereto shall promptly return to the
other parties all schedules, documents, instruments, work papers or other
written information, without retaining copies thereof, previously furnished by
it as a result of this Agreement or in connection herewith.
15.7 Authorization. Each of the parties hereto represents that the
individual executing this Agreement on its behalf has been duly and
appropriately authorized to execute the Agreement.
15.8 Closing Bid Price. All references to the closing bid price
of the Common Stock shall be as reported by Bloomberg, L.P.
15.9 Notices. All notices, demands, requests, consents,
approvals, and other communications required or permitted hereunder shall be in
writing and, unless otherwise specified herein, shall be (i) personally served,
(ii) deposited in the mail, registered or certified, return receipt requested,
postage prepaid, (iii) delivered by reputable air courier service with charges
prepaid, or (iv) transmitted by hand delivery, telegram, or facsimile, addressed
as set forth below or to such other address as such party shall have specified
most recently by written notice. Any notice or other communication required or
permitted to be given hereunder shall be deemed effective (a) upon hand delivery
or delivery by facsimile, with accurate confirmation generated by the
transmitting facsimile machine, at the address or number designated below (if
delivered on a business day during normal business hours where such notice is to
be received), or the first business day following such delivery (if delivered
other than on a business day during normal business hours where such notice is
to be received) or (b) on the second business day following the date of mailing
by reputable courier service, fully prepaid, addressed to such address, or upon
actual receipt of such mailing, whichever shall first occur. The addresses for
such communications shall be:
(i) If to the Company:
Data Race, Inc.
12400 Network Boulevard
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<PAGE>
San Antonio, Texas 78249
Attention: Greg Skalla
Telephone: (210) 263-2000
Facsimile: (210) 558-0365
(ii) If to the Purchasers, at the addresses and numbers listed on
Schedule A and Schedule B annexed hereto.
Any party hereto may from time to time change its address or facsimile
number for notices under this Section by giving at least ten (10) days' prior
written notice of such changed address or facsimile number to the other parties
hereto.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
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<PAGE>
IN WITNESS WHEREOF, this Purchase Agreement was duly executed on the
date first written below.
Agreed to and Accepted on
this 24th day of July, 1998
DATA RACE, INC.
By /s/ Gregory T. Skalla
----------------------------
Gregory T. Skalla
Vice President-Finance
Chief Financial Officer SOVEREIGN PARTNERS L.P.
"A" Purchaser
By /s/ Mark Valentine
-----------------------------
Mark Valentine
DOMINION CAPITAL FUND, LTD.
"A" Purchaser
By /s/ Mark Valentine
-----------------------------
Mark Valentine
FIRST CAPITAL GROUP OF TEXAS II, L.P.,
"B" Purchaser
By: First Capital Group Investment
Partners, LP, its General Partner
By: First Capital Group Management
Company, LP, its General Partner
By /s/ Jeffrey P. Blanchard
------------------------------------
Jeffrey P. Blanchard, Managing Partner
20
<PAGE>
SCHEDULE A
----------
<TABLE>
<CAPTION>
Purchaser Initial $ Amount of Initial Number of
Name and Address Purchase Price Series D Preferred Stock Class A Warrant Shares
- -------------------------- -------------- ------------------------ ----------------------
<S> <C> <C> <C>
Sovereign Partners L.P. $1,000,000 $1,000,000 226,415
365 Bay Street, 10th Fl.
Toronto, Ontario M5H 2V2
Dominion Capital
Fund, Ltd. $ 500,000 $ 500,000 113,208
365 Bay Street, 10th Fl.
Toronto, Ontario M5H 2V2
</TABLE>
21
<PAGE>
SCHEDULE B
----------
<TABLE>
<CAPTION>
Purchaser Initial $ Amount of Initial Number of
Name and Address Purchase Price Series E Preferred Stock Class B Warrant Shares
- ------------------------ -------------- ------------------------ ----------------------
<S> <C> <C> <C>
First Capital Group of
Texas II, L.P. $750,000 $750,000 140,625
P.O. Box 15616
San Antonio, TX 78212
</TABLE>
22
<PAGE>
EXHIBIT 10.2
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated the 24th day of July, 1998,
between the entities listed on Schedules A and B (the "A Purchasers" and "B
Purchasers" or collectively, the "Holders"), issued pursuant to the Purchase
Agreement of even date herewith (the "Purchase Agreement"), and DATA RACE, INC.,
a Texas corporation having its principal place of business at 12400 Network
Blvd., San Antonio, Texas 78249 (the "Company").
WHEREAS, simultaneously with the execution and delivery of this
Agreement, the Holders have agreed to purchase from the Company, pursuant to the
Purchase Agreement an aggregate of Four Million ($4,000,000) Dollars principal
amount of Preferred Stock and Warrants to purchase an aggregate of Eight Hundred
Forty Seven Thousand Two Hundred eighty Eight (847,288) shares of Common Stock.
The Common Stock of the Company underlying the Preferred Stock is referred to as
the "Conversion Shares", and the Common Stock of the Company underlying the
Warrants is referred to as the "Warrant Shares" (capitalized terms defined in
the Purchase Agreement and not otherwise defined herein have the meanings
specified in the Purchase Agreement); and
WHEREAS, the Company desires to grant to the Holders the registration
rights set forth herein.
NOW, THEREFORE, the parties hereto mutually agree as follows:
Section 1. Registrable Securities. As used herein the term
Registrable Securities means the Conversion Shares, and the Warrant Shares;
provided, however, that with respect to any particular Registrable Security,
such security shall cease to be a Registrable Security when, as of the date of
determination, (i) it has been effectively registered under the Securities Act
of 1933, as amended (the Securities Act) and disposed of pursuant thereto,
(ii) registration under the Securities Act is no longer required for the
immediate public distribution of such security as a result of the provisions of
Rule 144, or (iii) it has ceased to be outstanding. In the event of any merger,
reorganization, consolidation, recapitalization or other change in corporate
structure affecting the Common Stock, such adjustment shall be made in the
definition of Registrable Security as is appropriate in order to prevent any
dilution or enlargement of the rights granted pursuant to this Section 1.
Section 2. Restrictions on Transfer. The Holders acknowledge and
understand that prior to the registration of the Conversion Shares and Warrant
Shares as provided herein, the Securities are "restricted securities" as defined
in Rule 144 promulgated under the Securities Act. The Holders understand that
no disposition or transfer of the Securities may be made by Holder in the
absence of (i) an opinion of counsel reasonably satisfactory to the Company that
such transfer may be made or (ii) a registration statement under the Securities
Act is then in effect with respect thereto.
Section 3. Registration Rights. The Company agrees that it will
prepare and file with the Securities and Exchange Commission ("SEC"), within
thirty (30) days after receipt of
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<PAGE>
written demand by a Holder ("Demand Date"), a registration statement which shall
include any and all amendments thereto (the "Registration Statement"), or in the
event more than one Registration Statement is required to be filed to include
such items as newly authorized shares, such further Registration Statement shall
be filed thirty (30) days after the issuance of such newly authorized shares or
other event, as the case may be. In the event that such Registration Statement
is not effective within ninety (90) days after the Demand Date, then Section
3(e) liquidated damages shall apply, at the sole expense of the Company (except
as provided in Section 3(c) hereof), in respect of all holders of Registrable
Securities, so as to permit resale of the Registrable Securities under the
Securities Act, provided, the Company shall not be obligated to take any action
to effect any such registration, qualification or compliance pursuant to this
Section 3(a) in any jurisdiction in which the Company would be required to
qualify as a dealer in securities, under the securities or blue sky laws of such
jurisdiction.
The Company agrees that it will cause the Registration Statement to
become effective within ninety (90) days after the Demand Date. The number of
Registrable Securities to be registered shall be two hundred (200%) percent of
the number of shares that would be required if all of the Registrable Securities
were converted in accordance with the Statement of Designation, on a date which
is five (5) business days prior to the filing of the Registration Statement, or
such lower number of shares as may be issuable in accordance with Nasdaq
regulations.
(b) The Company will maintain the Registration Statement or post-
effective amendment filed under this Section 3 hereof current under the
Securities Act until the earlier of (i) the date that all of the Registrable
Securities have been sold pursuant to the Registration Statement, (ii) the date
that the Registrable Securities may be sold under the provisions of Rule 144 or
(iii) two years three months after the effective date of the Registration
Statement.
(c) All fees, disbursements and out-of-pocket expenses and costs
incurred by the Company in connection with the preparation and filing of the
Registration Statement under Section 3(a) and in complying with applicable
securities and Blue Sky laws (including, without limitation, all attorneys'
fees) shall be borne by the Company. The Holders shall bear the cost of
underwriting discounts and commissions, if any, applicable to the Registrable
Securities being registered and all of other the fees and expenses of such
registration, including of its counsel and such other expenses as are necessary
to qualify the sale of Securities in compliance with any state Blue Sky laws.
The Company shall qualify any of the securities for sale in such states as such
Holders reasonably designate and shall furnish indemnification in the manner
provided in Section 9 hereof. However, the Company shall not be required to
qualify in any state which will require an escrow or other restriction relating
to the Company and/or the sellers. The Company at its expense will supply the
Holders with copies of such Registration Statement and the prospectus or
offering circular included therein and other related documents in such
quantities as may be reasonably requested by the Holders.
(d) The Company shall not be required by this Section 3 to include
Holder's Registrable Securities in the Amended Registration Statement which is
to be filed if, in the opinion of counsel for both the Holders and the Company
(or, should they not agree, in the opinion of another counsel experienced in
securities law matters acceptable to counsel for the Holder and the Company) the
proposed offering or other transfer as to which such registration is requested
is
2
<PAGE>
exempt from applicable federal and state securities laws and would result in all
purchasers or transferees obtaining securities which are not restricted
securities, as defined in Rule 144 under the Securities Act.
(e) In the event the Registration Statement to be filed by the
Company pursuant to Section 3(a) above is not filed by the Company by the
thirtieth (30th) day after the Demand Date, or if the Registration Statement is
not declared effective by the SEC by the ninetieth (90th) day after the Demand
Date (the Effective Date), then the Company will pay, in cash, to the Holders
who made such a demand, on a pro-rata basis by wire transfer, as liquidated
damages for such failure and not as a penalty, two (2%) percent of the principal
amount of the outstanding Preferred Stock and Warrants that have been exercised
by the Holder, each month thereafter until the Registration Statement has been
filed and/or declared effective. The liquidated damages shall be payable within
seven (7) calendar days of written demand by the Holder.
If the Company does not remit the damages to the Holder as set forth
above, the Company will pay the to the Holders the reasonable costs of
collection, including attorneys fees, in addition to the liquidated damages.
Such payment shall be made to the Holders in cash immediately if the
registration of the Securities are not effected; provided, however, that the
payment of such liquidated damages shall not relieve the Company from its
obligations to register the Securities pursuant to this Section. The
registration of the Securities pursuant to this provision shall not affect or
limit Holder's other rights or remedies as set forth in this Agreement.
(f) No provision contained herein shall preclude the Company from
selling securities pursuant to any registration statement in which it is
required to include Registrable Securities pursuant to this Section 3.
(g) The initial number of Registrable Securities included in any
Registration Statement and each increase in the number of Registrable Securities
included therein shall be allocated pro rata among the Holders based on the
number of Registrable Securities held by each Holder at the time of such
establishment or increase, as the case may be. In the event a Holder shall sell
or otherwise transfer any of such holder's Registrable Securities, each
transferee shall be allocated a pro rata portion of the then remaining number of
Registrable Securities included in such Registration Statement for such
transferor. Any shares of Common Stock included in a Registration Statement and
which remain allocated to any person or entity which does not hold any
Registrable Securities shall be allocated to the remaining holders, pro rata
based on the number of Registrable Securities then held by such Holders. For
the purposes hereof, the number of Registrable Securities held by any Holder
shall be determined as if all Preferred Stock and Warrants then outstanding were
then converted into or exercised for Registrable Securities (whether or not such
securities are then convertible or exercisable).
Section 4. Cooperation with Company. Holders will cooperate with the
Company in all respects in connection with this Agreement, including, timely
supplying all information reasonably requested by the Company and executing and
returning all documents reasonably requested in connection with the registration
and sale of the Registrable Securities.
