<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF DESIGNATION OF PREFERENCES OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF APPLIED DIGITAL SOLUTIONS, INC.
A MISSOURI CORPORATION
Garrett A. Sullivan hereby certifies that:
A. He is the President of Applied Digital Solutions, Inc. (the
"COMPANY"), a Missouri corporation.
B. Pursuant to the authority vested in the Board of Directors of the
Company given by Article Three of the Company's Second Restated Articles of
Incorporation, as amended as of September 5, 2000, the Board of Directors of the
Company has duly adopted the following resolutions:
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors
does hereby provide for the issue of a series of Preferred Stock of the
corporation consisting of one hundred thousand (100,000) shares
designated as "Series C Convertible Preferred Stock," and does hereby
fix the preferences, qualifications, limitations, restrictions and
special or relative rights relating to said Series C Convertible
Preferred Stock as follows:
(1) DESIGNATION; VOTING RIGHTS.
(a) The series of preferred stock established hereby
shall be designated the "Series C Convertible Preferred Stock," which series
shall herein be referred to as the "SERIES C-1 PREFERRED SHARES" or the "SERIES
C-2 PREFERRED SHARES", as the case may be, (collectively, the "SERIES C
PREFERRED SHARES") and the authorized number of Series C Preferred Shares shall
be 100,000. Except as expressly provided herein, each of the Series C-1
Preferred Shares and the Series C-2 Preferred Shares shall have the same
preferences, qualifications, limitations, restrictions and special or relative
rights. The stated value per Series C Preferred Share shall be $1,000 (the
"STATED VALUE").
(b) The holders of the outstanding Series C Preferred
Shares (collectively, the "HOLDERS" and each a "HOLDER") shall have no voting
rights with respect to the Series C Preferred Shares, except as required by law,
including but not limited to The General and Business Corporation Law of
Missouri, and as expressly provided in this Certificate of Designation.
(2) HOLDER'S CONVERSION OF SERIES C PREFERRED SHARES. A Holder
shall have the right, at such Holder's option, to convert the Series C Preferred
Shares into shares of the Company's common stock, $.001 par value per share (the
"COMMON STOCK") (as converted, the "CONVERSION SHARES"), on the following terms
and conditions:
<PAGE> 2
(a) CONVERSION RIGHT. (i) Subject to the provisions
of Section 3(g) below and the restrictions identified herein, any Holder shall
be entitled to convert at any time or from time to time on or after the initial
date the first Series C Preferred Shares are issued (the "INITIAL ISSUANCE
DATE") any or all of such Holder's Series C Preferred Shares into fully paid and
nonassessable shares (rounded to the nearest whole share in accordance with
Section 2(d) below) of Common Stock, at the Conversion Rate (as defined below).
(ii) In addition to the conversion rights set forth
in Section 2(a)(i), at any time beginning at the earlier of (A) 90 days from the
Initial Issuance Date and (B) the effectiveness of the Initial Registration
Statement (as defined below), and if applicable, (A) 90 days from the Additional
Closing Date (as defined below), and (B) the effectiveness of the Additional
Registration Statement (as defined below) any Holder of Series C Preferred
Shares shall be entitled to convert any or all of such Holder's Series C
Preferred Shares into fully paid and nonassessable shares (rounded to the
nearest whole share in accordance with Section 2(d) below) of Common Stock at
either the Conversion Rate or the Alternate Conversion Rate (as defined below);
PROVIDED, HOWEVER, that such Holder's right to convert:
(x) any then outstanding Series C-1 Preferred Shares
pursuant to this Section 2(a)(ii) at the Alternate Conversion
Rate shall not apply if, after the Initial Registration
Statement is declared effective, the Closing Price (as defined
below) of the Company's Common Stock is equal to or greater
than 200% of the Conversion Price for such Series C-1
Preferred Shares, for 20 out of any 30 consecutive trading
days and the Initial Registration Statement has remained
effective at all times during and through the end of such 30
consecutive trading day period; and
(y) any then outstanding Series C-2 Preferred Shares
pursuant to this Section 2(a)(ii) at the Alternate Conversion
Rate shall not apply if, after the Initial Registration
Statement is declared effective, and if applicable, the
Additional Registration Statement is declared effective, the
Closing Price of the Company's Common Stock is equal to or
greater than 200% of the Conversion Price for such Series C-2
Preferred Shares, for 20 out of any 30 consecutive trading
days and such Registration Statement has remained effective at
all times during and through the end of such 30 consecutive
trading day period (the events described in clause (x) and (y)
each being hereinafter referred to as an "ALTERNATE CONVERSION
RATE ELIMINATION EVENT").
In the event that the Company issues any Series C-2 Preferred Shares after any
Alternate Conversion Rate Elimination Event (excluding Series C-2 Preferred
Shares issued as part of a dividend payment pursuant to Section 7 below), each
newly issued Series C-2 Preferred Share shall once again be entitled to the
Alternate Conversion Rate provision until such time as there is another
Alternate Conversion Rate Elimination Event relating specifically to the Series
C-2 Preferred Shares.
