<PAGE>
Exhibit 4.2
CERTIFICATE OF DESIGNATIONS,
PREFERENCES AND RIGHTS
of
SERIES G 8% CONVERTIBLE PREFERRED STOCK
of
IMAGINON, INC.
(Pursuant to Section 151 of the
Delaware General Corporation Law)
ImaginOn, Inc., a corporation organized and existing under the General
Corporation Law of the State of Delaware (the "Company"), hereby certifies that
the following resolutions were adopted by the Board of Directors of the Company
pursuant to authority of the Board of Directors as required by Section 151 of
the Delaware General Corporation Law.
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of the Company (the "Board of Directors" or the "Board") in
accordance with the provisions of the Amended and Restated Certificate of
Incorporation of the Company, the Board of Directors hereby authorizes a series
of the Company's previously authorized Preferred Stock, par value $0.01 per
share (the "Preferred Stock"), and hereby states the designations and number of
shares and fixes the relative rights, preferences, privileges, powers and
restrictions thereof as follows:
Series G 8% Convertible Preferred Stock:
Section 1. Designation, Amount and Par Value. The series of
---------------------------------
preferred stock shall be designated as Series G 8% Convertible Preferred Stock
(the "Preferred Stock") and the number of shares so designated shall be 40
---------------
(which shall not be subject to increase without the consent of the holders of
the Preferred Stock (each, a "Holder" and collectively, the "Holders")). Each
------ -------
share of Preferred Stock shall have a par value of $0.01 per share and a stated
value equal to the sum of $100,000 (the "Stated Value").
------------
Section 2. Dividends.
---------
(a) Holders shall be entitled to receive, out of funds legally
available therefor, and the Company shall pay, cumulative dividends at the rate
per share (as a percentage of the Stated Value per share) of 8% per annum,
payable half yearly (and to the extend accrued but not yet paid, upon
conversion) in cash or in Common Stock valued at the lesser of the Conversion
<PAGE>
Market Price (as defined in Section 5(c)(i) below) or the then Conversion Price
(as defined in Section 5(c)(i) below). Subject to the terms and conditions
herein, the decision whether to pay for dividends in cash or Common Stock shall
be at the discretion of the Company. Dividends on the Preferred Stock shall be
calculated on the basis of a 360-day year, shall accrue daily commencing on the
Original Issue Date (as defined in Section 7), and shall be deemed to accrue
from such date whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends. Any dividends that are not paid within six Trading Days (as
defined in Section 7) of the dividend payment date shall continue to accrue and
shall entail a late fee, which must be paid in cash, at the rate of 18% per
annum or the lesser rate permitted by applicable law (such fees to accrue daily,
from the date such dividends are due hereunder through and including the date of
payment).
(b) Notwithstanding anything to the contrary contained herein, the
Company must pay dividends in cash if:
(i) the number of shares of Common Stock (as defined in Section
7) at the time authorized, unissued and unreserved for all purposes is
insufficient to pay such dividend in Common Stock;
(ii) the Underlying Shares (as defined in Section 7) (x) are not
registered for resale pursuant to an effective Underlying Shares Registration
Statement (as defined in Section 7) and (y) may not be sold without volume
restrictions pursuant to Rule 144(k) promulgated under the Securities Act (as
defined in Section 7);
(iii) the Common Stock is not then quoted for trading on the
Nasdaq SmallCap Market, or is not listed on the Nasdaq National Market, the
American Stock Exchange or the New York Stock Exchange (each, a "Subsequent
----------
Market"); or
------
(iv) the payment of such dividends in Common Stock would result
in a violation of Section 5(a)(iii) or the rules or regulations of any
Subsequent Market on which the Common Stock is then listed or quoted for
trading.
(c) So long as any Preferred Stock shall remain outstanding, neither
the Company nor any subsidiary thereof shall redeem, purchase or otherwise
acquire directly or indirectly any Junior Securities (as defined in Section 7),
nor shall the Company directly or indirectly pay or declare any dividend or make
any distribution (other than a dividend or distribution described in Section 5
or dividends due and paid in the ordinary course on preferred stock of the
Company at such times when the Company is in compliance with its payment and
other obligations hereunder) upon, nor shall any distribution be made in respect
of, any Junior Securities, nor shall any amount be set aside for or applied to
the purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the Preferred Stock ("Pari Passu
----------
Securities").