Section 5. Registration Procedures. Whenever the Company is required
by the
3
<PAGE>
provisions of this Agreement to effect the registration of any of the
Registrable Securities under the Securities Act, the Company shall (except as
otherwise provided in this Agreement), as expeditiously as possible:
(a) prepare and file with the Commission such amendments and
supplements to such registration statement and the Prospectus used in connection
therewith as may be necessary to keep such registration statement effective as
per Section 3(b) herein and to comply with the provisions of the Securities Act
with respect to the sale or other disposition of all securities covered by such
registration statement when the Holder or Holders of such securities shall
desire to sell or otherwise dispose of the same (including prospectus
supplements with respect to the sales of securities from time to time in
connection with a registration statement pursuant to Rule 415 under the
Securities Act);
(b) furnish to each Holder such numbers of copies of a summary
prospectus or other prospectus, including a preliminary prospectus or any
amendment or supplement to any prospectus, in conformity with the requirements
of the Securities Act, and such other documents, as such Holder may reasonably
request in order to facilitate the public sale or other disposition of the
securities owned by such Holder;
(c) use its best efforts to register and qualify the securities
covered by such registration statement under such other securities or blue sky
laws of such jurisdictions as the Holder, shall reasonably request, and do any
and all other acts and things which may be necessary or advisable to enable each
Holder to consummate the public sale or other disposition in such jurisdiction
of the securities owned by such Holder, except that the Company shall not for
any such purpose be required to qualify to do business as a foreign corporation
in any jurisdiction wherein it is not so qualified or to file therein any
general consent to service of process;
(d) list such securities on the Nasdaq National Market System or any
securities exchange on which the Common Stock is then listed, if the listing of
such securities is then permitted under the rules of such system or exchange;
(e) enter into and perform its obligations under an underwriting
agreement, if the offering is an underwritten offering, in usual and customary
form, with the managing underwriter or underwriters of such underwritten
offering;
(f) notify each Holder of Registrable Securities covered by such
registration statement, at any time when a prospectus relating thereto covered
by such registration statement is required to be delivered under the Securities
Act, of the happening of any event of which it has knowledge as a result of
which the prospectus included in such registration statement, as then in effect,
includes an untrue statement of a material fact or omits to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading in the light of the circumstances then existing.
Section 6. Assignment. The rights granted the Holders under this
Agreement shall not be assigned without the written consent of the Company,
which consent shall not be unnecessarily withheld. In the event of a transfer
of the rights granted under this Agreement, the
4
<PAGE>
Holders agree that the Company may require that the transferee comply with
reasonable conditions as determined in the discretion of the Company. This
Agreement is binding upon and inures to the benefit of the parties hereto and
their respective heirs, successors and permitted assigns.
Section 7. Termination of Registration Rights. The rights granted
pursuant to this Agreement shall terminate as to each Holder (and permitted
transferees or assignees) upon the occurrence of any of the following:
(a) all of that particular Holder's securities subject to this
Agreement have been registered;
(b) such Holder's securities subject to this Agreement may be sold
without such registration pursuant to Rule 144 promulgated by the SEC pursuant
to the Securities Act; or
(c) all of such Holder's securities subject to this Agreement can be
sold pursuant to Rule 144(k).
Section 8. Indemnification.
(a) The Company and all key operating subsidiaries agree to indemnify
and hold harmless the Holders and each officer, director of the Holders, or
person, if any, who controls each Holder within the meaning of the Securities
Act (Distributing Holders) against any losses, claims, damages or liabilities,
joint or several (which shall, for all purposes of this Agreement, include, but
not be limited to, all costs of defense and investigation and all attorneys'
fees), to which the Distributing Holders may become subject, under the
Securities Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based upon any
untrue statement or alleged untrue statement of any material fact contained in
the Registration Statement, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading; provided, however, that neither the Company
nor all key operating subsidiaries will be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement or omission or alleged omission
made in the Registration Statement, preliminary prospectus, final prospectus,
offering circular, notification or amendment, or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company by
the Distributing Holders, specifically for use in the preparation thereof. This
Section shall not inure to the benefit of any Distributing Holder with respect
to any person asserting such loss, claim, damage or liability who purchased the
Registrable Securities which are the subject thereof if the Distributing Holder
failed to send or give (in violation of the Securities Act or the rules and
regulations promulgated thereunder) a copy of the prospectus contained in the
Registration Statement to such person at or prior to the written confirmation to
such person of the sale of such Registrable Securities, where the Distributing
Holder was obligated to do so under the Securities Act or the rules and
regulations promulgated hereunder. This indemnity agreement will be in addition
to any liability which the Company may otherwise have.
(b) Each Distributing Holder agrees that it will indemnify and hold
harmless the
5
<PAGE>
Company and each officer, director of the Company, or person, if any, who
controls the Company and all key operating subsidiaries within the meaning of
the Securities Act, against any losses, claims, damages or liabilities (which
shall, for all purposes of this Agreement, include, but not be limited to, all
costs of defense and investigation and all attorneys' fees) to which the Company
and all key operating subsidiaries or any such officer, director or controlling
person may become subject under the Securities Act or otherwise, insofar as such
losses claims, damages or liabilities (or actions in respect thereof); arise out
of or are based upon any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement prepared by the Company
and all key operating subsidiaries, or any related preliminary prospectus, final
prospectus, offering circular, notification or amendment or supplement thereto,
or arise out of or are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, but in each case only to the extent that such
untrue statement or alleged untrue statement or omission or alleged omission was
made in such Registration Statement, preliminary prospectus, final prospectus,
offering circular, notification or amendment or supplement thereto in reliance
upon, and in conformity with, written information furnished to the Company and
all key operating subsidiaries by such Distributing Holder, specifically for use
in the preparation thereof. This indemnity agreement will be in addition to any
liability which the distributing Holders may otherwise have.
(c) Promptly after receipt by an indemnified party under this Section
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against the indemnifying party under this
Section, notify the indemnifying party of the commencement thereof; but the
omission so to notify the indemnifying party will not relieve the indemnifying
party from any liability which it may have to any indemnified party otherwise
than as to the particular item as to which indemnification is then being sought
solely pursuant to this Section, except where such omission materially
prejudices the indemnifying party's rights. In case any such action is brought
against any indemnified party, and it notifies the indemnifying party of the
commencement thereof, the indemnifying party will be entitled to participate in,
and, to the extent that it may wish, jointly with any other indemnifying party
similarly notified, assume the defense thereof, subject to the provisions herein
stated and after notice from the indemnifying party to such indemnified party of
its election so to assume the defense thereof, the indemnifying party will not
be liable to such indemnified party under this Section for any legal or other
expenses subsequently incurred by such indemnified party in connection with the
defense thereof other than reasonable costs of investigation, unless the
indemnifying party shall not pursue the action to its final conclusion. The
indemnified party shall have the right to employ separate counsel in any such
action and to participate in the defense thereof, but the fees and expenses of
such counsel shall not be at the expense of the indemnifying party if the
indemnifying party has assumed the defense of the action with counsel reasonably
satisfactory to the indemnified party; provided that the fees and expenses of
such counsel shall be at the expense of the indemnifying party if (i) the
employment of such counsel has been specifically authorized in writing by the
indemnifying party, or (ii) the named parties to any such action (including any
impleaded parties) include both the indemnified party and the indemnifying party
and the indemnified party shall have been reasonably advised by such counsel
that there may be one or more legal defenses available to the indemnifying party
different from or in conflict with any legal defenses which may be available to
the indemnified party (in which case the indemnifying party shall not have the
right to assume the defense of such action on behalf of the indemnified party,
it being understood, however, that the indemnifying party shall, in
6
<PAGE>
connection with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable only for the reasonable fees and
expenses of one separate firm of attorneys for all indemnified parties, which
firm shall be designated in writing by the indemnified parties holding a
majority of the Registrable Securities). No settlement of any action against an
indemnified party shall be made without the prior written consent of the
indemnified party, which consent shall not be unreasonably withheld.
Section 9. Contribution. In order to provide for just and equitable
contribution under the Securities Act in any case in which (i) the Distributing
Holders, or the Company or all key operating subsidiaries, makes a claim for
indemnification, but is judicially determined (by the entry of a final judgment
or decree by a court of competent jurisdiction and the expiration of time to
appeal or the denial of the last right of appeal) that such indemnification may
not be enforced in such case notwithstanding the fact that the express
provisions of this Agreement provide for indemnification in such case, or (ii)
contribution under the Securities Act may be required on the part of any
Distributing Holder, or the Company or all key operating subsidiaries, then the
Company and all key operating subsidiaries and the applicable Distributing
Holder shall contribute to the aggregate losses, claims, damages or liabilities
to which they may be subject (which shall, for all purposes of this Agreement,
include, but not be limited to, all costs of defense and investigation and all
attorneys' fees), in either such case (after contribution from others) on the
basis of relative fault as well as any other relevant equitable considerations.
The relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Company and all key operating subsidiaries on the one hand or
the applicable Distributing Holder, on the other hand, and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission. The Company and all key operating subsidiaries and
the Distributing Holders agree that it would not be just and equitable if
contribution pursuant to this Section were determined by pro rata allocation or
by any other method of allocation which does not take account of the equitable
considerations referred to in this Section. The amount paid or payable by an
indemnified party as a result of the losses, claims, damages or liabilities (or
actions in respect thereof) referred to above in this Section shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
Section 10. "Piggy-Back" Registration. The Holders of this Registration
Rights Agreement shall have the right to include all Registrable Securities as
part of any registration of securities filed by the Company (other than that
required to be filed pursuant to the terms herein, and in connection with a
transaction contemplated by Rule 145(a) promulgated under the Act or pursuant to
Form S-8) and must be notified in writing of such filing; provided, however,
that the Holders agree it shall not have any piggy-back registration rights
pursuant to this Agreement if the Registrable Securities may be sold in the
United States pursuant to the provisions of Rule 144. Holders shall have five
(5) business days to notify the Company in writing as to whether the Company is
to include Holders or not include Holders as part of the registration; provided,
however, that if any registration pursuant to this Section shall be
underwritten, in whole or in part, the Company may require that the Registrable
Securities requested for inclusion pursuant to this Section
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be included in the underwriting on the same terms and conditions as the
securities otherwise being sold through the underwriters and the Holders agree
to enter into an underwriting agreement in customary form reasonably acceptable
to the Holders. If in the good faith judgment of the underwriter evidenced in
writing of such offering only a limited number of Registrable Securities should
be included in such offering, or no such shares should be included, the Holders,
and all other selling stockholders, shall be limited to registering such
proportion of their respective shares as shall equal the proportion that the
number of shares of selling stockholders permitted to be registered by the
underwriter in such offering bears to the total number of all shares then held
by all selling stockholders desiring to participate in such offering. Those
Registrable Securities which are excluded from an underwritten offering pursuant
to the foregoing provisions of this Section (and all other Registrable
Securities held by the selling stockholders) shall be withheld from the market
by the Holders thereof for a period, not to exceed ninety (90) days, which the
underwriter may reasonably determine is necessary in order to effect such
underwritten offering. The Company shall have the right to terminate or withdraw
any registration initiated by it under this Agreement prior to the effectiveness
of such registration whether or not any Holder elected to include securities in
such registration. All registration expenses incurred by the Company in
complying with this Agreement shall be paid by the Company, exclusive of
underwriting discounts, commissions and legal fees and expenses for counsel to
the Holders.
Section 11. Notices. Any notice pursuant to this Agreement by the
Company or by the Holder shall be in writing and shall be deemed to have been
duly given if delivered by (i) hand, (ii) by facsimile and followed by mail
delivery or (iii) if mailed by certified mail, return receipt requested, postage
prepaid, addressed as follows:
(a) If to the Holders, to its, his or her address set forth on
Schedule A and Schedule B attached to this Agreement.
(b) If to the Company, at the address set forth herein, or to such
other address as any such party may designate by notice to the other party.
Notices shall be deemed given at the time they are delivered personally or five
(5) days after they are mailed in the manner set forth above. If notice is
delivered by facsimile to the Company and followed by mail, delivery shall be
deemed given two (2) days after such facsimile is sent.
Section 12. Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
Section 13. Headings. The headings in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement.
Section 14. Governing Law, Venue. This Agreement will be construed
and enforced in accordance with and governed by the laws of the State of New
York, except for matters arising under the Securities Act, without reference to
principles of conflicts of law. Each of the parties consents to the
jurisdiction of the federal courts whose districts encompass any part of the
State of New York in connection with any dispute arising under this Agreement
and hereby waives, to the maximum extent permitted by law, any objection,
including any objection based on forum non
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conveniens, to the bringing of any such proceeding in such jurisdictions. Each
party hereby agrees that if another party to this Agreement obtains a judgment
against it in such a proceeding, the party which obtained such judgment may
enforce same by summary judgment in the courts of any state or country having
jurisdiction over the party against whom such judgment was obtained, and each
party hereby waives any defenses available to it under local law and agrees to
the enforcement of such a judgment. Each party to this Agreement irrevocably
consents to the service of process in any such proceeding by the mailing of
copies thereof by registered or certified mail, postage prepaid, to such party
at its address set forth herein. Nothing herein shall affect the right of any
party to serve process in any other manner permitted by law.