Notwithstanding the provisions hereof, a Holder shall not at any time
be entitled to elect to convert Series C Preferred Shares, and the Company shall
not honor any request for such conversion, which, upon giving effect to such
conversion, would cause the aggregate number of shares of Common Stock
beneficially owned by such Holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such conversion; provided,
-2-
<PAGE> 3
however, that the Holder may elect to waive this restriction upon not less than
sixty-one (61) days prior written notice to the Company. For purposes hereof,
beneficial ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. Notwithstanding the foregoing, the
Company shall not be precluded from issuing any required shares of Common Stock
pursuant to Section 2(c) hereof.
For purposes of this Certificate of Designation, the following terms
shall have the following meanings:
(i) "ADDITIONAL CLOSING DATE" shall have the meaning ascribed
thereto in the Purchase Agreement.
(ii) "ADDITIONAL REGISTRATION STATEMENT" shall have the
meaning ascribed thereto in the Registration Rights Agreement.
(iii) "ADDITIONAL SHARES OF COMMON STOCK" shall mean all
shares (including treasury shares) of Common Stock issued or sold (or,
pursuant to Section (2)(g), deemed to be issued) by the Company after
the Initial Issuance Date, whether or not subsequently reacquired or
retired by the Company, other than (a) (i) shares of Common Stock
issued upon conversion of the Series C Preferred Shares, (ii) shares of
Common Stock issued upon exercise of the Warrants, or (iii) such number
of additional shares of Common Stock as may become issuable by
conversion of the Series C Preferred Shares and exercise of the
Warrants by reason of adjustments required pursuant to the
anti-dilution provisions applicable to such Warrants or Series C
Preferred Shares; (b) shares of Common Stock issued pursuant to
Approved Stock Plans (as defined herein); (c) shares of Common Stock
issued in connection with acquisitions of the assets or stock of an
unaffiliated third-party consummated on an arms length basis (including
any brokerage commissions or finders fee relating thereto and any
shares issuable in respect of rights granted by an acquired company
which were in existence at the time of acquisition of such company by
the Company); (d) shares of Common Stock issued in connection with
joint ventures, licensing arrangements or strategic relationships,
provided that no more than 10 million shares are so issued in the
aggregate pursuant to clauses (c) and (d) during the three (3) month
period beginning on the Initial Issuance Date; and (e) shares of Common
Stock issued pursuant to any right (contingent or otherwise) to
purchase such shares as set forth in Schedule 3(c)(i) to the Purchase
Agreement.
(iv) "ALTERNATE CONVERSION PRICE" means:
(A) for the Series C-1 Preferred Shares, the product
of (x) the average of the Closing Price for the 10 trading
days immediately preceding the Conversion Date and (y) (i)
where the Conversion Date occurs during the period beginning
on the Initial Issuance Date and expiring 149 days thereafter,
140%; (ii) where the Conversion Date occurs during the period
beginning on the 150th day from the Initial Issuance Date and
ending on the 180th day thereafter, 125%; (iii) where the
Conversion Date occurs during the period beginning on the
181st day after the Initial Issuance Date and ending on the
-3-
<PAGE> 4
240th day thereafter, 115%; or (iv) where the Conversion Date
occurs during the period beginning on the 241st day from the
Initial Issuance Date, 110%; provided, HOWEVER, that during
the period commencing on the Initial Issuance Date and ending
90 days thereafter, the Alternate Conversion Price shall not
be less than the Hard Floor Price pertaining to the Series C-1
Preferred Shares;
(B) for the Series C-2 Preferred Shares, the product
of (x) the average of the Closing Price for the 10 trading
days immediately preceding the Conversion Date and (y) (i)
where the Conversion Date occurs during the period beginning
on the Additional Closing Date applicable to the issuance of
such Series C-2 Preferred Shares and expiring 149 days
thereafter, 140%; (ii) where the Conversion Date occurs during
the period beginning on the 150th day from the applicable
Additional Closing Date and ending on the 180th day
thereafter, 125%; (iii) where the Conversion Date occurs
during the period beginning on the 181st day after the
applicable Additional Closing Date and ending on the 240th day
thereafter, 115%; or (iv) where the Conversion Date occurs
during the period beginning on the 241st day from the
applicable Additional Closing Date, 110%; PROVIDED, HOWEVER,
that during the period commencing on the applicable Additional
Closing Date and ending 90 days thereafter, the Alternate
Conversion Price shall not be less than the Hard Floor Price
pertaining to such Series C-2 Preferred Shares.
(v) "ALTERNATE CONVERSION RATE" shall be determined according
to the following formula:
Stated Value + Amount of Accrued but Unpaid Dividends
-----------------------------------------------------
Alternate Conversion Price
(vi) "APPROVED STOCK PLAN" means any contract, plan or
agreement which has been or shall be approved by the Board of Directors of the
Company, pursuant to which the Company's securities may be issued to any
employee, officer, director, consultant or other service provider of the Company
in an aggregate amount that does not exceed 25% of the Company's then
outstanding Common Stock.
(vii) "AVERAGE MARKET PRICE" shall mean the average of the
Closing Price of the Common Stock for the ten (10) trading days immediately
preceding the applicable date.
(viii) "CLOSING PRICE" means, for any security as of any date,
the last closing trade price on the Nasdaq National Market at 4:00 p.m., New
York City Time as reported by Bloomberg, or, if the Nasdaq National Market is
not the principal securities exchange for such security, the last closing price
at 4:00 p.m., New York City Time 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 price at 4:00
p.m., New York City Time of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
-4-
<PAGE> 5
closing price is reported for such security by Bloomberg, the last trade price
at 4:00 p.m., New York City Time of such security as reported by Bloomberg, or,
if no last trade price is reported for such security by Bloomberg, the average
of the bid prices at 4:00 p.m., New York City Time of any market makers for such
security as reported in the "pink sheets" by the National Quotation Bureau, Inc.