----------
Section 3. Voting Rights. The Preferred Stock shall have voting
-------------
rights consistent with the voting rights of the holders of Common Stock. Each
share of Preferred Stock
2
<PAGE>
shall be entitled to the number of votes as shall be equal to the Stated Value
divided by the Conversion Price on the Original Issue Date. In addition, so long
as any shares of Preferred Stock are outstanding, the Company shall not, without
the affirmative vote of the Holders of a majority of the shares of the Preferred
Stock then outstanding, (a) alter or change adversely the powers, preferences or
rights given to the Preferred Stock or alter or amend this Certificate of
Designation, (b) authorize or create any class of stock ranking as to dividends
or distribution of assets upon a Liquidation (as defined in Section 4) senior to
or otherwise pari passu with the Preferred Stock, (c) amend its certificate or
articles of incorporation or other charter documents so as to affect adversely
any rights of the Holders, (d) increase the authorized number of shares of
Preferred Stock, or (e) enter into any agreement with respect to the foregoing.
Section 4. Liquidation. Upon any liquidation, dissolution or
-----------
winding-up of the Company, whether voluntary or involuntary (a "Liquidation"),
-----------
the Holders shall be entitled to receive out of the assets of the Company,
whether such assets are capital or surplus, for each share of Preferred Stock an
amount equal to the Stated Value per share before any distribution or payment
shall be made to the holders of any Junior Securities but after any payment or
distribution to be made to the holders of any Senior Securities (as defined in
Section 7), and if the assets of the Company shall be insufficient to pay in
full such amounts and amounts payable to the holders of Pari Passu Securities,
then the entire assets to be distributed to the Holders and holders of Pari
Passu Securities, shall be distributed among the Holders and holders of Pari
Passu Securities, ratably in accordance with the respective amounts that would
be payable on such shares if all amounts payable thereon were paid in full. A
sale, conveyance or disposition of 50% or more of the assets of the Company or
the effectuation by the Company of a transaction or series of related
transactions in which more than 33% of the voting power of the Company is
disposed of, or a consolidation or merger of the Company with or into any other
company or companies into one or more companies not wholly owned by the Company
shall not be treated as a Liquidation, but instead shall be subject to the
provisions of Section 5. The Company shall mail written notice of any
Liquidation, not less than 30 days prior to the payment date stated therein, to
each record Holder.
Section 5. Conversion.
----------
(a)(i) Conversions at Option of Holder. Each share of Preferred Stock
-------------------------------
shall be convertible into shares of Common Stock at the Conversion Ratio (as
defined in Section 7) at the option of the Holder, at any time and from time to
time. Holders shall effect conversions by surrendering the certificate or
certificates representing the shares of Preferred Stock to be converted to the
Company, together with the form of conversion notice attached hereto as Exhibit
-------
A (a "Conversion Notice"). Each Conversion Notice shall specify the number of
- -----------------
shares of Preferred Stock to be converted, the applicable Conversion Price and
the date on which such conversion is to be effected, which date may not be prior
to the date the Holder delivers such Conversion Notice by facsimile to the
Company (the "Conversion Date"). If no Conversion Date is specified in a
---------------
Conversion Notice, the Conversion Date shall be the date that such Conversion
Notice is deemed delivered under Section 5(h). If the Holder is converting less
than all shares of Preferred Stock represented by the certificate or
certificates tendered by the Holder with the Conversion Notice, or if a
conversion hereunder cannot be effected in full for any reason, the
3
<PAGE>
Company shall promptly deliver to such Holder (in the manner and within the time
set forth in Section 5(b)) a certificate representing the number of shares of
Preferred Stock as have not been converted.
(ii) Redemption on Expiration Date. Subject to the provisions in this
-----------------------------
paragraph, the shares of Preferred Stock for which Conversion Notices have not
previously been received shall be redeemed on the fifth anniversary of the
Original Issue Date (the "Expiration Date"), at a price equal to the Stated
---------------
Value of the shares of Preferred Stock then outstanding plus all accred and
unpaid dividends.
(iii) Certain Conversion Restrictions.
--------------------------------
(A) A Holder may not convert shares of Preferred Stock or receive
shares of Common Stock as payment of dividends hereunder to the extent such
conversion or receipt of such dividend would result in the Holder, together with
any affiliate thereof, beneficially owning (as determined in accordance with
Section 13(d) of the Exchange Act (as defined in Section 7) and the rules
promulgated thereunder) in excess of 9.999% of the then issued and outstanding
shares of Common Stock, including shares issuable upon conversion of, and
payment of dividends on, the shares of Preferred Stock held by such Holder after
application of this Section. Since the Holder will not be obligated to report
to the Company the number of shares of Common Stock it may hold at the time of a
conversion hereunder, unless the conversion at issue would result in the
issuance of shares of Common Stock in excess of 9.999% of the then outstanding
shares of Common Stock without regard to any other shares which may be
beneficially owned by the Holder or an affiliate thereof, the Holder shall have
the authority and obligation to determine whether the restriction contained in
this Section will limit any particular conversion hereunder and to the extent
that the Holder determines that the limitation contained in this Section
applies, the determination of which portion of the shares of Preferred Stock are
convertible shall be the responsibility and obligation of the Holder. If the
Holder has delivered a Conversion Notice for shares of Preferred Stock that,
without regard to any other shares that the Holder or its affiliates may
beneficially own, would result in the issuance in excess of the permitted
amount hereunder, the Company shall notify the Holder of this fact and shall
honor the conversion for the maximum number of shares of Preferred Stock
permitted to be converted on such Conversion Date in accordance with the periods
described in Section 5(b) and, at the option of the Holder, either retain shares
of Preferred Stock tendered for conversion in excess of the permitted amount
hereunder for future conversions or return such excess shares of Preferred Stock
permitted to the Holder.