Section 14. Severability/Defined Terms. If any provision of this
Agreement shall for any reason be held invalid or unenforceable, such invalidity
or unenforceability shall not affect any other provision hereof and this
Agreement shall be construed as if such invalid or unenforceable provision had
never been contained herein. Terms not otherwise defined herein shall be
defined in accordance with the Purchase Agreement.
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IN WITNESS WHEREOF, the parties hereto have caused this Registration
Rights Agreement to be duly executed, on the day and year first above written.
Attest: DATA RACE, INC.
By: /s/ Gregory T. Skalla By: /s/ Gregory T. Skalla
---------------------- -------------------------------------
Name: Gregory T. Skalla Name: Gregory T. Skalla
Title: Secretary Title: Vice President-Finance
Chief Financial Officer
SOVEREIGN PARTNERS L.P.
"A" Purchaser
By /s/ Mark Valentine
--------------------------------------
Mark Valentine
DOMINION CAPITAL FUND, LTD.
"A" Purchaser
By /s/ Mark Valentine
--------------------------------------
Mark Valentine
FIRST CAPITAL GROUP OF TEXAS II, L.P.,
"B" Purchaser
By: First Capital Group Investment
Partners, LP, its General Partner
By: First Capital Group Management
Company, LP, its General Partner
By /s/ Jeffrey P. Blanchard
--------------------------------------
Jeffrey P. Blanchard, Managing Partner
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<PAGE>
EXHIBIT 10.3
THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY
NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT.
FORM OF CLASS A
STOCK PURCHASE WARRANT
To Purchase _____ Shares of Common Stock of
DATA RACE, INC.
THIS CERTIFIES that, for value received, _________ (the "Investor"),
is entitled, upon the terms and subject to the conditions hereinafter set forth,
at any time upon the earlier of (i) ninety-one (91) days after the date hereof,
or (ii) the Effective Date of the Registration Statement which shall include the
Warrant Shares, and on or prior to ___________, which is two (2) years after the
date of issuance (the "Termination Date"), but not thereafter, to subscribe for
and purchase from DATA RACE, INC., a Texas corporation (the "Company"),
__________ _____________ (_________) shares of Common Stock (the "Warrant
Shares"). The purchase price of one share of Common Stock (the "Exercise Price")
under this Warrant shall be equal to [the lesser of (i) one hundred twenty
percent (120%) of the average of the three lowest closing bid prices of the
Common Stock during the twenty-two (22) trading days immediately preceding the
date this Warrant was issued, or (ii) US $0.80.] The Exercise Price and the
number of shares for which the Warrant is exercisable shall be subject to
adjustment as provided herein. This Warrant is being issued in connection with
the Purchase Agreement dated on or about July , 1998 for preferred stock and
warrants in the amount of Four Million ($4,000,000) Dollars (the "Agreement")
between the Company and Investor and certain other investors and is subject to
its terms. In the event of any conflict between the terms of this Warrant and
the Agreement, the Agreement shall control.
1. Title of Warrant. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares
of Common Stock which may be issued upon the exercise of rights represented by
this Warrant will, upon exercise of the rights represented by this Warrant, be
duly authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Exercise of the purchase rights represented
by this Warrant may be made, in whole or in part, upon the earlier of (i) ninety
one (91) days after the date hereof, or (ii) the Effective Date of the
Registration Statement which shall include the Warrant Shares, and before the
close of business on the Termination Date by the surrender of this Warrant
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and the Notice of Exercise annexed hereto duly executed, at the office of the
Company located at 12400 Network Blvd., San Antonio, Texas 78249, and upon
payment of the Exercise Price of the shares thereby purchased; whereupon the
holder of this Warrant shall be entitled to receive a certificate for the number
of shares of Common Stock so purchased. Certificates for shares purchased
hereunder shall be delivered by the Company, or the Company shall have
instructed its Transfer Agent to deliver to the holder hereof within five
business days after the date on which this Warrant shall have been exercised as
aforesaid. Payment of the Exercise Price of the shares may be by certified check
or cashier's check or by wire transfer to an account designated by the Company
in an amount equal to the Exercise Price multiplied by the number of shares
being purchased.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for shares
of Common Stock upon the exercise of this Warrant shall be made without charge
to the holder hereof for any issue or transfer tax or other incidental expense
in respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. Restrictions on Transfer.
(a) This Warrant has been issued subject to investment
representations of the original Holder hereof and may be transferred or
exchanged only in compliance with the Securities Act and applicable state
securities laws and in compliance with the restrictions on transfer provided in
the Agreement. The transferee shall be bound, as the original Holder by the same
representations and terms described herein and under the Agreement. This Warrant
and any Warrant Shares may not be sold, transferred, pledged, hypothecated or
otherwise disposed of except as follows: (i) to a person who, in the opinion of
counsel to the Company, is a person to whom this Warrant or the Warrant Shares
may legally be transferred without registration and without the delivery of a
current prospectus under the Act with respect thereto, and then only against
receipt of an agreement of such person to comply with the provisions of this
Section 6(a) with respect to any resale or other disposition of such securities;
or (ii) to any person upon delivery of a prospectus then meeting the
requirements of the Act relating to such securities and the offering thereof for
such sale or disposition, and thereafter to all successive assignees.
(b) Unless the Warrant Shares have been registered under the Act, or
exempt from registration, upon exercise of any of the Warrant and the issuance
of any of the Warrant Shares, all certificates representing Warrant Shares shall
bear on the face thereof substantially the following legend:
2
<PAGE>
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH
SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID ACT."
7. Closing of Books. The Company will at no time close its
shareholder books or records in any manner which interferes with the timely
exercise of this Warrant.
8. No Rights as Shareholder until Exercise. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise thereof. If, however, at the time of the
surrender of this Warrant and purchase the holder hereof shall be entitled to
exercise this Warrant, the shares so purchased shall be and be deemed to be
issued to such holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been exercised.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
or stock certificate, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and upon reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and cancellation
of such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of this Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day
for the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a legal
holiday.
11. Effect of Certain Events. In case the Company shall at any time
prior to the Termination Date effect a Sale or Merger Transaction, the holder of
this Warrant shall have the right thereafter to purchase, by exercise of this
Warrant and payment of the aggregate Exercise Price in effect immediately prior
to such action, the kind and amount of shares and other securities and property
which it would have owned or have been entitled to receive after the happening
of such transaction had this Warrant been exercised immediately prior thereto.
The holder hereof shall be given at least ten days notice prior to the effective
date of such transaction and shall have the right to exercise this Warrant
immediately prior to the transaction, whether or not this Warrant is then
exercisable, and to participate in such transaction on the same basis as other
holders of Common Stock. In the event this Warrant is being exercised under such
circumstances immediately prior to a Sale or Merger Transaction, then the
Warrant may be exercised on a cashless basis in which, in lieu of paying the
Exercise Price in cash, the holder may surrender the right to receive upon
exercise that number of shares of Common Stock determined by multiplying the
number of Warrant Shares to which the holder would otherwise be entitled by a
fraction, the numerator of which shall be the amount by which the then current
market price per share of Common Stock exceeds the Exercise
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<PAGE>
Price, and the denominator of which will be the then current market price per
share of Common Stock.
12. Adjustments of Exercise Price and Number of Warrant Shares. The
number and kind of securities purchasable upon the exercise of this Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following.
In case the Company shall (i) declare or pay a dividend in shares of
Common Stock or make a distribution in shares of Common Stock to holders of its
outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock,
(iii) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock, the number of Warrant Shares purchasable
upon exercise of this Warrant immediately prior thereto shall be adjusted so
that the holder of this Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Company which he would have owned
or have been entitled to receive had such Warrant been exercised in advance
thereof. An adjustment made pursuant to this paragraph shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
13. Voluntary Adjustment by the Company. The Company may at its
discretion, at any time during the term of this Warrant, reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant Shares or
number or kind of securities or other property purchasable upon the exercise of
this Warrant or the Exercise Price is adjusted, as herein provided, the Company
shall promptly mail by registered or certified mail, return receipt requested,
to the holder of this Warrant notice of such adjustment or adjustments setting
forth the number of Warrant Shares (and other securities or property)
purchasable upon the exercise of this Warrant and the Exercise Price of such
Warrant Shares after such adjustment, setting forth a brief statement of the
facts requiring such adjustment and setting forth computation by which such
adjustment was made. Such notice, in absence of manifest error, shall be
conclusive evidence of the correctness of such adjustment.
15. Purchase Rights. If at any time after the date hereof, the
Company grants, issues, sells or distributes any options, convertible securities
or rights to purchase stock, warrants, securities or other property pro rate to
the record holders of Common Stock (the "Purchase Rights"), then the holder of
this Warrant will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon full exercise of this Warrant (without taking into account any limitations
or restrictions on the timing or amount of exercise) immediately before the date
on which a record is taken for the grant, issuance, sale or distribution of such
Purchase Rights, or, if no such record is taken, the date as of which the record
holders of Common Stock are to be determined for the grant, issue or sale or
other distribution of such Purchase Rights.
16. Authorized Shares. The Company covenants that during the period
the Warrant is outstanding, it will reserve from its authorized and unissued
Common Stock a sufficient
4
<PAGE>
number of shares to provide for the issuance of Common Stock upon the exercise
of any purchase rights under this Warrant. The Company further covenants that
its issuance of this Warrant shall constitute full authority to its officers who
are charged with the duty of executing stock certificates to execute and issue
the necessary certificates for shares of the Company's Common Stock upon the
exercise of the purchase rights under this Warrant. The Company will take all
such reasonable action as may be necessary to assure that such shares of Common
Stock may be issued as provided herein without violation of any applicable law
or regulation, or of any requirements of the Nasdaq National Market or any
domestic securities exchange upon which the Common Stock may be listed.
17. Limitation on Number of Warrant Shares. Notwithstanding any
other provision herein, the Company shall not be obligated to issue any Warrant
Shares upon exercise of this Warrant or any other warrants issued pursuant to
the Agreement or conversion of any shares of Preferred Stock issued pursuant to
the Agreement ("Preferred Stock") if the issuance of such shares of Common Stock
would exceed that number of shares of Common Stock which the Company may issue
upon exercise of this Warrant or any other warrants issued pursuant to the
Agreement or conversion of any shares of Preferred Stock issued pursuant to the
Agreement (the "Exchange Cap") without breaching the Company's obligations under
the rules or regulations of The Nasdaq Stock Market, Inc., except that such
limitation shall not apply in the event that the Company (a) obtains the
approval of its stockholders as required by NASD Rule 4460 (or any successor
rule or regulation) for issuances of Common Stock in excess of such amount, or
(ii) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
holders of Warrants representing a majority of the Warrant Shares then issuable
upon exercise of outstanding Warrants. Until such approval or written opinion is
obtained, the holder of this Warrant shall not be issued, upon exercise of this
Warrant, Warrant Shares to the extent the number of shares of Common Stock
issued to such holder upon conversion of Preferred Stock plus the number of
Warrant Shares issued upon exercise of this Warrant would be greater than such
holder's Cap Allocation Amount (as defined in the applicable Statement of
Designations for such Preferred Stock). In the event the Company is prohibited
from issuing Warrant Shares as a result of the operation of this Section, the
Company shall redeem for cash those Warrant Shares which can not be issued at a
price equal to amount by which the then-current market price exceeds the
Exercise Price of such Warrant Shares as of the date of the attempted exercise.
18. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant shall
be construed and shall be given effect in all respects as if it had been issued
and delivered by the Company on the date hereof. This Warrant shall be binding
upon any successors or assigns of the Company. This Warrant shall constitute a
contract under the laws and jurisdictions of New York and for all purposes shall
be construed in accordance with and governed by the laws of said state without
regard to its conflict of law, principles or rules.
(b) Restrictions. The holder hereof acknowledges that the Common
Stock acquired upon the exercise of this Warrant, if not registered, may have
restrictions upon its resale imposed by state and federal securities laws.
5
<PAGE>
(c) Modification and Waiver. This Warrant and any provisions hereof
may be changed, waived, discharged or terminated only by an instrument in
writing signed by the party against which enforcement of the same is sought.
(d) Notices. Any notice, request or other document required or
permitted to be given or delivered to the holders hereof of the Company shall be
delivered or shall be sent by certified or registered mail, postage prepaid, to
each such holder at its address as shown on the books of the Company or to the
Company at the address set forth in the Agreement.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Class A Warrant to be
executed by its officers thereunto duly authorized.
Dated: July 24, 1998
DATA RACE, INC.
By:
-------------------------------------
Gregory T. Skalla, Vice President-
Finance and Chief Financial Officer
7
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EXHIBIT 10.4
THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH SECURITIES MAY
NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN
EXEMPTION THEREFROM UNDER SAID ACT.