If the Closing Price cannot be calculated for such security on such date, as set
forth above, the Closing Price of such security shall be the fair market value
as determined in good faith by an investment banking firm jointly selected by
the Company and the Holders, with the fees and expenses of such determination
borne solely by the Company.
(ix) "CONVERSION DATE" means the date of delivery of a
Conversion Notice pursuant to Section (2)(b)(i) hereof.
(x) "CONVERSION PRICE" means:
(a) as to the Series C-1 Preferred Shares to be
issued on the Initial Issuance Date, and any Series C-1 Preferred Shares to be
issued as a dividend payment on such shares pursuant to Section 7 hereof: (i)
for the period commencing on the Initial Issuance Date and ending on the 90th
day thereafter, $7.5626 and (ii) for the period commencing on the 91st day after
the Initial Issuance Date, $5.6720;
(b) as to the Series C-2 Preferred Shares to be
issued at any Additional Closing (as defined in the Purchase Agreement), and any
Series C-2 Preferred Shares issued as a dividend payment on such shares pursuant
to Section 7 hereof, $5.00 (subject to adjustment for stock splits, combinations
and similar events).
(xi) "CONVERSION RATE" shall be determined according to the
following formula:
Stated Value + Amount of Accrued but Unpaid Dividends
-----------------------------------------------------
Conversion Price
(xii) "HARD FLOOR PRICE" means, in respect of any Series C-1
Preferred Shares or Series C-2 Preferred Shares, the lesser of (i) $6.00
(subject to adjustment for stock splits, combinations and similar events) or
(ii) the Conversion Price pertaining to such Series C-1 Preferred Shares or the
Series C-2 Preferred Shares, as the case may be.
(xiii) "INITIAL REGISTRATION STATEMENT" shall have the meaning
ascribed thereto in the Registration Rights Agreement.
(xiv) "PRINCIPAL MARKET" means the Nasdaq National Market, or
if the Common Stock is not traded on the Nasdaq National Market, then the
principal securities exchange or trading market for the Common Stock.
(xv) "PURCHASE AGREEMENT" means the Securities Purchase
Agreement dated as of October 25, 2000 by and among the Company and the Buyers
signatory thereto.
-5-
<PAGE> 6
(xvi) "REGISTRATION RIGHTS AGREEMENT" means the Registration
Rights Agreement dated as the Initial Issuance Date by and among the Company and
the initial Holders.
(xvii) "SEC" means the United States Securities and Exchange
Commission.
(xviii) "UNDERLYING COMMON STOCK" means the shares of Common
Stock issuable upon conversion of all the outstanding Series C Preferred Shares
and upon exercise of all the outstanding Warrants, without regard to any
restrictions on conversion or exercise.
(xix) "WARRANTS" shall mean the common stock purchase warrants
(and any such warrants issued in substitution therefor) issued pursuant to the
terms of the Purchase Agreement.
(b) 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 Series C
Preferred Shares into full shares of Common Stock on any Conversion
Date, the Holder thereof shall (A) deliver by courier or transmit by
facsimile, for receipt on or prior to 11:59 p.m., Eastern Time on such
date, a copy of a fully executed notice of conversion set forth in the
form attached hereto as Exhibit I (the "CONVERSION NOTICE"), to the
Company and its designated transfer agent (the "TRANSFER AGENT"), and
(B) if required by Section 2(b)(vi), surrender to a common carrier for
delivery to the Company as soon as practicable following such date the
original certificates representing the Series C 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").
(ii) COMPANY'S RESPONSE. Upon receipt by the Company and the
Transfer Agent of the Conversion Notice by courier or facsimile, the
Company shall, (A) on the next business day following the date of
receipt (or the second business day following the date of receipt if
received after 11:00 a.m. local time of the Company) send, via
facsimile, a confirmation of receipt of such Conversion Notice to such
Holder and the Transfer Agent, which confirmation shall constitute an
instruction to the Transfer Agent to process such Conversion Notice in
accordance with the terms herein and (B) on or before the second (2nd)
business day following the date of receipt (or the third business day
following the date of receipt if received after 11:00 am local time of
the Company) by the Company or the Transfer Agent (as applicable), (I)
provided that the Transfer Agent is participating in The Depository
Trust Company ("DTC") Fast Automated Securities Transfer Program, and
if such shares shall not require any restrictive legend, credit such
aggregate number of shares of Common Stock to which the Holder shall be
-6-
<PAGE> 7
entitled to the Holder's or its designee's balance account with DTC
through its Deposit Withdrawal Agent Commission System, or (II) if the
Transfer Agent is not participating in the DTC Fast Automated
Securities Program, the Holder requests or such shares require a
restrictive legend, 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.