(B) If the Common Stock is then quoted for trading on the Nasdaq Small
Cap Market and the Company has not obtained the Shareholder Approval (as defined
below), then the Company is precluded from issuing Underlying Shares at a
Conversion Price that is less than the closing sales price per share of the
Common Stock on the Trading Day immediately preceding the closing of the
transactions contemplated by the Purchase Agreement, subject to equitable
adjustment in the event of stock splits and similar events (such price, the
"Market Price"), in excess of 8,932,233 shares of Common Stock (the "Issuable
------------- --------
Maximum") upon conversion of the Preferred Stock and as payment of dividends
-------
thereon. The Issuable
4
<PAGE>
Maximum equals 19.999% of the number of shares of Common Stock outstanding
immediately prior to the closing of transactions set forth in the Purchase
Agreement. Each Holder shall be entitled to a portion of the Issuable Maximum
equal to the quotient obtained by dividing (x) the number of shares of Preferred
Stock issued and sold to such Holder on the Original Issue Date by (y) the
number of all shares of Preferred Stock issued and sold by the Company on the
Original Issue Date. If any Holder shall no longer hold shares of Preferred
Stock, then such Holder's remaining portion of the Issuable Maximum shall be
allocated pro-rata among the remaining Holders. If on any Conversion Date (A)
the Common Stock is listed for trading on the Nasdaq Small Cap Market and (B)
the Company shall not have previously obtained the vote of shareholders, if any,
as may be required by the applicable rules and regulations of the Nasdaq Small
Cap Market (or any successor entity) applicable to approve the issuance of a
number of shares of Common Stock in excess of the Issuable Maximum at a price
below the Market Price (the "Shareholder Approval"), then the Company shall
--------------------
issue to the Holder requesting a conversion a number of shares of Common Stock
equal to the lesser of (x) the number of shares of Common Stock issuable upon
such conversion at the Conversion Price and (y) the Holder's pro rata portion
(determined as described above) of the Issuable Maximum less all shares of
Common Stock previously issued to such Holder upon conversions of the Preferred
Stock (including as payment of dividends thereon) (but only those shares issued
at a Conversion Price less than the Market Price). With respect to the remainder
of the aggregate Stated Value of the shares of Preferred Stock then held by such
Holder for which a conversion in accordance with the Conversion Price would
result in an issuance of shares of Common Stock in excess of such Holder's pro-
rata portion of the Issuable Maximum (the "Excess Stated Value"), the converting
-------------------
Holder shall have the option to require the Company to either (1) use its best
efforts to obtain the Shareholder Approval applicable to such issuance as soon
as is possible, but in any event not later than the 75th day after such request,
or (2) pay cash to the converting Holder in an amount equal to the Mandatory
Redemption Amount (as defined in Section 7) for the Excess Stated Value. If the
converting Holder shall have elected the first option pursuant to the
immediately preceding sentence and the Company shall have failed to obtain the
Shareholder Approval on or prior to the 75th day after such request, then,
within three Business Days following the request of the converting Holder, which
may be given at any time following such 75th day, the Company shall pay cash to
the converting Holder an amount equal to the Mandatory Redemption Amount for the
Excess Stated Value. If the Company fails to pay the Mandatory Redemption Amount
in full pursuant to this Section when due, the Company will pay interest thereon
at a rate of 18% per annum or such lesser maximum amount that is permitted to be
paid by applicable law, to the converting Holder, accruing daily from the date
such amounts were due until such amount, plus all such interest thereon, is paid
in full. The Company and the Holder understand and agree that shares of Common
Stock issued to and then held by a Holder as a result of conversions of
Preferred Stock shall not be entitled to vote in respect of the Shareholder
Approval.