FORM OF CLASS B
STOCK PURCHASE WARRANT
To Purchase _____ Shares of Common Stock of
DATA RACE, INC.
THIS CERTIFIES that, for value received, _________ (the "Investor"), is
entitled, upon the terms and subject to the conditions hereinafter set forth, at
any time one year after the date hereof, and on or prior to ___________, which
is two (2) years after the date of issuance (the "Termination Date") but not
thereafter, to subscribe for and purchase from DATA RACE, INC., a Texas
corporation (the "Company"), ____________________ (_________) shares of Common
Stock (the "Warrant Shares"). The purchase price of one share of Common Stock
(the "Exercise Price") under this Warrant shall be US $0.80. The Exercise Price
and the number of shares for which the Warrant is exercisable shall be subject
to adjustment as provided herein. This Warrant is being issued in connection
with the Purchase Agreement dated on or about July 24, 1998 for preferred stock
and warrants in the amount of Four Million ($4,000,000) Dollars (the
"Agreement") between the Company and Investor and certain other investors and is
subject to its terms. In the event of any conflict between the terms of this
Warrant and the Agreement, the Agreement shall control.
1. Title of Warrant. Prior to the expiration hereof and subject to
compliance with applicable laws, this Warrant and all rights hereunder are
transferable, in whole or in part, at the office or agency of the Company by the
holder hereof in person or by duly authorized attorney, upon surrender of this
Warrant together with the Assignment Form annexed hereto properly endorsed.
2. Authorization of Shares. The Company covenants that all shares of
Common Stock which may be issued upon the exercise of rights represented by this
Warrant will, upon exercise of the rights represented by this Warrant, be duly
authorized, validly issued, fully paid and nonassessable and free from all
taxes, liens and charges in respect of the issue thereof (other than taxes in
respect of any transfer occurring contemporaneously with such issue).
3. Exercise of Warrant. Exercise of the purchase rights represented by
this Warrant may be made, in whole or in part, upon the earlier of one year
after the date hereof, and before the close of business on the Termination Date
by the surrender of this Warrant and the Notice of Exercise annexed hereto duly
executed, at the office of the Company located at 12400 Network Blvd., San
Antonio, Texas 78249, and upon payment of the Exercise Price of the shares
thereby purchased; whereupon the holder of this Warrant shall be entitled to
receive a certificate for the number of shares of Common Stock so purchased.
Certificates for shares purchased hereunder shall
1
<PAGE>
be delivered by the Company, or the Company shall have instructed its Transfer
Agent to deliver to the holder hereof within five business days after the date
on which this Warrant shall have been exercised as aforesaid. Payment of the
Exercise Price of the shares may be by certified check or cashier's check or by
wire transfer to an account designated by the Company in an amount equal to the
Exercise Price multiplied by the number of shares being purchased.
4. No Fractional Shares or Scrip. No fractional shares or scrip
representing fractional shares shall be issued upon the exercise of this
Warrant.
5. Charges, Taxes and Expenses. Issuance of certificates for shares of
Common Stock upon the exercise of this Warrant shall be made without charge to
the holder hereof for any issue or transfer tax or other incidental expense in
respect of the issuance of such certificate, all of which taxes and expenses
shall be paid by the Company, and such certificates shall be issued in the name
of the holder of this Warrant or in such name or names as may be directed by the
holder of this Warrant; provided, however, that in the event certificates for
shares of Common Stock are to be issued in a name other than the name of the
holder of this Warrant, this Warrant when surrendered for exercise shall be
accompanied by the Assignment Form attached hereto duly executed by the holder
hereof; and provided further, that upon any transfer involved in the issuance or
delivery of any certificates for shares of Common Stock, the Company may
require, as a condition thereto, the payment of a sum sufficient to reimburse it
for any transfer tax incidental thereto.
6. Restrictions on Transfer.
(a) This Warrant has been issued subject to investment representations of
the original Holder hereof and may be transferred or exchanged only in
compliance with the Securities Act and applicable state securities laws and in
compliance with the restrictions on transfer provided in the Agreement. The
transferee shall be bound, as the original Holder by the same representations
and terms described herein and under the Agreement. This Warrant and any Warrant
Shares may not be sold, transferred, pledged, hypothecated or otherwise disposed
of except as follows: (i) to a person who, in the opinion of counsel to the
Company, is a person to whom this Warrant or the Warrant Shares may legally be
transferred without registration and without the delivery of a current
prospectus under the Act with respect thereto, and then only against receipt of
an agreement of such person to comply with the provisions of this Section 6(a)
with respect to any resale or other disposition of such securities; or (ii) to
any person upon delivery of a prospectus then meeting the requirements of the
Act relating to such securities and the offering thereof for such sale or
disposition, and thereafter to all successive assignees.
(b) Unless the Warrant Shares have been registered under the Act, or
exempt from registration, upon exercise of any of the Warrant and the issuance
of any of the Warrant Shares, all certificates representing Warrant Shares shall
bear on the face thereof substantially the following legend:
"THESE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"). SUCH
SECURITIES MAY NOT BE OFFERED OR SOLD OR TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN
2
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EXEMPTION THEREFROM UNDER SAID ACT."
7. Closing of Books. The Company will at no time close its shareholder
books or records in any manner which interferes with the timely exercise of this
Warrant.
8. No Rights as Shareholder until Exercise. This Warrant does not
entitle the holder hereof to any voting rights or other rights as a shareholder
of the Company prior to the exercise thereof. If, however, at the time of the
surrender of this Warrant and purchase the holder hereof shall be entitled to
exercise this Warrant, the shares so purchased shall be and be deemed to be
issued to such holder as the record owner of such shares as of the close of
business on the date on which this Warrant shall have been exercised.
9. Loss, Theft, Destruction or Mutilation of Warrant. The Company
represents and warrants that upon receipt by the Company of evidence reasonably
satisfactory to it of the loss, theft, destruction or mutilation of any Warrant
or stock certificate, and in case of loss, theft or destruction, of indemnity or
security reasonably satisfactory to it, and upon reimbursement to the Company of
all reasonable expenses incidental thereto, and upon surrender and cancellation
of such Warrant or stock certificate, if mutilated, the Company will make and
deliver a new Warrant or stock certificate of like tenor and dated as of such
cancellation, in lieu of this Warrant or stock certificate.
10. Saturdays, Sundays, Holidays, etc. If the last or appointed day for
the taking of any action or the expiration of any right required or granted
herein shall be a Saturday, Sunday or a legal holiday, then such action may be
taken or such right may be exercised on the next succeeding day not a legal
holiday.
11. Effect of Certain Events. In case the Company shall at any time prior
to the Termination Date effect a Sale or Merger Transaction, and the acquiror
does not assume the obligations hereunder so that the holder of this Warrant has
the right thereafter to purchase, by exercise of this Warrant and payment of the
aggregate Exercise Price in effect immediately prior to such action, the kind
and amount of shares and other securities and property which it would have owned
or have been entitled to receive after the happening of such transaction had
this Warrant been exercised immediately prior thereto. The holder hereof shall
be given at least ten days notice prior to the effective date of such
transaction and shall have the right to exercise this Warrant immediately prior
to the transaction, whether or not this Warrant is then exercisable, and to
participate in such transaction on the same basis as other holders of Common
Stock. In the event this Warrant is being exercised under such circumstances
immediately prior to a Sale or Merger Transaction, then the Warrant may be
exercised on a cashless basis in which, in lieu of paying the Exercise Price in
cash, the holder may surrender the right to receive upon exercise that number of
shares of Common Stock determined by multiplying the number of Warrant Shares to
which the holder would otherwise be entitled by a fraction, the numerator of
which shall be the amount by which the then current market price per share of
Common Stock exceeds the Exercise Price, and the denominator of which will be
the then current market price per share of Common Stock.
3
<PAGE>
12. Adjustments of Exercise Price and Number of Warrant Shares. The
number and kind of securities purchasable upon the exercise of this Warrant and
the Exercise Price shall be subject to adjustment from time to time upon the
happening of any of the following.
In case the Company shall (i) declare or pay a dividend in shares of Common
Stock or make a distribution in shares of Common Stock to holders of its
outstanding Common Stock, (ii) subdivide its outstanding shares of Common Stock,
(iii) combine its outstanding shares of Common Stock into a smaller number of
shares of Common Stock or (iv) issue any shares of its capital stock in a
reclassification of the Common Stock, the number of Warrant Shares purchasable
upon exercise of this Warrant immediately prior thereto shall be adjusted so
that the holder of this Warrant shall be entitled to receive the kind and number
of Warrant Shares or other securities of the Company which he would have owned
or have been entitled to receive had such Warrant been exercised in advance
thereof. An adjustment made pursuant to this paragraph shall become effective
immediately after the effective date of such event retroactive to the record
date, if any, for such event.
13. Voluntary Adjustment by the Company. The Company may at its
discretion, at any time during the term of this Warrant, reduce the then current
Exercise Price to any amount and for any period of time deemed appropriate by
the Board of Directors of the Company.
14. Notice of Adjustment. Whenever the number of Warrant Shares or number
or kind of securities or other property purchasable upon the exercise of this
Warrant or the Exercise Price is adjusted, as herein provided, the Company shall
promptly mail by registered or certified mail, return receipt requested, to the
holder of this Warrant notice of such adjustment or adjustments setting forth
the number of Warrant Shares (and other securities or property) purchasable upon
the exercise of this Warrant and the Exercise Price of such Warrant Shares after
such adjustment, setting forth a brief statement of the facts requiring such
adjustment and setting forth computation by which such adjustment was made. Such
notice, in absence of manifest error, shall be conclusive evidence of the
correctness of such adjustment.
15. Purchase Rights. If at any time after the date hereof, the Company
grants, issues, sells or distributes any options, convertible securities or
rights to purchase stock, warrants, securities or other property pro rate to the
record holders of Common Stock (the "Purchase Rights"), then the holder of this
Warrant will be entitled to acquire, upon the terms applicable to such Purchase
Rights, the aggregate Purchase Rights which such holder could have acquired if
such holder had held the number of shares of Common Stock acquirable upon full
exercise of this Warrant (without taking into account any limitations or
restrictions on the timing or amount of exercise) immediately before the date on
which a record is taken for the grant, issuance, sale or distribution of such
Purchase Rights, or, if no such record is taken, the date as of which the record
holders of Common Stock are to be determined for the grant, issue or sale or
other distribution of such Purchase Rights.
16. Authorized Shares. The Company covenants that during the period the
Warrant is outstanding, it will reserve from its authorized and unissued Common
Stock a sufficient number of shares to provide for the issuance of Common Stock
upon the exercise of any purchase rights under this Warrant. The Company further
covenants that its issuance of this Warrant shall constitute full authority to
its officers who are charged with the duty of executing stock certificates
4
<PAGE>
to execute and issue the necessary certificates for shares of the Company's
Common Stock upon the exercise of the purchase rights under this Warrant. The
Company will take all such reasonable action as may be necessary to assure that
such shares of Common Stock may be issued as provided herein without violation
of any applicable law or regulation, or of any requirements of the Nasdaq
National Market or any domestic securities exchange upon which the Common Stock
may be listed.
17. Limitation on Number of Warrant Shares. Notwithstanding any other
provision herein, the Company shall not be obligated to issue any Warrant Shares
upon exercise of this Warrant or any other warrants issued pursuant to the
Agreement or conversion of any shares of Preferred Stock issued pursuant to the
Agreement ("Preferred Stock") if the issuance of such shares of Common Stock
would exceed that number of shares of Common Stock which the Company may issue
upon exercise of this Warrant or any other warrants issued pursuant to the
Agreement or conversion of any shares of Preferred Stock issued pursuant to the
Agreement (the "Exchange Cap") without breaching the Company's obligations under
the rules or regulations of The Nasdaq Stock Market, Inc., except that such
limitation shall not apply in the event that the Company (a) obtains the
approval of its stockholders as required by NASD Rule 4460 (or any successor
rule or regulation) for issuances of Common Stock in excess of such amount, or
(ii) obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
holders of Warrants representing a majority of the Warrant Shares then issuable
upon exercise of outstanding Warrants. Until such approval or written opinion is
obtained, the holder of this Warrant shall not be issued, upon exercise of this
Warrant, Warrant Shares to the extent the number of shares of Common Stock
issued to such holder upon conversion of Preferred Stock plus the number of
Warrant Shares issued upon exercise of this Warrant would be greater than such
holder's Cap Allocation Amount (as defined in the applicable Statement of
Designations for such Preferred Stock). In the event the Company is prohibited
from issuing Warrant Shares as a result of the operation of this Section, the
Company shall redeem for cash those Warrant Shares which can not be issued at a
price equal to amount by which the then-current market price exceeds the
Exercise Price of such Warrant Shares as of the date of the attempted exercise.