(iii) DISPUTE RESOLUTION. In the case of a dispute as to the
determination of the Conversion Price or the Alternate Conversion
Price, 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 within one (1) business day of receipt of such Holder's
Conversion Notice. If such Holder and the Company are unable to agree
upon the determination of the Conversion Price or the Alternate
Conversion Price 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
the disputed determination of the Conversion Price or the Alternate
Conversion Price to PricewaterhouseCoopers LLP or another an
independent, reputable accounting firm of national standing acceptable
to the Company and such Holder of Series C Preferred Shares. The
Company shall cause such accounting firm 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 accounting firm's
determination shall be binding upon all parties absent manifest error.
The reasonable fees and expenses of the accounting firm shall be borne
by the party whose calculation is furthest from the accounting firm's
determination. The Company shall not be required to pay damages or be
subject to other remedies or penalties pursuant to this Certificate of
Designation or otherwise in the event of a delay in the delivery of
Series C Preferred Shares for which there is a good faith dispute as to
the Conversion Price or Alternate Conversion Price which is being
resolved in a timely manner in accordance with the terms of this
Section 2(b)(iii).
(iv) RECORD HOLDER. The person or persons entitled to receive
the shares of Common Stock issuable upon a conversion of Series C
Preferred Shares shall be treated for all purposes as the record holder
or holders of such shares of Common Stock as of the close of business
on the Conversion Date.
-7-
<PAGE> 8
(v) COMPANY'S FAILURE TO TIMELY CONVERT.
(A) CASH DAMAGES. If the Company shall fail (other
than as contemplated in Section 2(b)(iii) above or other than
as a result of the situations described in Section 4(a) with
respect to which the Holder has elected, and the Company has
satisfied its obligations under, one of the options set forth
in subparagraphs (i) through (iv) of Section 4(a)) to issue a
certificate for or credit via DTC to a Holder on a timely
basis as described in this Section 2(b), the number of shares
of Common Stock to which such Holder is entitled upon such
Holder's conversion of Series C Preferred Shares, the Company
shall pay damages to such Holder equal to the greater of (x)
actual damages incurred by such Holder as a result of such
Holder's needing to "buy in" shares of Common Stock to satisfy
its securities delivery requirements ("BUY IN ACTUAL DAMAGES")
and (y) after the effective date of the Initial Registration
Statement, or if applicable the Additional Registration
Statement, if the Company fails to deliver shares of Common
Stock within five days after the last possible date which the
Company could have issued such Common Stock to such Holder
without violating this Section 2(b), on each date such
conversion is not timely effected, in an amount equal to 1% of
the product of (i) the number of shares of Common Stock not
issued to the Holder on a timely basis and to which such
Holder is entitled and (ii) the Closing Price of the Common
Stock on the last possible date which the Company could have
issued such Common Stock to such Holder without violating this
Section 2(b).
(B) VOID CONVERSION NOTICE. If, for any reason, after
the tenth (10th) business day after delivery of a Conversion
Notice, a Holder has not received all of the shares of Common
Stock to which such Holder is entitled upon such Holder's
conversion of Series C Preferred Shares, then the Holder, upon
written notice to the Company, with a copy to the Transfer
Agent, may void its Conversion Notice with respect to, and
retain or have returned, as the case may be, any Series C
Preferred Shares that have not been converted pursuant to such
Holder's Conversion Notice; provided that the voiding of
Holder's Conversion Notice shall not affect the Company's
obligations to make any payments which have accrued prior to
the date of such notice pursuant to Section 2(b)(v)(A) or
otherwise.
(vi) BOOK-ENTRY. Notwithstanding anything to the contrary set
forth herein, upon conversion of the Series C Preferred Shares in
accordance with the terms hereof, the Holder thereof shall not be
required to physically surrender the certificate representing the
Series C Preferred Shares to the Company unless the full number of
Series C Preferred Shares represented by the certificate are being
converted. The Holder and the Company shall maintain records showing
the number of Series C Preferred Shares so converted and the dates of
such conversions or shall use such other method, reasonably
satisfactory to the Holder and the Company, so as not to require
physical surrender of the certificate representing the Series C
Preferred Shares upon each such conversion. The Company shall confirm
-8-
<PAGE> 9
to a Holder, within one business day of a request therefor, the number
of Series C Preferred Shares represented by a certificate held by such
Holder. In the event of any dispute or discrepancy, such records of the
Company establishing the number of Series C Preferred Shares to which
the record holder is entitled shall be controlling and determinative in
the absence of manifest error. Notwithstanding the foregoing, if Series
C Preferred Shares represented by a certificate are converted as
aforesaid, the Holder may not transfer the certificate representing the
Series C Preferred Shares unless the Holder first physically surrenders
the certificate representing the Series C Preferred Shares to the
Company, whereupon the Company will forthwith issue and deliver upon
the order of the Holder a new certificate of like tenor, registered as
the Holder may request, representing in the aggregate the remaining
number of Series C Preferred Shares represented by such certificate.
The Holder and any assignee, by acceptance of a certificate,
acknowledge and agree that, by reason of the provisions of this
paragraph, following conversion of any Series C Preferred Shares, the
number of Series C Preferred Shares represented by such certificate may
be less than the number of Series C Preferred Shares stated on the face
thereof. Each certificate for Series C Preferred Shares shall bear the
following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY
REVIEW THE TERMS OF THE COMPANY'S CERTIFICATE OF
DESIGNATION RELATING TO THE SERIES C PREFERRED SHARES
REPRESENTED BY THIS CERTIFICATE, INCLUDING SECTION
2(b)(vi) THEREOF. THE NUMBER OF SERIES C PREFERRED
SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS
THAN THE NUMBER OF SERIES C PREFERRED SHARES STATED
ON THE FACE HEREOF PURSUANT TO SECTION 2(b)(vi) OF
THE CERTIFICATE OF DESIGNATION RELATING TO THE SERIES
C PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE.