(b)(i) Not later than three Trading Days after each Conversion Date,
the Company will deliver to the Holder (A) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number of
shares of Common Stock being acquired upon the conversion of shares of Preferred
Stock, (B) one or more certificates representing the number of shares of
Preferred Stock not converted and (C) a bank check in the amount of accrued and
unpaid
5
<PAGE>
dividends (if the Company has elected or is required to pay accrued dividends in
cash). Notwithstanding the foregoing or anything to the contrary contained
herein, the Company shall not be obligated to issue certificates evidencing the
shares of Common Stock issuable upon conversion of any shares of Preferred Stock
until one Trading Day after certificates evidencing such shares of Preferred
Stock are delivered for conversion to the Company, or the Holder of such
Preferred Stock notifies the Company that such certificates have been lost,
stolen or destroyed and provides a bond (or other adequate security) reasonably
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. The Company shall, upon request of the Holder, if
available, use reasonable efforts to deliver any certificate or certificates
required to be delivered by the Company under this Section electronically
through the Depository Trust Corporation or another established clearing
corporation performing similar functions. If in the case of any Conversion
Notice such certificate or certificates are not delivered to or as directed by
the applicable Holder by the third Trading Day after the Conversion Date, the
Holder shall be entitled to elect by written notice to the Company at any time
on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately return the
certificates representing the shares of Preferred Stock tendered for conversion.
(ii) If the Company fails to deliver to the Holder such certificate
or certificates pursuant to Section 5(b)(i), by the fourth Trading Day after the
Conversion Date, the Holder shall be entitled, on its next conversion of
Preferred Stock, to a 1% discount off the then Conversion Price for each Trading
Day after such fourth Trading Day until such certificates are delivered. Upon
receipt of the late certificates, the Holder will cause to be sent to the
Company by facsimile a notice stating the date of receipt of the certificates
and the number of days beyond the fourth Trading Day by which the certificates
were late in substantially the form set forth as Exhibit B hereto. Nothing
---------
herein shall limit a Holder's right to pursue actual damages for the Company's
failure to deliver certificates representing shares of Common Stock upon
conversion within the period specified herein and such Holder shall have the
right to pursue all remedies available to it hereunder, at law or in equity
including, without limitation, a decree of specific performance and/or
injunctive relief.
(c)(i) The conversion price for each share of Preferred Stock in
effect on any Conversion Date (the "Conversion Price") shall be determined as
----------------
follows: (A) from the Original Issue Date until a date which is the six month
anniversary of the Original Issue Date, the Conversion Price shall equal the
lower of (x) $1.25, or (y) 150% of the Market Price on the Original Issue Date
(the "Initial Conversion Price"), and (B) on the six month anniversary of the
------------------------
Original Issue Date, and on each such subsequent six month anniversary for so
long as the Preferred Stock is outstanding, the Conversion Price shall be
adjusted to the Conversion Market Price on such date, if that would result in a
lower Conversion Price (the "Adjusted Conversion Price"); provided, however,
-------------------------
that in no event shall the Adjusted Conversion Price be less than $0.25. The
"Conversion Market Price" shall be defined as the average of the closing bid
------------------------
prices of the Common Stock over the twenty (20) consecutive Trading Days
immediately preceding the date of the calculation. Notwithstanding the
foregoing, in the event the Company is obligated to pay damages pursuant to
Section 2(c)(i) of the Registration Rights Agreement and fails to pay any such
amount within five (5) days of its due date, the Conversion Price shall
immediately and
6
<PAGE>
automatically be adjusted to $0.25; provided, however, that if the Conversion
Price is so reduced as a result of this provision because of a failure to timely
pay such damages and the shares are not converted by the Investors prior to the
sale by the Investors of such shares of Preferred Stock to a third person, upon
such sale and transfer the Conversion Price will revert to the lower of $1.25 or
150% of the Market Price on the Closing Date or to the Adjusted Conversion Price
as determined on each subsequent six month anniversary.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall (a) pay a stock dividend or otherwise make a distribution
or distributions on shares of its Junior Securities or pari passu securities
payable in shares of Common Stock, (b) subdivide outstanding shares of Common
Stock into a larger number of shares, (c) combine outstanding shares of Common
Stock into a smaller number of shares, or (d) issue by reclassification and
exchange of the Common Stock any shares of capital stock of the Company, then
the Conversion Price shall be multiplied by a fraction of which the numerator
shall be the number of shares of Common Stock outstanding before such event and
of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this Section
5(c)(ii) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) Subject to the exclusions set forth below, if at any time while
any shares of Preferred Stock are outstanding (the "MFN Period"), the Company
sells any shares of its Common Stock at a per share selling price ("Per Share
Selling Price") lower than the Conversion Price then in effect, the Conversion
Price shall be adjusted downward to equal such lower Per Share Selling Price;
provided, however, that in no event shall the Conversion Price be adjusted below
$0.25. The Company shall give to the Investors written notice of any such sale
within 24 hours of the closing of any such sale and shall within such 24 hour
period issue a press release announcing such sale.