19. Miscellaneous.
(a) Issue Date; Jurisdiction. The provisions of this Warrant shall be
construed and shall be given effect in all respects as if it had been issued and
delivered by the Company on the date hereof. This Warrant shall be binding upon
any successors or assigns of the Company. This Warrant shall constitute a
contract under the laws and jurisdictions of New York and for all purposes shall
be construed in accordance with and governed by the laws of said state without
regard to its conflict of law, principles or rules.
(b) Restrictions. The holder hereof acknowledges that the Common Stock
acquired upon the exercise of this Warrant, if not registered, may have
restrictions upon its resale imposed by state and federal securities laws.
(c) Modification and Waiver. This Warrant and any provisions hereof may
be changed, waived, discharged or terminated only by an instrument in writing
signed by the party against which enforcement of the same is sought.
5
<PAGE>
(d) Notices. Any notice, request or other document required or permitted
to be given or delivered to the holders hereof of the Company shall be delivered
or shall be sent by certified or registered mail, postage prepaid, to each such
holder at its address as shown on the books of the Company or to the Company at
the address set forth in the Agreement.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
6
<PAGE>
IN WITNESS WHEREOF, the Company has caused this Class B Warrant to be
executed by its officers thereunto duly authorized.
Dated: July 24, 1998
DATA RACE, INC.
By:
-------------------------------------
Gregory T. Skalla,
Vice President-Finance
Chief Financial Officer
7
<PAGE>
EXHIBIT 10.5
FORM OF
STATEMENT OF DESIGNATION,
PREFERENCES AND RIGHTS
OF
SERIES F CONVERTIBLE PREFERRED STOCK
OF
DATA RACE, INC.
Pursuant to Article 2.13 of the
Texas Business Corporation Act
Data Race, Inc., a corporation organized and existing under the Texas
Business Corporation Act (the "COMPANY"), does hereby certify that the following
resolutions were adopted by the Board of Directors of the Company on July 20,
1998 pursuant to authority of the Board of Directors as required by Article 2.13
of the Texas Business Corporation Act.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Company (the "BOARD OF DIRECTORS" or the
"BOARD") in accordance with the provisions of its Articles of
Incorporation, the Board of Directors hereby authorizes a series of the
Company's previously authorized preferred Stock, no par value (the
"PREFERRED STOCK"), and hereby states the designation and number of shares,
and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:
Series F Convertible Preferred Stock:
1. Designation, Amount and Dividends. The designation of this
---------------------------------
series, which consists of 750 shares of Preferred Stock, is the Series F
Convertible Preferred Stock (the "PREFERRED SHARES") and the stated value
shall be One Thousand Dollars ($1,000.00) per share (the "STATED VALUE").
The Preferred Shares shall not bear any dividends.
<PAGE>
2. Holder's Conversion of Preferred Shares. A holder of Preferred
---------------------------------------
Shares shall have the right, at such holder's option, to convert the
Preferred Shares into shares of the Company's common stock, no par value
per share (the "COMMON STOCK"), on the following terms and conditions:
a. Conversion Right. Subject to the provisions of Section 11
----------------
below, at any time or times on or after the earliest of the first
anniversary of the Issuance Date (as defined below), the Mandatory
Conversion Date (as defined below) or the occurrence of a Triggering Event
(as defined below), any holder of Preferred Shares shall be entitled to
convert any whole number of Preferred Shares into fully paid and
nonassessable shares (rounded to the nearest whole share in accordance with
Section 2(i) below) of Common Stock, at the Conversion Rate (as defined
below); provided, however, that in no event shall any holder be entitled to
convert Preferred Shares in excess of that number of Preferred Shares
which, upon giving effect to such conversion, would cause the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such conversion. For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock beneficially owned by the holder
and its affiliates shall include the number of shares of Common Stock
issuable upon conversion of the Preferred Shares with respect to which the
determination of such proviso is being made, but shall exclude the number
of shares of Common Stock which would be issuable upon (i) conversion of
the remaining, nonconverted Preferred Shares beneficially owned by the
holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
(including, without limitation, any warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by the holder and its affiliates. Except as set forth in
the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. Each holder may waive the
foregoing limitation with respect to its conversions by written notice to
the Company upon not less than 61 days prior notice (with such waiver
taking effect only upon the expiration of such 61 day notice period), and
such limitation shall not apply to conversions as of the Mandatory
Conversion Date.
b. Conversion Rate. Subject to the other provisions hereof,
---------------
each of the Preferred Shares shall be convertible, at the option of the
holder, into that number of shares of fully paid and nonassessable shares
of Common Stock which is to be derived from dividing the Stated Value by
the Conversion Price (the "Conversion Rate).
For purposes of this Statement of Designation, the following terms shall
have the following meanings:
The "CLOSING BID PRICE" shall mean, for any security as of any
date, the last closing bid price for such security on the Nasdaq National Market
as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the Nasdaq
National Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market
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<PAGE>
on the electronic bulletin board for such security as reported by Bloomberg, or,
if no closing bid price is reported for such security by Bloomberg, the last
closing trade price of such security as reported by Bloomberg, or, if no last
closing trade price is reported for such security by Bloomberg, the average of
the bid prices of any market makers for such security as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot
be calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as mutually determined by the Company and the holders of a majority of the
outstanding Preferred Shares. If the Company and the holders of Preferred Shares
are unable to agree upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 2(g)(iii) below with the term
"Closing Bid Price" being substituted for the term "Market Price". To the extent
required hereunder, all such determinations of the Closing Bid Price shall be
appropriately adjusted for any stock dividend, stock split or other similar
transaction.
"CONVERSION PRICE" means, as of any Conversion Date (as defined
below) or other date of determination, the Fixed Conversion Price.
"FIXED CONVERSION PRICE" means ____ ($___), subject to adjustment
as provided herein. [Prior to filing this Statement the Company shall fill in
the blank with the Market Price (as defined below) of the Common Stock on the
date of the Company's Call pursuant to the Purchase Agreement.]
"ISSUANCE DATE" shall mean, with respect to each Preferred Share,
the date of issuance of the applicable Preferred Share.
"MARKET PRICE" shall mean, with respect to any security for any
date, the arithmetic average of the Closing Bid Price for such security on each
of the five consecutive trading days immediately preceding such date.
c. Premium. The Preferred Shares shall bear a non-compounding
-------
premium at the rate of eight (8%) percent per annum. Accrual of such premium
shall commence on the Issuance Date. The premium on each Preferred Share shall
be payable by the Company upon conversion of the Preferred Share, at the
Company's option, in cash or, subject to the Exchange Cap as provided in Section
11, in shares of Common Stock (valued at the Market Price on the Conversion
Date) which have been previously registered by the Company for resale by the
holder of the Preferred Shares. The premium on each Preferred Share shall be
payable solely in cash by the Company upon redemption thereof or liquidation.
d. Adjustment to Conversion Price -- Dilution and Other Events.
-----------------------------------------------------------
In order to prevent dilution of the rights granted under this Statement of
Designation, the Conversion Price will be subject to adjustment from time to
time as provided in this Section 2(d).
-------
(i) Adjustment of Fixed Conversion Price upon Issuance of
-----------------------------------------------------
Common Stock. If and whenever on or after the date of issuance of the Preferred
- ------------
Shares, the Company issues or sells, or is deemed to have issued or sold, any
shares of Common Stock (other than shares of Common Stock deemed to have been
issued by the Company in connection with
-3-
<PAGE>
Approved Issuances (as defined below)) for a consideration per share less than
the Market Price in effect immediately prior to such time (the "APPLICABLE
PRICE"), then immediately after such issue or sale, the Fixed Conversion Price
shall be reduced to an amount equal to the product of (x) the Fixed Conversion
Price in effect immediately prior to such issue or sale and (y) the quotient
determined by dividing (1) the sum of (I) the product of the Applicable Price
and the number of shares of Common Stock Deemed Outstanding (as defined below)
immediately prior to such issue or sale, and (II) the consideration, if any,
received by the Company upon such issue or sale, by (2) the product of (I) the
Applicable Price and (II) the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale. For purposes of determining
the adjusted Fixed Conversion Price under this Section 2(d)(i), the following
shall be applicable:
(A) Issuance of Options. If the Company in any manner grants any
-------------------
rights or options to subscribe for or to purchase Common Stock (other than
in connection with an Approved Issuance or upon conversion of the Preferred
Shares) or any stock or other securities convertible into or exchangeable
for Common Stock (such rights or options being herein called "OPTIONS" and
such convertible or exchangeable stock or securities being herein called
"CONVERTIBLE SECURITIES") and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or exchange
of such Convertible Securities is less than the Applicable Price, then the
total maximum number of shares of Common Stock issuable upon the exercise
of such Options or upon conversion or exchange of the total maximum amount
of such Convertible Securities issuable upon the exercise of such Options
shall be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For purposes of this Section 2(d)(i)(A),
the "price per share for which Common Stock is issuable upon exercise of
such Options or upon conversion or exchange of such Convertible Securities"
is determined by dividing (I) the total amount, if any, received or
receivable by the Company as consideration for the granting of such
Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the issuance or sale of such Convertible Securities and the
conversion or exchange thereof, by (II) the total maximum number of shares
of Common Stock issuable upon exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options. No adjustment of the Fixed Conversion Price shall
be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such
Convertible Securities.
(B) Issuance of Convertible Securities. If the Company in any
----------------------------------
manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less
than the Applicable Price, then the maximum number of shares of Common
Stock issuable upon conversion or exchange of such Convertible Securities
shall be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of this Section
2(d)(i)(B), the "price per share for which Common Stock is issuable upon
such conversion or exchange" is determined by dividing (I) the total amount
received or receivable by the
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<PAGE>
Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the conversion or exchange thereof, by
(II) the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities. No adjustment of
the Fixed Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustment of the Fixed Conversion Price
had been or are to be made pursuant to other provisions of this Section
2(d)(i), no further adjustment of the Fixed Conversion Price shall be made
by reason of such issue or sale.
(C) Change in Option Price or Rate of Conversion. If the purchase
---------------------------------------------
price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Fixed
Conversion Price in effect at the time of such change shall be readjusted
to the Fixed Conversion Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for
such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold;
provided that no adjustment shall be made if such adjustment would result
in an increase of the Fixed Conversion Price then in effect.
(D) Certain Definitions. For purposes of determining the adjusted
-------------------
Fixed Conversion Price under this Section 2(d)(i), the following terms have
meanings set forth below:
(I) "APPROVED ISSUANCES" shall mean (i) a loan from a
commercial bank, (ii) any transaction involving the Company's issuances of
securities (A) as consideration in a merger or consolidation or (B) as
consideration for the acquisition of a business, product or license or
other assets by the Company, (iii) the issuance of Common Stock in a firm
commitment, underwritten public offering, (iv) the issuance of securities
upon exercise or conversion of the Company's options, warrants or other
convertible securities outstanding as of the date hereof, (v) the grant of
additional options or warrants, or the issuance of additional securities,
under any Company stock option plan, restricted stock plan, stock purchase
plan or other plan or written compensation contract for the benefit of the
Company's employees, consultants or directors, (vi) the issuance of
securities pursuant to the Rights Agreement, dated September 15, 1997,
between the Company and ChaseMellon Shareholder Services, L.L.C., as
amended from time to time in accordance with its terms (the "Rights
Agreement"), and (vii) the issuance of securities pursuant to the Purchase
Agreement, or in connection with any of the transactions related thereto.
(II) "COMMON STOCK DEEMED OUTSTANDING" means, at any given
time, the number of shares of Common Stock actually outstanding at such
time, plus the number of shares of Common Stock deemed to be outstanding
pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof regardless of whether
the Options or Convertible
-5-
<PAGE>
Securities are actually exercisable at such time, but excluding any shares
of Common Stock issuable upon conversion of the Preferred Shares.
(E) Treatment of Expired Options and Unexercised Convertible
--------------------------------------------------------
Securities. If, in any case, the total number of shares of Common Stock
----------
issuable upon the exercise of any Option or upon exercise, conversion or
exchange of any Convertible Security is not, in fact, issued and the rights
to exercise such Option or to exercise, convert or exchange such
Convertible Securities shall have expired or terminated, the Fixed
Conversion Price then in effect will be readjusted to the Fixed Conversion
Price which would have been effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination (other than
in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(F) Effect on Fixed Conversion Price of Certain Events. For
--------------------------------------------------
purposes of determining the adjusted Fixed Conversion Price under this
Section 2(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If any Common
-------------------------------------
Stock, Options or Convertible Securities are issued or sold or deemed to
have been issued or sold for cash, the consideration received therefor will
be deemed to be the amount received by the Company therefor, before
deduction of reasonable commissions, underwriting discounts or allowances
or other reasonable expenses paid or incurred by the Company in connection
with such issuance or sale. In case any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of
consideration received by the Company will be the Market Price of such
security on the date of receipt. In case any Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity
in connection with any merger in which the Company is the surviving entity
the amount of consideration therefor will be deemed to be the fair value of
such portion of the net assets and business of the non-surviving entity as
is attributable to such Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of a
majority of the Preferred Shares then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the "VALUATION EVENT"), the fair value of such
consideration will be determined within forty-eight (48) hours of the tenth
(10th) day following the Valuation Event by an independent, reputable
appraiser selected by the Company. The determination of such appraiser
shall be deemed binding upon all parties absent manifest error.