(c) MANDATORY CONVERSION. If any Series C Preferred
Shares remain outstanding on the Mandatory Conversion Date (as defined below),
then all such Series C Preferred Shares shall be converted as of such date in
accordance with this Section 2(c) as if the Holders had given the Conversion
Notice on the Mandatory Conversion Date, and the Conversion Date had been fixed
as of the Mandatory Conversion Date, for all purposes of this Section 2. All
Holders shall thereupon and within two (2) business days thereafter surrender
all Preferred Stock Certificates, duly endorsed for cancellation, to the Company
or the Transfer Agent. No person shall after the Mandatory Conversion Date have
any rights in respect of Series C Preferred Shares, except the right to receive
shares of Common Stock on conversion thereof as provided in this Section 2.
"MANDATORY CONVERSION Date" means October 23, 2003.
(d) 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 Series C Preferred Share by a Holder 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
-9-
<PAGE> 10
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.
(e) 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 Series C Preferred Shares.
(f) EFFECT OF FAILURE TO OBTAIN AND MAINTAIN
EFFECTIVENESS OF REGISTRATION STATEMENT. (x) The Company shall file the Initial
Registration Statement within 30 days of the Initial Issuance Date and, if
necessary, shall file the Additional Registration Statement within 30 days of
the applicable Additional Closing Date.
(y) (i) If the Initial Registration Statement is not
declared effective by the SEC on or before the 120th calendar day, or the 180th
calendar day in the event of an underwritten offering elected by the Holders,
following the Initial Issuance Date (the "INITIAL SCHEDULED EFFECTIVE DATE"),
then for each consecutive thirty (30) day period following the Initial Scheduled
Effective Date, each Holder of Series C Preferred Shares shall, until such time
as the Initial Registration Statement is declared effective by the SEC (all such
payments to be made in cash or in kind, at the Company's option), on the first
day of each thirty (30) day period, be entitled to an amount equal to the
product of (A) one and a half percent multiplied by (B) the Stated Value plus
all accrued and unpaid dividends thereon, multiplied by (C) the number of Series
C Preferred Shares held by such Holder.
(ii) If the Additional Registration Statement is not
declared effective by the SEC on or before the 120th calendar day, or the 180th
calendar day in the event of an underwritten offering elected by the Holders,
following the applicable Additional Closing Date (the "ADDITIONAL SCHEDULED
EFFECTIVE DATE"), then for each consecutive thirty (30) day period following the
Additional Scheduled Effective Date, each Holder of Series C-2 Preferred Shares
shall, until such time as the Additional Registration Statement is declared
effective by the SEC (all such payments to be made in cash or in kind, at the
Company's option), on the first day of each thirty (30) day period, be entitled
to an amount equal to the product of (A) one and a half percent multiplied by
(B) the Stated Value plus all accrued and unpaid dividends thereon, multiplied
by (C) the number of Series C-2 Preferred Shares held by such Holder.
(g) ADJUSTMENT TO CONVERSION PRICE AND THE CLOSING
PRICE 3/4 DILUTION AND OTHER EVENts. In order to prevent dilution of the rights
granted under this Certificate of Designation, the Conversion Price, the
Alternate Conversion Price, the Hard Floor Price, and the Closing Price for any
days during any measuring period prior to any of the events set forth below (the
"ADJUSTING CLOSING PRICE", and the foregoing collectively, the "ADJUSTING
NUMBERS") will be subject to adjustment from time to time as provided in this
Section 2(g). Any such adjustments to the Adjusting Numbers will be applicable
to Series C Preferred Shares not yet converted or redeemed.
(i) DIVIDENDS AND DISTRIBUTIONS. If the Company shall
declare or pay to the holders of the Common Stock a dividend or other
distribution payable in shares of Common Stock or any other security
convertible into or exchangeable for shares of Common Stock, each
Holder shall be entitled to receive the number of shares of Common
Stock or other securities convertible into or exchangeable for shares
-10-
<PAGE> 11
of Common Stock, as applicable, which such Holder would have owned or
been entitled to receive after the declaration and payment of such
dividend or other distribution as if the Series C Preferred Shares then
held by such Holder had been converted at the Conversion Price or
Alternate Conversion Price, as applicable, in effect immediately prior
to the record date for the determination of stockholders entitled to
receive such dividend or other distribution.
(ii) STOCK SPLITS AND COMBINATIONS. If the Company
shall subdivide (by means of any stock split, stock dividend,
recapitalization or otherwise) the outstanding shares of Common Stock
into a greater number of shares of Common Stock, or combine (by means
of any combination, reverse stock split or otherwise) the outstanding
shares of Common Stock into a lesser number of shares, or issue by
reclassification of shares of Common Stock any shares of the Company,
the Adjusting Numbers, each as in effect immediately prior thereto
shall be adjusted so that each Holder shall receive the number of
shares of Common Stock which such Holder would have owned or been
entitled to receive after the happening of any and each of the events
described above if such Holder had converted the Series C Preferred
Shares held by such Holder immediately prior to the happening of each
such event on the day upon which such subdivision or combination, as
the case may be, becomes effective. Additional Shares of Common Stock
deemed to have been issued pursuant to this Section 2(g)(ii) shall be
deemed to have been issued for no consideration.