(A) For the purposes of this Section 5(c)(iii), the term "Per
Share Selling Price" shall include the amount actually paid by third parties for
each share of Common Stock; in the event a fee is paid by the Company in
connection with the transaction, any such fee shall be deducted from the selling
price pro rata to all shares sold in the transaction to arrive at the Per Share
Selling Price. A sale of shares of Common Stock shall include the sale or
issuance of rights, options, warrants or convertible securities ("derivative
securities") under which the Company is or may become obligated to issue shares
of Common Stock, and in such circumstances the sale of Common Stock shall be
deemed to have occurred at the time of the issuance of the derivative securities
and the Per Share Selling Price of the Common Stock covered thereby shall also
include the exercise price thereof (in addition to the consideration received by
the Company upon such sale or issuance less the fee amount as provided above).
In case of any such security issued within the MFN Period in a "Variable Rate
Transaction" or an "MFN Transaction" (each as defined below), the Per Share
Selling Price shall be deemed to be the lowest conversion or exercise price at
which such securities are converted or exercised or might have been converted or
exercised in the case of a Variable Rate Transaction, or the lowest
7
<PAGE>
adjustment price in the case of an MFN Transaction. If shares are issued for a
consideration other than cash, the Per Share Selling Price shall be the fair
value of such consideration as determined in good faith by the Board of
Directors of the Company.
(B) The term "Variable Rate Transaction" shall mean a
transaction in which the Company issues or sells (a) any debt or equity
securities that are convertible into, exchangeable or exercisable for, or
include the right to receive additional shares of Common Stock either (x) at a
conversion, exercise or exchange rate or other price that is based upon and/or
varies with the trading prices of or quotations for the Common Stock at any time
after the initial issuance of such debt or equity securities, or (y) with a
fixed conversion, exercise or exchange price that is subject to being reset at
some future date after the initial issuance of such debt or equity security or
upon the occurrence of specified or contingent events directly or indirectly
related to the business of the Company or the market for the Common Stock (but
excluding customary anti-dilution provisions for forward or reverse stock
splits, stock dividends, reclassifications, recapitalizations, mergers or
consolidations or similar adjustments affecting the Company's Common Stock), or
(b) any securities of the Company pursuant to an "equity line" structure which
provides for the sale, from time to time, of securities of the Company which are
registered pursuant to the 1933 Act.
(C) The term "MFN Transaction" shall mean a transaction in
which the Company issues or sells any securities in a capital raising
transaction or series of related transactions (the "New Offering") which grants
to an investor (the "New Investor") the right to receive additional shares based
upon future transactions of the Company on terms more favorable than those
granted to the New Investor in the New Offering.
(D) The term "MFN Period" shall have the meaning set forth
in Section 5(c)(iii) above.
This Section 5(c)(iii) shall not apply to any (i) the issuance of
Common Stock upon the exercise or conversion of the Company's options, warrants
or other convertible securities issued and outstanding on the Original Issue
Date or (ii) sales of shares of Common Stock by the Company pursuant to the
provisions of any employee option or similar plan adopted by the Company prior
to the Original Issue Date or subsequently adopted by the Company and approved
by the Company's shareholders.
(iv) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be. The number
of shares of Common Stock outstanding at any given time shall not include shares
owned or held by or for the account of the Company, and the disposition of any
such shares shall be considered an issue or sale of Common Stock.
(v) Whenever the Initial Conversion Price or the Conversion
Price is adjusted pursuant to Section 5(c)(ii) or (iii), the Company shall,
within five (5) days, give notice by facsimile or overnight courier to each
Holder setting forth the Initial Conversion Price or the Conversion Price (as
applicable) after such adjustment and setting forth a brief statement of the
facts requiring such adjustment.
8
<PAGE>
(vi) In case of any reclassification of the Common Stock, or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property (other than compulsory share exchanges which
constitute Change of Control Transactions), the Holders of the Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities, cash and property receivable upon
or deemed to be held by holders of Common Stock following such reclassification
or share exchange, and the Holders of the Preferred Stock shall be entitled upon
such event to receive such amount of securities, cash or property as a holder of
the number of shares of Common Stock of the Company into which such shares of
Preferred Stock could have been converted immediately prior to such
reclassification or share exchange would have been entitled. This provision
shall similarly apply to successive reclassifications or share exchanges.