(II) Integrated Transactions. In case any Option is issued in
-----------------------
connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $.01 for
purposes of Section 2(d)(i)(A).
-6-
<PAGE>
(III) Treasury Shares. The number of shares of Common Stock
---------------
outstanding at any given time does not include shares owned or held by or
for the account of the Company, and the disposition of any shares so owned
or held will be considered an issue or sale of Common Stock.
(IV) Record Date. If the Company takes a record of the holders
-----------
of Common Stock for the purpose of entitling them (1) to receive a dividend
or other distribution payable in Common Stock, Options or in Convertible
Securities or (2) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of
subscription or purchase, as the case may be (assuming such issuance
ultimately occurs).
(ii) Adjustment of Fixed Conversion Price upon Subdivision or
--------------------------------------------------------
Combination of Common Stock. If the Company at any time subdivides (by any
---------------------------
stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Fixed Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any
time combines (by combination, reverse stock split or otherwise) one or
more classes of its outstanding shares of Common Stock into a smaller
number of shares, the Fixed Conversion Price in effect immediately
prior to such combination will be proportionately increased.
(iii) Intentionally omitted.
(iv) Reorganization, Reclassification, Consolidation, Merger or Sale.
---------------------------------------------------------------
Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Company's assets to another
Person (as defined below) or other transaction which is effected in such a
way that holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with respect to
or in exchange for Common Stock, other than a Major Transaction, is
referred to herein as "ORGANIC CHANGE." Prior to the consummation of any
Organic Change, the Company will appropriate provision (in form and
substance reasonably satisfactory to the holders of a majority of the
Preferred Shares then outstanding) to insure that each of the holders of
the Preferred Shares will thereafter have the right to acquire and receive
in lieu of or addition to (as the case may be) the shares of Common Stock
otherwise acquirable and receivable upon the conversion of such holder's
Preferred Shares, such shares of stock, securities or assets that would
have been issued or payable in such Organic Change with respect to or in
exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the conversion of such holder's Preferred
Shares had such Organic Change not taken place (without taking into account
any limitations or restrictions on the timing or amount of conversions). In
any such case, the Company will make appropriate provision (in form and
substance reasonably satisfactory to the holders of a majority of the
Preferred Shares then outstanding) with respect to such holders' rights and
-7-
<PAGE>
interests to insure that the provisions of this Section 2(d) and Section
2(e) below will thereafter be applicable to the Preferred Shares
(including, in the case of any such consolidation, merger or sale in which
the successor entity or purchasing entity is other than the Company, an
immediate adjustment of the Fixed Conversion Price to the value for the
Common Stock reflected by the terms of such consolidation, merger or sale,
if the value so reflected is less than the Fixed Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Company will
not effect any such consolidation, merger or sale, other than a Major
Transaction, unless prior to the consummation thereof, the successor entity
(if other than the Company) resulting from consolidation or merger or the
entity purchasing such assets assumes, by written instrument, the
obligation to deliver to each holder of Preferred Shares such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire. "PERSON" shall mean an
individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or
any department or agency thereof.
(v) Certain Events. If any event occurs of the type contemplated by
--------------
the provisions of this Section 2(d) but not expressly provided for by such
provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity
features), then the Company's Board of Directors will make an appropriate
adjustment in the Conversion Price so as to protect the rights of the
holders of the Preferred Shares; provided that no such adjustment will
increase the Conversion Price as otherwise determined pursuant to this
Section 2(d).
(vi) Notices.
--------
(A) Immediately upon any adjustment of the Conversion Price, the
Company will give written notice thereof to each holder of Preferred
Shares, setting forth in reasonable detail and certifying the calculation
of such adjustment.
(B) The Company will give written notice to each holder of
Preferred Shares at least twenty (20) days prior to the date on which the
Company closes its books or takes a record (I) with respect to any dividend
or distribution upon the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock or (III) for determining
rights to vote with respect to any Organic Change, dissolution or
liquidation and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(C) The Company will also give written notice to each holder of
Preferred Shares at least twenty (20) days prior to the date on which any
Organic Change, dissolution or liquidation will take place and in no event
shall such notice be provided to such holder prior to such information
being made known to the public.
e. Purchase Rights. In addition to any adjustments of the
---------------
Conversion Price pursuant to Section 2(d) above, if at any time after the
Issuance Date the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or
-8-
<PAGE>
other property pro rata to the record holders of any class of Common Stock (the
"PURCHASE RIGHTS"), then the holders of Preferred Shares will be entitled to
acquire, upon the terms applicable to such Purchase Rights, the aggregate
Purchase Rights which such holder could have acquired if such holder had held
the number of shares of Common Stock acquirable upon complete conversion of the
Preferred Shares (without taking into account any limitations or restrictions on
the timing or amount of conversions) immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issue or sale of such Purchase Rights.
f. [Intentionally omitted.]
g. Mechanics of Conversion. Subject to the Company's inability
-----------------------
to fully satisfy its obligations under a Conversion Notice (as defined below) as
provided for in Section 4 below:
(i) Holder's Delivery Requirements. To convert Preferred Shares
------------------------------
into full shares of Common Stock on any date (the "CONVERSION DATE"), the
holder thereof shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m., Eastern Time on such date, a copy of a
fully executed notice of conversion in the form attached hereto as Exhibit
I (the "CONVERSION NOTICE"), to the Company, and (B) surrender to a common
carrier for delivery to the Company as soon as practicable following such
date, the original certificates representing the Preferred Shares being
converted (or an indemnification undertaking with respect to such shares in
the case of their loss, theft or destruction) (the "PREFERRED STOCK
CERTIFICATES") and the originally executed Conversion Notice.
(ii) Company's Response. Upon receipt by the Company of a
------------------
facsimile copy of a Conversion Notice, the Company shall immediately send,
via facsimile, a confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Company of the Preferred Stock Certificates to
be converted pursuant to a Conversion Notice, together with the originally
executed Conversion Notice, the Company or its designated transfer agent
(the "TRANSFER AGENT") (as applicable) shall, on the next business day
following the date of receipt of both (or the second business day following
the date of receipt of both if received after 11:00 a.m. local time of the
Company), (I) issue and surrender to a common carrier for overnight
delivery to the address as specified in the Conversion Notice, a
certificate, registered in the name of the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled, or
(II) credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account
with The Depository Trust Company. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion
is greater than the number of Preferred Shares being converted, then the
Company shall, as soon as practicable and in no event later than two
business days after receipt of the Preferred Stock Certificate(s) and at
its own expense, issue and deliver to the holder a new Preferred Stock
Certificate representing the number of Preferred Shares not converted.
-9-
<PAGE>
(iii) Dispute Resolution. In the case of a dispute as
------------------
to the determination of the Market Price or the arithmetic calculation of
the Conversion Rate, the Company shall promptly issue to the holder the
number of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via
facsimile as soon as possible, but in no event later than two (2) business
days after receipt of such holder's Conversion Notice. If such holder and
the Company are unable to agree upon the determination of the Market Price
or arithmetic calculation of the Conversion Rate within one (1) business
day of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall within one (1) business day
submit via facsimile (A) the disputed determination of the Market Price to
an independent, reputable investment bank or (B) the disputed arithmetic
calculation of the Conversion Rate to its independent, outside accountant.
The Company shall cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the
Company and the holder of the results no later than forty-eight (48) hours
from the time it receives the disputed determinations or calculations. Such
investment bank's or accountant's determination or calculation, as the case
may be, shall be binding upon all parties absent manifest error. The period
of time in which the Company is required to effect conversions or
redemptions under this Statement of Designations shall be tolled with
respect to the subject conversion or redemption pending resolution of any
dispute by the Company made in good faith and in accordance with this
Section 2(g)(iii).
(iv) Record Holder. The person or persons entitled to receive
-------------
the shares of Common Stock issuable upon a conversion of Preferred Shares
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within three (3)
-----------------------------------
business days of the Company's receipt of the Conversion Notice (the "SHARE
DELIVERY PERIOD") the Company shall fail to issue a certificate to a holder
for the number of shares of Common Stock to which such holder is entitled
upon such holder's conversion of Preferred Shares or to issue a new
Preferred Stock Certificate representing the number of Preferred Shares to
which such holder is entitled pursuant to Section 2(g)(ii) (a "CONVERSION
FAILURE"), in addition to all other available remedies which such holder
may pursue hereunder and under the Purchase Agreement between the Company
and the initial holders of the Preferred Shares (the " PURCHASE AGREEMENT")
(including indemnification), the Company shall pay additional damages to
such holder for each business day after such third (3rd) business day that
such conversion is not timely effected in an amount equal to two (2%)
percent per month of the product of (A) the number of shares of Common
Stock not issued to the holder on a timely basis pursuant to Section
2(g)(ii) and to which such holder is entitled, and (B) the Closing Bid
Price of the Common Stock on the last possible date which the Company could
have issued such Common Stock to such holder without violating Section
2(g)(ii). If the Company fails to pay the additional damages set forth in
this Section 2(g)(v) within five business days of the date incurred, then
the holder entitled to such payments shall have the right at any time, so
long as the Company continues to fail to make such payments, to require the
Company, upon written notice, to immediately issue, in lieu of
-10-
<PAGE>
the cash additional damages set forth in this Section 2(g)(v), the number
of shares of Common Stock equal to the quotient of (X) the aggregate amount
of the additional damages payments described above divided by (Y) the
Market Price in effect on such Conversion Date as is specified by the
holder in writing to the Company. Payment of the additional damages shall
not relieve the Company of its obligation to send the shares of Common
Stock to the holder upon conversion.
h. Mandatory Conversion. Subject to Section 11, if any
--------------------
Preferred Shares remain outstanding on the Mandatory Conversion Date (as
defined below), then all such Preferred Shares shall be converted as of
such date in accordance with this Section 2 as if the holders of such
Preferred Shares had given the Conversion Notice on the Mandatory
Conversion Date; provided, however, that if a Triggering Event has occurred
and is continuing on the Mandatory Conversion Date, then the Company shall,
within five business days following the Mandatory Conversion Date (unless
otherwise notified in writing by the holder of its request to have the
Preferred Shares converted into Common Stock), pay to each holder of
Preferred Shares then outstanding, in immediately available funds, an
amount equal to the Triggering Event Redemption Price as of the Mandatory
Conversion Date. All holders of Preferred Shares shall thereupon surrender
all Preferred Stock Certificates, duly endorsed for cancellation, to the
Company or the Transfer Agent, provided that the Company has complied with
its obligations under this Section 2(h). Notwithstanding the foregoing,
except in the case of a Major Transaction, if the Common Stock is not
designated for quotation on the Nasdaq National Market or listed on The New
York Stock Exchange, Inc. or The American Stock Exchange, Inc. but such
events do not constitute a Triggering Event, then the Mandatory Conversion
Date shall be extended until the Common Stock is so designated or listed.
"MANDATORY CONVERSION DATE" means the date which is the earlier of five
years after the applicable Issuance Date, subject to extension as described
in the immediately preceding sentence, or immediately prior to a Major
Transaction.
i. Fractional Shares. The Company shall not issue any fraction
-----------------
of a share of Common Stock upon any conversion. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a
fraction of a share of Common Stock. If, after the aforementioned
aggregation, the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up or down to the nearest whole share.
j. Taxes. The Company shall pay any and all taxes which may be
-----
imposed upon it with respect to the issuance and delivery of Common Stock
upon the conversion of the Preferred Shares.