(iii) ADJUSTMENT UPON ISSUANCE OF CERTAIN SECURITIES.
If at any time during the one year period following the Initial Closing
Date or at any time during the one year period following an Additional
Closing Date, as applicable, the Company in any manner issues or sells
(a "SUBSEQUENT FINANCING") pursuant to Section 4(2) of the Securities
Act of 1933, as amended (the "1933 ACT"), Regulation D or Regulation S
of the 1933 Act or any other private placement (other than pursuant to
Company authorized stock option plans with employees, consultants or
directors of the Company) of any security convertible into,
exchangeable for or exercisable for Common Stock or any other right to
acquire Common Stock ("CONVERTIBLE SECURITIES") and such Subsequent
Financing has a price per share for which Common Stock is issuable upon
the conversion, exchange or exercise of such Convertible Security that
is determined based on a formula that varies to the market price or may
vary because of a reset other than standard anti-dilution adjustments
(the formulation for such variable price being herein referred to as
the "NEW FORMULA") and such New Formula is not calculated using the
same formula used in determining the Conversion Price or the Alternate
Conversion Price hereunder, then the Company shall within one (1)
business day provide written notice thereof via facsimile and overnight
courier to each affected Holder ("VARIABLE NOTICE") on the date of
issuance of such Convertible Securities. From and after the date the
Company issues any such Convertible Securities with a New Formula, a
Holder of Series C-1 Preferred Shares or Series C-2 Preferred Shares,
-11-
<PAGE> 12
as applicable, shall have the right, but not the obligation, in its
sole discretion to substitute the New Formula for the applicable
Conversion Price or the Alternate Conversion Price upon conversion of
such Series C-1 or C-2 Preferred Shares, as applicable, by designating
in the Conversion Notice delivered upon conversion of such Series C
Preferred Shares that solely for purposes of such conversion the Holder
is relying on the New Formula rather than the formula relating to the
calculation of the Conversion Price or the Alternate Conversion Price
then in effect. A Holder's election to rely on a New Formula for a
particular conversion of Series C Preferred Shares shall not obligate
the Holder to rely on a New Formula for any future conversions of
Series C Preferred Shares.
(iv) REORGANIZATION, RECLASSIFICATION, CONSIDERATION,
MERGER OR SALE. Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the
Company's assets to another Person (as defined below) or other
transaction which is effected in such a way that holders of Common
Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange
for Common Stock is referred to herein as an "ORGANIC CHANGE." Provided
that the Company has not redeemed shares pursuant to Section 3, prior
to the consummation of any Organic Change, the Company will make
appropriate provision (in form and substance reasonably satisfactory to
a majority of the Holders) to insure that each of the Holders will
thereafter have the right to acquire and receive in lieu of or in
addition to (as the case may be) the shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such
Holder's then outstanding Series C Preferred Shares, such shares of
stock, securities or assets as may be issued or payable with respect to
or in exchange for the number of shares of Common Stock immediately
theretofore acquirable and receivable upon the conversion of such
Holder's Series C Preferred Shares had such Organic Change not taken
place. In any such case, the Company will make appropriate provision
(in form and substance reasonably satisfactory to a majority of the
Holders) with respect to such Holders' rights and interests to insure
that the provisions of Section 2(b) will thereafter be applicable to
the Series C 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 Conversion Price to the value for the Common Stock reflected by the
terms of such Organic Change, if the value so reflected is less than
the Conversion Price in effect immediately prior to such Organic
Change). The Company will not effect any such Organic Change, unless
prior to the consummation thereof, the successor entity (if other than
the Company) resulting from such Organic Change assumes, by written
instrument (in form and substance reasonably satisfactory to a majority
of the Holders) the obligation to deliver to each Holder such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, such Holder may be entitled to acquire or receive. The
provisions of this subparagraph (iii) shall similarly apply to
successive Organic Changes. "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) ADJUSTMENT UPON ISSUANCE OF OPTIONS AND
CONVERTIBLE SECURITIES. If the Company at any time or from time to time
after the date hereof shall issue, sell, grant or assume, or shall fix
a record date for the determination of holders of any class of
securities of the Company entitled to receive, any rights or options to
subscribe for, purchase or otherwise acquire Additional Shares of
Common Stock or any stock or other securities convertible into or
exchangeable for Additional Shares of Common Stock (other than warrants
issued as an ancillary part of any bank facility or borrowing from any
financial institution not undertaken to raise or raising, directly or
-12-
<PAGE> 13
indirectly, equity capital which shall not exceed 100,000 shares) (such
rights or options being herein called "OPTIONS" and such convertible or
exchangeable stock or securities being herein called "CONVERTIBLE
SECURITIES") (whether or not the rights thereunder are immediately
exercisable) 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 (the "NEW OPTION ISSUANCE PRICE") is less
than the Average Market Price immediately prior to such time, then, and
in each such case, the maximum number of Additional Shares of Common
Stock (as set forth in the instrument relating thereto, without regard
to any provisions contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such Options or, in the case of
Convertible Securities and Options therefor, the conversion or exchange
of such Convertible Securities, shall be deemed to be Additional Shares
of Common Stock issued as of the time of such issue, sale, grant or
assumption or, in case such a record date shall have been fixed, as of
the close of business on such record date (or, if the Common Stock
trades on an ex-dividend basis, on the date prior to the commencement
of ex-dividend trading).