(vii) In case of any (1) merger or consolidation of the Company
with or into another Person, or (2) sale by the Company of more than one-half of
the assets of the Company (on an as valued basis) in one or a series of related
transactions, a Holder shall have the right thereafter to (A) convert its shares
of Preferred Stock into the shares of stock and other securities, cash and
property receivable upon or deemed to be held by holders of Common Stock
following such merger, consolidation or sale, and such Holder shall be entitled
upon such event or series of related events to receive such amount of
securities, cash and property as the shares of Common Stock into which such
shares of Preferred Stock could have been converted immediately prior to such
merger, consolidation or sale would have been entitled, or (B) in the case of a
merger or consolidation, (x) require the surviving entity to issue shares of
convertible preferred stock or convertible debentures with such aggregate stated
value or in such face amount, as the case may be, equal to the Stated Value of
the shares of Preferred Stock then held by such Holder, plus all accrued and
unpaid dividends and other amounts owing thereon, which newly issued shares of
preferred stock or debentures shall have terms identical (including with respect
to conversion) to the terms of the Preferred Stock (except, in the case of
debentures, as may be required to reflect the differences between debt and
equity) and shall be entitled to all of the rights and privileges of a Holder of
Preferred Stock set forth herein and the agreements pursuant to which the
Preferred Stock was issued (including, without limitation, as such rights relate
to the acquisition, transferability, registration and listing of such shares of
stock other securities issuable upon conversion thereof), and (y) simultaneously
with the issuance of such convertible preferred stock or convertible debentures,
shall have the right to convert such instrument only into shares of stock and
other securities, cash and property receivable upon or deemed to be held by
holders of Common Stock following such merger or consolidation. In the case of
clause (B), the conversion price applicable for the newly issued shares of
convertible preferred stock or convertible debentures shall be based upon the
amount of securities, cash and property that each share of Common Stock would
receive in such transaction, the Conversion Ratio immediately prior to the
effectiveness or closing date for such transaction and the Conversion Price
stated herein. The terms of any such merger, sale or consolidation shall include
such terms so as continue to give the Holders of Preferred Stock the right to
receive the securities, cash and property set forth in this Section upon any
conversion or redemption following such event. This provision shall similarly
apply to successive such events. The rights set forth in this Section 5(c)(vii)
shall not alter the rights of a Holder set forth in Section 6,
9
<PAGE>
provided that a Holder may only exercise the rights set forth in this Section
5(c)(vii) or the rights set forth in Section 6 with respect to a single event
giving rise to such rights.
(viii) If (a) the Company shall declare a dividend (or any other
distribution) on the Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock, (c) the
Company shall authorize the granting to all holders of Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of any class
or of any rights, (d) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the Common Stock, any
consolidation or merger to which the Company is a party, any sale or transfer of
all or substantially all of the assets of the Company, or any compulsory share
of exchange whereby the Common Stock is converted into other securities, cash
or property, or (e) the Company shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the affairs of the Company; then the
Company shall notify the Holders at their last addresses as they shall appear
upon the stock books of the Company, at least 20 calendar days prior to the
applicable record or effective date hereinafter specified, a notice stating (x)
the date on which a record is to be taken for the purpose of such dividend,
distribution, redemption, rights or warrants, or if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distributions, redemption, rights or warrants are to be
determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange. Holders are entitled to convert shares of
Preferred Stock during the 20-day period commencing the date of such notice to
the effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of Common Stock as shall be
issuable (taking into account the provisions of Section 5(a) and Section 5(c))
upon the conversion of all outstanding shares of Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly authorized, validly issued, fully paid and nonassessable.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
shall round to the next highest whole number and disregard the fraction.
(f) The issuance of certificates for Common Stock on conversion of
Preferred Stock shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
10
<PAGE>
than that of the Holder of such shares of Preferred Stock so converted.
(g) Shares of Preferred Stock converted into Common Stock or
redeemed in accordance with the terms hereof shall be canceled and may not be
reissued.
(h) Any and all notices or other communications or deliveries to
be provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Financial Officer addressed to1313
Laurel Street, Suite No. 1, San Carlos, CA 94070 or by facsimile to: 650/596-
9350, or to such other address or facsimile number as shall be specified in
writing by the Company for such purpose. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
8:00 p.m. (New York City time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 8:00 p.m. (New York City
time) on any date and earlier than 11:59 p.m. (New York City time) on such date,
(iii) upon receipt, if sent by a nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.
Section 6. Redemption Upon Triggering Events.