-11-
<PAGE>
3. Redemption at Option of Holders.
-------------------------------
a. Redemption Option Upon Major Transaction. In addition to
----------------------------------------
all other rights of the holders of Preferred Shares contained herein,
simultaneous with the occurrence of a Major Transaction (as defined below),
each holder of Preferred Shares shall have the right, at such holder's
option, to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to 120% of the
Liquidation Preference (as defined in Section 8 below) ("MAJOR TRANSACTION
REDEMPTION PRICE").
b. Redemption Option Upon Triggering Event. In addition to all
---------------------------------------
other rights of the holders of Preferred Shares contained herein, after a
Triggering Event (as defined below), each holder of Preferred Shares shall
have the right, at such holder's option, to require the Company to redeem
all or a portion of such holder's Preferred Shares at a price per Preferred
Share equal to 120% of the Liquidation Preference ("TRIGGERING EVENT
REDEMPTION PRICE" and, collectively with "MAJOR TRANSACTION REDEMPTION
PRICE," the "REDEMPTION PRICE").
c. "Major Transaction". A "MAJOR TRANSACTION" shall be deemed
-------------------
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business
combination of the Company with or into another Person which requires or
receives the consent or recommendation of the Company's Board of Directors
(excluding a consolidation, merger or other business combination in which
holders of the Company's voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, the voting
power of the surviving entity or entities necessary to elect a majority of
the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities and excluding a short-form merger
effected without the consent or recommendation of the Company's Board of
Directors) (an "EXEMPT MAJOR TRANSACTION").
(ii) the sale or transfer of all or substantially all of
the Company's assets or rights to the "Be There!" business or product line
other than in connection with a disposition to a subsidiary of the Company;
or
(iii) consummation of a purchase, tender or exchange offer
made to the holders of more than 50% of the outstanding shares of Common
Stock which requires or receives the consent or recommendation of the
Company's Board of Directors.
d. "Triggering Event". A "TRIGGERING EVENT" shall be deemed to
------------------
have occurred at such time as any of the following events (other than in
connection with a Major Transaction):
(i) the failure of the Registration Statement to be
declared effective by the SEC on or prior to the date that is 150 days
after the Demand;
-12-
<PAGE>
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Preferred Shares for sale of all of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such
lapse or unavailability continues for a period of thirty (30) consecutive
trading days, provided that the cause of such lapse or unavailability is
not due to factors solely within the control of such holder of Preferred
Shares;
(iii) the Company undertakes any voluntary action to
terminate the quotation or listing of the Common Stock on the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc., unless such action is taken in connection with the
continued quotation or listing of the Common Stock on another of the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc.;
(iv) the Company's failure to deliver shares of Common
Stock within 15 days of its receipt of a Conversion Notice (together with
the Preferred Stock Certificate) or the Company's notice to any holder of
Preferred Shares, including by way of public announcement, at any time, of
its intention not to comply with proper requests for conversion of any
Preferred Shares into shares of Common Stock, other than due to any of the
reasons set forth in Section 4(a) below; or
(v) if the Company pursuant to or within the meaning of
Title 11, U.S. Code, or any similar federal or state law for the relief of
debtors ("BANKRUPTCY LAW"), (I) commences a voluntary case, (II) consents
to the entry of an order for relief against it in any involuntary case,
(III) consents to the appointment of a receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law (a "CUSTODIAN") of
it or for all or substantially all of its property, (IV) makes a general
assignment for the benefit of its creditors, or (V) admits in writing that
it is generally unable to pay its debts as the same become due.
e. Mechanics of Redemption at Option of Buyer Upon Major
-----------------------------------------------------
Transaction. No sooner than 15 days nor later than 10 days prior to the
-----------
consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier ("NOTICE OF MAJOR
TRANSACTION") to each holder of Preferred Shares. At any time after receipt
of a Notice of Major Transaction (or, in the event a Notice of Major
Transaction is not delivered at least 10 days prior to a Major Transaction,
at any time within 10 days prior to a Major Transaction), any holder of
Preferred Shares then outstanding may require the Company to redeem,
effective immediately prior to the consummation of such Major Transaction,
all of the holder's Preferred Shares then outstanding by delivering written
notice thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION
AT OPTION OF BUYER UPON MAJOR TRANSACTION") to the Company, which Notice of
Redemption at Option of Buyer Upon Major Transaction shall indicate (i) the
number of Preferred Shares that such holder is
-13-
<PAGE>
electing to redeem and (ii) the applicable Major Transaction Redemption
Price, as calculated pursuant to Section 3(a) above. Preferred Shares which
are not required to be redeemed pursuant to this paragraph are subject to
mandatory conversion as provided herein.
f. Mechanics of Redemption at Option of Buyer Upon Triggering
----------------------------------------------------------
Event. Within one (1) day after the occurrence of a Triggering Event, the
-----
Company shall deliver written notice thereof via facsimile and overnight
courier ("NOTICE OF TRIGGERING EVENT") to each holder of Preferred Shares.
At any time after the earlier of a holder's receipt of a Notice of
Triggering Event and such holder becoming aware of a Triggering Event, any
holder of Preferred Shares then outstanding may require the Company to
redeem all of the Preferred Shares by delivering written notice thereof via
facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER
UPON TRIGGERING EVENT") to the Company, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the number of
Preferred Shares that such holder is electing to redeem and (ii) the
applicable Triggering Event Redemption Price, as calculated pursuant to
Section 3(b) above.
g. Payment of Redemption Price. Upon the Company's receipt of
---------------------------
a Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction from any
holder of Preferred Shares or Pari Passu Shares (as defined in Section 8),
the Company shall immediately notify each holder of Preferred Shares and
Pari Passu Shares by facsimile of the Company's receipt of such Notice(s)
of Redemption at Option of Buyer Upon Triggering Event or Notice(s) of
Redemption at Option of Buyer Upon Major Transaction and each holder which
has sent such a notice shall promptly submit to the Company or its Transfer
Agent such holder's Preferred Stock Certificates which such holder has
elected to have redeemed. The Company shall deliver the applicable
Triggering Event Redemption Price, in the case of a redemption pursuant to
Section 3(f), to such holder within five business days after the Company's
receipt of a Notice of Redemption at Option of Buyer Upon Triggering Event
and, in the case of a redemption pursuant to Section 3(e), the Company
shall deliver the applicable Major Transaction Redemption Price immediately
prior to the consummation of the Major Transaction; provided that a
holder's Preferred Stock Certificates shall have been so delivered to the
Company; provided further that if the Company is unable to redeem all of
the Preferred Shares and Pari Passu Shares to be redeemed (because of
insufficient funds to lawfully effect such redemption), the Company shall
redeem an amount from each holder of Preferred Shares and Pari Passu Shares
being redeemed equal to such holder's pro-rata amount (based on the
relative redemption amounts of all holders of Preferred Shares and Pari
Passu Shares) of all Preferred Shares and Pari Passu Shares being redeemed.
If the Company shall fail to redeem all of the Preferred Shares submitted
for redemption (other than pursuant to a dispute as to the arithmetic
calculation of the Redemption Price), in addition to any remedy such holder
of Preferred Shares may have under this Statement of Designations and the
Purchase Agreement, the applicable Redemption Price payable in respect of
such unredeemed Preferred Shares shall bear interest at the rate of 2.0%
per month (prorated for partial months) until paid in full. Until the
Company pays such unpaid applicable Redemption Price in full to a holder of
Preferred Shares submitted for redemption, such holder shall have the
option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of redemption,
require the Company to promptly return to such holder(s) all of the
-14-
<PAGE>
Preferred Shares that were submitted for redemption by such holder(s) under
this Section 3 and for which the applicable Redemption Price has not been
paid, by sending written notice thereof to the Company via facsimile (the
"VOID OPTIONAL REDEMPTION NOTICE"). Upon the Company's receipt of such Void
Optional Redemption Notice(s) and prior to payment of the full applicable
Redemption Price to such holder, (i) the Notice(s) of Redemption at Option
of Buyer Upon Triggering Event or the Notice(s) of Redemption at Option of
Buyer Upon Major Transaction, as the case may be, shall be null and void
with respect to those Preferred Shares submitted for redemption and for
which the applicable Redemption Price has not been paid, and (ii) the
Company shall immediately return any Preferred Shares submitted to the
Company by each holder for redemption under this Section 3(g) and for which
the applicable Redemption Price has not been paid. Notwithstanding the
foregoing, in the event of a dispute as to the determination of the Closing
Bid Price or the arithmetic calculation of the Redemption Price, such
dispute shall be resolved pursuant to Section 2(g)(iii) above with the term
"Closing Bid Price" being substituted for the term "Average Market Price"
and the term "Redemption Price" being substituted for the term "Conversion
Rate". A holder's delivery of a Void Optional Redemption Notice and
exercise of its rights follo wing such notice shall not affect the
Company's obligations to make any payments which have accrued prior to the
date of such notice. Payments provided for in this Section 3 shall have
priority to payments to other stockholders, other than any required
payments with respect to shares of the Company's Series A Convertible
Preferred Stock which were outstanding on the Issuance Date, in connection
with a Major Transaction.
4. Inability to Fully Convert.
--------------------------
a. Holder's Option if Company Cannot Fully Convert. If, upon
-----------------------------------------------
the Company's receipt of a Conversion Notice or on the Mandatory Conversion
Date, the Company can not issue shares of Common Stock registered for
resale under the Registration Statement for any reason, including, without
limitation, because the Company (x) does not have a sufficient number of
shares of Common Stock authorized and available, (y) is otherwise
prohibited by applicable law or by the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or its Securities,
including without limitation the Exchange Cap, from issuing all of the
Common Stock which is to be issued to a holder of Preferred Shares pursuant
to a Conversion Notice or (z) fails to have a sufficient number of shares
of Common Stock registered for resale under the Registration Statement,
then the Company shall issue as many shares of Common Stock as it is able
to issue in accordance with such holder's Conversion Notice and pursuant to
Section 2(g) above and, with respect to the unconverted Preferred Shares,
the holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at
a price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
Triggering Event Redemption Price as of such Conversion Date;
-15-
<PAGE>
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(z) above, require the Company to issue
restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(g) above;
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were
to be converted pursuant to such holder's Conversion Notice (provided that
a holder's voiding its Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of
such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(y) above,
and the issuance of additional Conversion Shares at a Conversion Price
equal to the Market Price would not violate the rules or regulations of The
Nasdaq Stock Market, Inc., then, subject to Section 11, require the Company
to issue shares of Common Stock in accordance with such holder's Conversion
Notice and pursuant to Section 2(g) above at a Conversion Price equal to
the Market Price of the Common Stock on the date of such holder's Notice in
Response to Inability to Convert (as defined below).
b. Mechanics of Fulfilling Holder's Election. The Company
-----------------------------------------
shall immediately send via facsimile to a holder of Preferred Shares, upon
receipt of a facsimile copy of a Conversion Notice from such holder which
cannot be fully satisfied as described in Section 4(a) above, a notice of
the Company's inability to fully satisfy such holder's Conversion Notice
(the "INABILITY TO FULLY CONVERT NOTICE"). Such Inability to Fully Convert
Notice shall indicate (i) the reason why the Company is unable to fully
satisfy such holder's Conversion Notice, (ii) the number of Preferred
Shares which cannot be converted and (iii) the applicable Mandatory
Redemption Price. Such holder shall notify the Company of its election
pursuant to Section 4(a) above by delivering written notice via facsimile
to the Company ("NOTICE IN RESPONSE TO INABILITY TO CONVERT").
c. Payment of Redemption Price. If such holder shall elect to
---------------------------
have its shares redeemed pursuant to Section 4(a)(i) above, the Company
shall pay the Mandatory Redemption Price in cash to such holder within
thirty (30) days of the Company's receipt of the holder's Notice in
Response to Inability to Convert, provided that prior to the Company's
receipt of the holder's Notice in Response to Inability to Convert the
Company has not delivered a notice to such holder stating, to the
satisfaction of the holder, that the event or condition resulting in the
Mandatory Redemption has been cured and all Conversion Shares issuable to
such holder can and will be delivered to the holder in accordance with the
terms of Section 2(g). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in
this Section 4(c) (other than pursuant to a dispute as to the determination
of the arithmetic calculation of the Redemption Price), in addition to any
remedy such holder of Preferred Shares may have under this Statement of
Designations and the Securities Purchase Agreement, such unpaid amount
shall bear interest at the rate of 2.0% per month (prorated for partial
months) until paid in full. Until the full Mandatory Redemption Price is
paid in full to such holder, such holder may void the
-16-
<PAGE>
Mandatory Redemption with respect to those Preferred Shares for which the
full Mandatory Redemption Price has not been paid and receive back such
Preferred Shares. Notwithstanding the foregoing, if the Company fails to
pay the applicable Mandatory Redemption Price within such thirty (30) days
time period due to a dispute as to the determination of the arithmetic
calculation of the Redemption Rate, such dispute shall be resolved pursuant
to Section 2(g)(iii) above with the term "Redemption Price" being
substituted for the term "Conversion Rate".
d. Pro-rata Conversion and Redemption. In the event the
----------------------------------
Company receives a Conversion Notice from more than one holder of Preferred
Shares or Pari Passu Shares on the same day and the Company can convert and
redeem some, but not all, of the Preferred Shares or Pari Passu Shares
pursuant to this Section 4, the Company shall convert and redeem from each
holder of Preferred Shares or Pari Passu Shares electing to have Preferred
Shares or Pari Passu Shares converted and redeemed at such time an amount
equal to such holder's pro-rata amount (based on the relative redemption
amounts of all holders of Preferred Shares and Pari Passu shares) of all
Preferred Shares and Pari Passu Shares being converted and redeemed at such
time.
e. Involuntary Delisting. In the event the Common Stock at any
---------------------
time is not designated for quotation on the Nasdaq National Market or
listed on The New York Stock Exchange, Inc. or The American Stock Exchange,
Inc. but such events do not constitute a Triggering Event and are not in
connection with a Major Transaction, then in addition to any other remedies
the holders of Preferred Shares may have at law or in equity, the Company
shall pay to each holder of Preferred Shares an amount in cash per
Preferred Share on each day that the Common Stock is not so designated or
listed equal to the product of the Liquidation Preference multiplied by
1.0%, provided that the Company shall not be required to make such payments
for more than 24 consecutive days. The Company's failure to pay such
amounts on each day they are due shall constitute a Triggering Event for
purposes of Section 3.