For purposes of this Section 2(g)(v), the New Option
Issuance Price shall mean the amount determined by dividing (A) the
total amount, if any, received and receivable by the Company as
consideration for the issue, sale, grant or assumption of the Options
or Convertible Securities in question, plus the minimum aggregate
amount of additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained therein for
a subsequent adjustment of such consideration to protect against
dilution) payable to the Company upon the exercise in full of such
Options or the conversion or exchange of such Convertible Securities
or, in the case of Options for Convertible Securities, the exercise of
such Options for Convertible Securities and the conversion or exchange
of such Convertible Securities, by (B) the total maximum number of
shares of Common Stock (as set forth in the instruments relating
thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration to protect against
dilution) 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 further adjustment of the 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.
-13-
<PAGE> 14
(vi) 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 any class of Common Stock change at any time, the Conversion
Price at the time of such change shall be readjusted, effective on and after the
date of such change, to the Conversion Price which would have been in effect on
the date of such change 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 Conversion Price in excess of the amount of
the adjustment originally made as a result of the issuance of such Option or
Convertible Securities.
(vii) ISSUANCE OF ADDITIONAL SHARES OF COMMON STOCK. In case
the Company at any time or from time to time after the date hereof shall issue
or sell Additional Shares of Common Stock (including Additional Shares of Common
Stock deemed to be issued pursuant to other provisions of this Section 2(g), but
excluding any Additional Shares of Common Stock issued in a Subsequent Financing
in respect of which a Holder has elected to convert outstanding Preferred Shares
to a New Formula pursuant to Section 2(g)(iii) hereof), without consideration or
for a consideration per share less than either the Average Market Price or the
Conversion Price in effect immediately prior to such issue or sale (the "BASE
PRICE"), then, and in each such case, the Conversion Price shall be reduced, to
a price determined by multiplying such Conversion Price by a fraction
(A) the numerator of which shall be the sum of (i) the number
of shares of Common Stock outstanding immediately prior to such issue or sale
and (ii) the number of shares of Common Stock which the aggregate consideration
received by the Company for the total number of such Additional Shares of Common
Stock so issued or sold would purchase at the Base Price, and
(B) the denominator of which shall be the number of shares of
Common Stock outstanding immediately after such issue or sale, PROVIDED that,
for the purposes of this Section 2(g)(vii), (x) immediately after any Additional
Shares of Common Stock are deemed to have been issued pursuant to the other
provisions of this Section 2(g), such Additional Shares of Common Stock shall be
deemed to be outstanding, and (y) treasury shares of Common Stock shall not be
deemed to be outstanding.
(viii) NOTICES.
(A) Immediately upon any adjustment pursuant hereto, the
Company will give immediate written notice thereof to each Holder, setting forth
in reasonable detail and certifying the calculation of such adjustment.
-14-
<PAGE> 15
(B) The Company will give written notice to each Holder 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, or (II) for determining rights to vote with respect to any Organic
Change, dissolution or liquidation; PROVIDED that 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
at least twenty (20) days prior to (i) the date on which any Organic Change,
dissolution or liquidation will take place and (ii) the anticipated closing date
of any Subsequent Financing.
(ix) Successive adjustments pursuant hereto shall be made
whenever any event specified above shall occur. All calculations under this
Section 2(g) shall be made to the nearest cent or to the nearest one-hundredth
of a share, as the case may be. No adjustment in the Conversion Price shall be
made if the amount of such adjustment would be less than $0.01, but any such
amount shall be carried forward and an adjustment with respect thereto shall be
made at the time of and together with any subsequent adjustment which, together
with such amount and any other amount or amounts so carried forward, shall
aggregate $0.01 or more.
(x) OTHER DILUTIVE EVENTS. In case any event shall occur as to
which the provisions of this Section 2(g) are not strictly applicable or if
strictly applicable would not fairly protect the conversion rights of the Holder
in accordance with the essential intent and principles of this Section 2(g),
then, in each such case, the Board of Directors of the Company shall make an
adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to preserve, without dilution, the
conversion rights represented by this Section 2.
(xi) NO DILUTION OR IMPAIRMENT. The Company shall not, by
amendment of its certificate of incorporation or through any Organic Change or
any other voluntary action, avoid or seek to avoid the observance or performance
of any of the terms of this Certificate of Designation. Without limiting the
generality of the foregoing, the Company (A) shall take all such action as may
be necessary or appropriate in order that the Company may validly and legally
issue fully paid and nonassessable shares of Common Stock, free from all taxes,
liens, security interests, encumbrances, preemptive rights and charges on the
conversion of the Series C Preferred Shares, (B) shall not take any action which
results in any adjustment pursuant hereto if the total number of shares of
Common Stock issuable after the action upon the conversion of the Series C
Preferred Shares would exceed the total number of shares of Common Stock then
authorized by the Company's articles of incorporation and available for the
purpose of issue upon such exercise, and (C) shall not permit the par value of
any shares of stock receivable upon the conversion of the Series C Preferred
Shares to exceed the amount payable therefor upon such exercise.