---------------------------------
(a) Upon the occurrence of a Triggering Event, each Holder shall
(in addition to all other rights it may have hereunder or under applicable law)
have the right, exercisable at the sole option of such Holder, to require the
Company to redeem all or a portion of the Preferred Stock then held by such
Holder for a redemption price, in cash, equal to the sum of (i) the Mandatory
Redemption Amount (as defined in Section 7) plus (ii) the product of (A) the
number of Underlying Shares issued in respect of conversions hereunder not more
than twenty Trading Days prior to the Triggering Event at issue and then held by
the Holder and (B) the Per Share Market Value on the date such redemption is
demanded or the date the redemption price hereunder is paid in full, whichever
is greater (such sum, the "Redemption Price"). The Redemption Price shall be due
----------------
and payable within ten Trading Days of the date on which the notice for the
payment therefor is provided by a Holder. If the Company fails to pay the
Redemption Price hereunder in full pursuant to this Section on the date such
amount is due in accordance with this Section, the Company will pay interest
thereon at a rate of 18% per annum (or such lesser rate permitted by applicable
law), accruing daily from such date until the Redemption Price, plus all such
interest thereon, is paid in full. For purposes of this Section, a share of
Preferred Stock is outstanding until such date as the Holder shall have received
Underlying Shares upon a conversion (or attempted conversion) thereof that meets
the
11
<PAGE>
requirements hereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgment, decree or order of any
court, or any order, rule or regulation of any administrative or governmental
body):
(i) the failure of an Underlying Shares Registration Statement
to be declared effective by the Commission on or prior to the 180th day after
the Original Issue Date;
(ii) if, during the Effectiveness Period (as defined in the
Registration Rights Agreement), there is a "Blackout Period" (as that term is
defined in the Registration Rights Agreement as between the Company and the
holder of the Preferred Stock extending for longer than 180 days;
(iii) the Company shall fail for any reason to deliver
certificates representing Underlying Shares issuable upon a conversion hereunder
that comply with the provisions hereof prior to the tenth Trading Day after the
Conversion Date or the Company shall provide notice to any Holder, including by
way of public announcement, at any time, of its intention not to comply with
requests for conversion of any shares of Preferred Stock in accordance with the
terms hereof;
(iv) the Company shall be a party to any Change of Control
Transaction, shall agree to sell (in one or a series of related transactions)
more than 33% of its assets or shall redeem or repurchase more than the amount
permitted to be redeemed or repurchased under Section 2(c) of Common Stock or
other Junior Securities (other than redemptions of Underlying Shares);
(v) the Company shall fail to have available a sufficient
number of authorized and unreserved shares of Common Stock to issue to such
Holder upon a conversion hereunder; or
(vi) the Company shall fail to observe or perform any other
material covenant, agreement or warranty contained in, or otherwise commit any
material breach of the Transaction Documents (as defined in Section 7), and such
failure or breach shall not, if subject to the possibility of a cure by the
Company, have been remedied or cured within twenty Business Days after the date
on which written notice of such failure or breach shall have been given.
Section 7. Section 7. Section 7. Definitions. For the purposes
-----------------------------------
hereof, the following terms shall have the following meanings:
"Change of Control Transaction" means the occurrence of any of (i) an
-----------------------------
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of control
(whether through legal or beneficial ownership of capital stock of the Company,
by contract or otherwise) of in excess of 33% of the voting
12
<PAGE>
securities of the Company, (ii) a replacement at one time or over time of more
than one-half of the members of the Company's board of directors which is not
approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), (iii) the merger of the Company with or into
another entity that is not wholly-owned by the Company, consolidation or sale of
50% or more of the assets of the Company in one or a series of related
transactions, or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"Commission" means the Securities and Exchange Commission.
----------
"Common Stock" means the Company's common stock, $0.01 par value per
------------
share, and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"Conversion Ratio" means, at any time, a fraction, the numerator of
----------------
which is Stated Value and the denominator of which is the Conversion Price at
such time.
"Effective Date" means the date on which the Commission first declares
--------------
effective an Underlying Shares Registration Statement.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
------------
"Junior Securities" means the Common Stock and all other equity
-----------------
securities of the Company other than those securities that are outstanding on
the Original Issue Date and which are explicitly senior in rights or liquidation
preference to the Preferred Stock.
"Mandatory Redemption Amount" for each share of Preferred Stock means
---------------------------
the sum of (i) the greater of (A) 120% of the Stated Value and (B) the product
of (a) the Per Share Market Value on the Trading Day immediately preceding (x)
the date of the Triggering Event or the Conversion Date, as the case may be, or
(y) the date of payment in full by the Company of the applicable redemption
price, whichever is greater, and (b) the Conversion Ratio calculated on the
date of the Triggering Event, or the Conversion Date, as the case may be, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such share of Preferred Stock.