5. Reissuance of Certificates. In the event of a conversion or
--------------------------
redemption pursuant to this Statement of Designations of less than all of
the Preferred Shares represented by a particular Preferred Stock
Certificate, the Company shall promptly cause to be issued and delivered to
the holder of such Preferred Shares a preferred stock certificate
representing the remaining Preferred Shares which have not been so
converted or redeemed.
6. Reservation of Shares. Subject to the Exchange Cap in Section
---------------------
11, the Company shall, so long as any of the Preferred Shares are
outstanding, reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of effecting the conversion of the
Preferred Shares, such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all of the Preferred
Shares then outstanding; provided that the number of shares of Common Stock
so reserved shall at no time be less than 200% of the number of shares of
Common Stock for which the Preferred Shares are at any time convertible
(subject to the Exchange Cap if lower). The initial number of shares of
Common Stock reserved for conversions of the Preferred Shares and each
increase in the number of shares so reserved shall be allocated pro rata
among the
-17-
<PAGE>
holders of the Preferred Shares based on the number of Preferred Shares
held by each holder at the time of issuance of the Preferred Shares or
increase in the number of reserved shares, as the case may be. In the event
a holder shall sell or otherwise transfer any of such holder's Preferred
Shares, each transferee shall be allocated a pro rata portion of the number
of reserved shares of Common Stock reserved for such transferor. Any shares
of Common Stock reserved and which remain allocated to any person or entity
which does not hold any Preferred Shares shall be allocated to the
remaining holders of Preferred Shares, pro rata based on the number of
Preferred Shares then held by such holder.
7. Voting Rights. Holders of Preferred Shares shall have no voting
-------------
rights (including with respect to a Major Transaction), except as expressly
required by law, including but not limited to the Texas Business
Corporation Act, and as expressly provided in this Statement of
Designations.
8. Liquidation, Dissolution, Winding-Up. In the event of any
------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Preferred Shares shall be entitled to receive
in cash out of the assets of the Company, whether from capital or from
earnings available for distribution to its stockholders (the "PREFERRED
FUNDS"), after all required payments with respect to shares of the
Company's Series A Convertible Preferred Stock which were outstanding on
the Issuance Date, but before any amount shall be paid to the holders of
any of the capital stock of the Company of any class junior in rank to the
Preferred Shares in respect of the preferences as to the distributions and
payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the Stated Value plus all accrued and
unpaid premium thereon (such sum being referred to as the "LIQUIDATION
PREFERENCE"); provided that, if the Preferred Funds are insufficient to pay
the full amount due to the holders of Preferred Shares and holders of the
Company's Series D Convertible Preferred Stock and Series E Convertible
Preferred Stock (the "Pari Passu Shares"), which are of equal rank with the
Preferred Shares as to payments of Preferred Funds (and redemption
amounts), then each holder of Preferred Shares and Pari Passu Shares shall
receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Statement of Designations, Preferences and
Rights, as a percentage of the full amount of Preferred Funds payable to
all holders of Preferred Shares and Pari Passu Shares. The purchase or
redemption by the Company of stock of any class, in any manner permitted by
law, shall not, for the purposes hereof, be regarded as a liquidation,
dissolution or winding up of the Company. Neither the consolidation or
merger of the Company with or into any other Person, nor the sale or
transfer by the Company of less than substantially all of its assets,
shall, for the purposes hereof, be deemed to be a liquidation, dissolution
or winding up of the Company. No holder of Preferred Shares shall be
entitled to receive any amounts with respect thereto upon any liquidation,
dissolution or winding up of the Company other than the amounts provided
for herein; provided that a holder of Preferred Shares shall be entitled to
all amounts previously accrued with respect to amounts owed hereunder.
9. Preferred Rank; Participation. (i) All shares of Common Stock
-----------------------------
shall be of junior rank to all Preferred Shares and Pari Passu Shares in
respect to the preferences as to
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<PAGE>
distributions and payments upon the liquidation, dissolution and winding up
of the Company. The rights of the shares of Common Stock shall be subject
to the preferences and relative rights of the Preferred Shares and Pari
Passu Shares. Without the prior express written consent of the holders of
not less than three-fourths (3/4) of the then outstanding Preferred Shares
and Pari Passu Shares, the Company shall not hereafter authorize or issue
additional or other capital stock that is of senior or equal rank to the
Preferred Shares and Pari Passu Shares in respect of the preferences as to
distributions and payments upon the liquidation, dissolution and winding up
of the Company. Without the prior express written consent of the holders of
not less than three-fourths (3/4) of the then outstanding Preferred Shares
and Pari Passu Shares, the Company shall not hereafter authorize or make
any amendment to the Company's Articles of Incorporation or bylaws, or file
any resolution of the board of directors of the Company with the Texas
Secretary of State containing any provisions, which would adversely affect
or otherwise impair the rights or relative priority of the holders of the
Preferred Shares and Pari Passu Shares relative to the holders of the
Common Stock or the holders of any other class of capital stock; provided
that the foregoing shall not affect the Company's ability to effect a Major
Transaction. In the event of the merger or consolidation of the Company
with or into another corporation (other than a Major Transaction), the
Preferred Shares and Pari Passu Shares shall maintain their relative
powers, designations and preferences provided for herein and no merger
shall result inconsistent therewith.
(ii) Subject to the rights of the holders, if any, of the Parri Passu
Shares, the holders of the Preferred Shares shall, as holders of Preferred
Stock, be entitled to such dividends paid and distributions made to the
holders of Common Stock to the same extent as if such holders of Preferred
Shares had converted the Preferred Shares into Common Stock (without regard
to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common
Stock; provided that the holders of the Preferred Shares shall be entitled
to such dividends and distributions only to the extent that they exceed an
amount per Preferred Share equal to $1,000, plus the accrued premium
thereon.
10. Restriction on Redemption and Cash Dividends with respect to
------------------------------------------------------------
Other Capital Stock. Until all of the Preferred Shares have been converted
-------------------
or redeemed as provided herein, except as permitted in the Rights
Agreement, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or cash distribution on, its Common Stock
without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares.
11. Limitation on Number of Conversion Shares. Notwithstanding any
-----------------------------------------
other provision herein, the Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Preferred Shares and Pari
Passu Shares if the issuance of such shares of Common Stock would exceed
that number of shares of Common Stock which the Company may issue upon
Conversion of the Preferred Shares and Pari Passu Shares (the "EXCHANGE
CAP") without breaching the Company's obligations under the rules or
regulations of The Nasdaq Stock Market, Inc., except that such limitation
shall not apply in
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<PAGE>
the event that the Company (a) obtains the approval of its stockholders as
required by NASD Rule 4460 (or any successor rule or regulation) for
issuances of Common Stock in excess of such amount or (ii) obtains a
written opinion from outside counsel to the Company that such approval is
not required, which opinion shall be reasonably satisfactory to the holders
of a majority of the Preferred Shares then outstanding. Until such approval
or written opinion is obtained, no purchaser of Preferred Shares and Pari
Passu Shares pursuant to the Purchase Agreement (the "PURCHASERS") shall be
issued, upon conversion of Preferred Shares and Pari Passu Shares, shares
of Common Stock in an amount greater than the product of (i) the Exchange
Cap amount multiplied by (ii) a fraction, the numerator of which is the
number of Preferred Shares and Pari Passu Shares issued to such Purchaser
pursuant to the Purchase Agreement and the denominator of which is the
aggregate amount of all the Preferred Shares and Pari Passu Shares issued
to the Purchasers pursuant to the Purchase Agreement (the "CAP ALLOCATION
AMOUNT"). In the event that any Purchaser shall sell or otherwise transfer
any of such Purchaser's Preferred Shares and Pari Passu Shares, the
transferee shall be allocated a pro rata portion of such Purchaser's Cap
Allocation Amount. In the event that any holder of Preferred Shares and
Pari Passu Shares shall convert all of such holder's Preferred Shares and
Pari Passu Shares into a number of shares of Common Stock which, in the
aggregate, is less than such holder's Cap Allocation Amount, then the
difference between such holder's Cap Allocation Amount and the number of
shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares and Pari Passu Shares on a pro rata basis in proportion to the
number of Preferred Shares then held by each such holder.
12. Vote to Change the Terms of Preferred Shares. The affirmative
--------------------------------------------
vote at a meeting duly called for such purpose or the written consent
without a meeting, of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares and Pari Passu Shares, shall be required
for any change to this Statement of Designations or the Company's
Certificate of Incorporation which would amend, alter, change or repeal any
of the powers, designations, preferences and rights of the Preferred
Shares.
13. Lost or Stolen Certificates. Upon receipt by the Company of
---------------------------
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case
of mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall
not be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares
into Common Stock.
14. Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Statement of Designations
-----------------
shall be cumulative and in addition to all other remedies available under
this Statement of Designations, at law or in equity (including a decree of
specific performance and/or other injunctive relief), no remedy contained
herein shall be deemed a waiver of compliance with the provisions giving
rise to such remedy and nothing herein shall limit a holder's right to
pursue actual damages for any
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<PAGE>
failure by the Company to comply with the terms of this Statement of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as
expressly provided herein. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof)
shall be the amounts to be received by the holder thereof and shall not,
except as expressly provided herein, be subject to any other obligation of
the Company (or the performance thereof). The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to
the holders of the Preferred Shares and that the remedy at law for any such
breach may be inadequate. The Company therefore agrees that, in the event
of any such breach or threatened breach, the holders of the Preferred
Shares shall be entitled, in addition to all other available remedies, to
an injunction restraining any breach, without the necessity of showing
economic loss and without any bond or other security being required.
15. Specific Shall Not Limit General; Construction. No specific
----------------------------------------------
provision contained in this Statement of Designations shall limit or modify
any more general provision contained herein. This Statement of Designations
shall be deemed to be jointly drafted by the Company and all holders of
Preferred Shares and shall not be construed against any person as the
drafter hereof.
16. Failure or Indulgence Not Waiver. No failure or delay on the
--------------------------------
part of a holder of Preferred Shares in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
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<PAGE>
IN WITNESS WHEREOF, the Company has caused this Statement of Designations
to be signed on behalf of the Company, as of the _____ day of ______________.
DATA RACE, INC.
By:
------------------------------------
Gregory T. Skalla
Vice President-Finance
Chief Financial Officer
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<PAGE>
EXHIBIT I
DATA RACE, INC.
CONVERSION NOTICE
Reference is made to the Statement of Designations, Preferences and Rights of
Series F Convertible Preferred Stock (the "STATEMENT OF DESIGNATIONS"). In
accordance with and pursuant to the Statement of Designations, the undersigned
hereby elects to convert the number of shares of Series F Convertible Preferred
Stock, no par value per share (the "PREFERRED SHARES"), of Data Race, Inc., a
Texas corporation (the "COMPANY"), indicated below into shares of Common Stock,
no par value per share (the "COMMON STOCK"), of the Company, by tendering the
stock certificate(s) representing the share(s) of Preferred Shares specified
below as of the date specified below.
Date of Conversion:
------------------------------------------------------
Number of Preferred Shares to be converted:
------------------------------
Stock certificate no(s). of Preferred Shares to be converted:
------------
Please confirm the following information:
Conversion Price:
--------------------------------------------------------
Number of shares of Common Stock
to be issued:
------------------------------------------------------------
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
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----------------------------------------------------------------
----------------------------------------------------------------
Facsimile Number:
--------------------------------------------------------
Authorization:
-----------------------------------------------------------
By:
--------------------------------------------------
Title:
-----------------------------------------------
Dated:
-------------------------------------------------------------------
Account Number:
(if electronic book entry transfer):
-----------------------------------
Transaction Code Number
(if electronic book entry transfer):
-----------------------------------
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