"Original Issue Date" shall mean the date of the first issuance of any
-------------------
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"Per Share Market Value" means on any particular date (a) the closing
----------------------
bid price per share of Common Stock on such date on the Nasdaq Small Cap Market
or a Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such
13
<PAGE>
date, then the closing bid price on the Nasdaq Small Cap Market or a Subsequent
Market on the date nearest preceding such date, or (b) if the Common Stock is
not then listed or quoted on a Subsequent Market, the closing bid price for a
shares of Common Stock on the OTC, as reported by the National Quotation Bureau
Incorporated or similar organization or agency succeeding to its functions of
reporting prices) at the close of business on such date, or (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period,
as determined in good faith by the Holder, or (d) if the Common Stock is not
then publicly traded the fair market value of a share of Common Stock as
determined by an Appraiser selected in good faith by the Holders of a majority
of the shares of Preferred Stock. All stock prices shall be conclusively
reported by Bloomberg L.P. (or the successor to its function of reporting stock
prices).
.
"Person" means a corporation, an association, a partnership, an
------
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Purchase Agreement" means the Stock Purchase Agreement, dated as of
------------------
the Original Issue Date, to which the Company and the original Holder are
parties, as amended, modified or supplemented from time to time in accordance
with its terms.
"Registration Rights Agreement" means the Registration Rights
-----------------------------
Agreement, dated as of the Original Issue Date, to which the Company and the
original Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"Securities Act " means the Securities Act of 1933, as amended.
--------------
"Trading Day" means (a) a day on which the Common Stock is traded on
-----------
the Nasdaq Small Cap Market or a Subsequent Market on which the Common Stock is
then listed or quoted, as the case may be, or (b) if the Common Stock is not
listed on the Nasdaq Small Cap Market or a Subsequent Market, a day on which the
Common Stock is traded in the over-the-counter market, as reported by the OTC,
or (c) if the Common Stock is not quoted on the OTC, a day on which the Common
Stock is quoted in the over-the-counter market as reported by the National
Quotation Bureau Incorporated (or any similar organization or agency succeeding
its functions of reporting prices); provided, however, that in the event that
-------- -------
the Common Stock is not listed or quoted as set forth in (a), (b) and (c)
hereof, then Trading Day shall mean any day except Saturday, Sunday and any day
which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"Transaction Documents" shall have the meaning set forth in the
---------------------
Purchase Agreement.
"Underlying Shares" means, collectively, the shares of Common Stock
-----------------
into which the shares of Preferred Stock are convertible in accordance with the
terms hereof.
14
<PAGE>
"Underlying Shares Registration Statement" means a registration
----------------------------------------
statement that meets the requirements of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the Holder, who shall be named
as a "selling stockholder" thereunder.
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series G 8%
Convertible Preferred Stock indicated below, into shares of Common Stock, $0.01
par value per share (the "Common Stock"), of Imaginon, Inc., a Delaware
------------
corporation (the "Company"), according to the conditions hereof, as of the date
-------
written below. If shares are to be issued in the name of a person other than
undersigned, the undersigned will pay all transfer taxes payable with respect
thereto and is delivering herewith such certificates and opinions as reasonably
requested by the Company in accordance therewith. No fee will be charged to the
Holder for any conversion, except for such transfer taxes, if any.
If a Registration Statement is effective and shares are to be issued without a
legend, the undersigned agrees to resell the shares of Common Stock issuable
pursuant to the Notice of Conversion only pursuant to the Prospectus included in
the Registration Statement (as such terms are defined in the Registration Rights
Agreement among the Company and the investor signatory thereto).
Conversion calculations:
Date to Effect Conversion:
Applicable Conversion Price:
Number of shares of Preferred Stock to be Converted:
Stated Value of shares of Preferred Stock to be Converted:
Number of shares of Common Stock to be Issued:
Signature
Name
Address
15
<PAGE>
EXHIBIT B
NOTICE OF LATE DELIVERY
(To be Executed by the Holder and the
Holder's broker or share custodian)
To: ImaginOn, Inc.
We received _________#_______ Conversion Shares relating to the Conversion
Notice dated _____________[date]_______ (the "Conversion Date") a total of
_____#____ Trading Days beyond the fourth Trading Day after the Conversion Date.
_______________________________________
[Authorized Signatory for Investor]
On _____________[date]___________ we received _________#_______ shares of
ImaginOn, Inc. common stock into the account of
________________________________.
_______________________________________
[Name of Entity]
(Registered broker dealer acting as
prime broker or custodian of the
above named account holder)
By:
Title:
Date:
16
<PAGE>
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Company on this 3rd day of August, 2000.
ImaginOn, Inc.
/s/ David M. Schwartz
----------------------------------
By: David M. Schwartz
President and Chief Executive Officer
17