-15-
<PAGE> 16
(3) CONVERSION/REDEMPTION UPON MAJOR TRANSACTION; REDEMPTION OPTION
UPON TRIGGERING EVENT; COMPANY REDEMPTION OPTION.
(a) (i) CONVERSION/REDEMPTION UPON MAJOR TRANSACTION. Upon (x)
a public announcement by the Company of a Major Transaction (the "ANNOUNCEMENT
DATE") or (y) receipt by the Holders of a Notice of Major Transaction (as
defined below), then each Holder shall have the right to elect to convert such
Holder's Series C Preferred Shares then outstanding by delivering a Conversion
Notice in accordance with Sections 2(b) and 3(e) hereof, at the lesser of the
Conversion Price or the Alternate Conversion Price in effect on the Conversion
Date or the Announcement Date (as specified in such Conversion Notice); provided
however, that if such Major Transaction occurs within 180 days of the Initial
Issuance Date, then each Holder shall have the right to convert at the lesser of
the Conversion Price or an Alternate Conversion Price equal to 110% of the
average of the Closing Price of the Company's Common Stock for the 10 trading
days immediately preceding the Announcement Date or the Conversion Date,
whichever is lower; provided, further, if the Company is unable to deliver
Common Stock that may be forthwith sold (hereinafter, "FREELY TRADEABLE SHARES")
pursuant to an effective Registration Statement or Rule 144(k) under the 1933
Act ("RULE 144(K)") to the Holders to satisfy the request set forth in such
Conversion Notice, the Company shall be obligated to (x) deliver to the Holders
as many shares of Common Stock as may be forthwith sold pursuant to an effective
Registration Statement or Rule 144(k) in exchange for the conversion of the
appropriate number of shares of Preferred Stock covered by such a Conversion
Notice and then (y) immediately prior to consummation of the applicable Major
Transaction mandatorily redeem the balance of the such outstanding Series C
Preferred Shares in cash at a price per Series C Preferred Share equal to the
product of (A) the aggregate number of shares of Common Stock for which each
such Series C Preferred Share would be converted into pursuant to such
Conversion Notice (the "MANDATORY TRANSACTION SHARES") multiplied by (B) the
Closing Price of the Common Stock on the date of delivery of the Conversion
Notice ("MAJOR TRANSACTION REDEMPTION PRICE"). In the event that the Company
fails to pay the Holders as provided in this Section 3(a), interest shall accrue
at the rate of 2% per month (or such lesser amount allowed by law) on such
outstanding amounts and be due and payable in arrears on the last day of each
month (the "MANDATORY INTEREST"). If conversion does not occur under this
Section 3(a) or the Company does not elect to optionally redeem the Preferred
Stock in connection with a Merger Transaction pursuant to Section 3(a)(ii)
below, any Holder may, by delivery of a notice of election to put no later than
three (3) business days prior to the consummation of the Major Transaction,
require the Company to redeem, immediately prior to the consummation of the
Major Transaction, such Holder's Series C Preferred Shares at a price per Series
C Preferred Share equal to the sum of (x) 120% of the Stated Value, or in the
event of the merger or consolidation of the Company into another Person (or a
reverse triangular merger), 130% of the Stated Value, plus (y) accrued but
unpaid dividends thereon. In the event any such Major Transaction is not
consummated subsequent to delivery to the Company of a notice of election to
redeem with respect to such failed Major Transaction then any such put election
notice and any Conversion Notice shall be deemed null and void and such Holders
shall be treated as though such failed Major Transaction was not contemplated
and such conversion was not requested.
(ii) REDEMPTION AT THE COMPANY'S ELECTION UPON MERGER
TRANSACTION. At any time or times on or after the date the Company publicly
discloses a pending, proposed or intended Merger Transaction (as defined below),
the Company shall have the right in its sole discretion, to require that all,
but not less than all, of the outstanding Series C Preferred Shares (and any
Series C Preferred Shares that may be issued pursuant to an Additional Closing
-16-
<PAGE> 17
(as such term is defined in the Purchase Agreement) prior to the Merger Election
Redemption Date (as defined below)) be redeemed ("MERGER REDEMPTION ELECTION")
at a price per Series C Preferred Share equal to (A) 130% of the Stated Value
plus (B) accrued but unpaid dividends thereon (the "MERGER REDEMPTION PRICE");
provided that the Conditions to Merger Redemption Election (as set forth below)
are satisfied or waived by all the Holders of the Series C Preferred Shares then
outstanding. The Company shall exercise its right to make a Merger Redemption
Election by providing each Holder of Series C Preferred Shares written notice
("NOTICE OF MERGER REDEMPTION") by facsimile or overnight courier, after the
public disclosure of a proposed, pending or intended Merger Transaction and at
least twenty (20) trading days prior to the date of consummation of the Merger
Transaction. The Notice of Merger Redemption shall indicate the anticipated date
on which the Company shall redeem the outstanding Series C Preferred Shares
("MERGER ELECTION REDEMPTION DATE"), which date shall be the date of
consummation of the Merger Transaction. If the Company has exercised its right
of Merger Redemption Election and the conditions to such Merger Redemption
Election have been satisfied then all Series C Preferred Shares outstanding at
the time of the consummation of the Merger Transaction shall be redeemed as of
the Merger Election Redemption Date by payment by or on behalf of the Company to
each Holder of Series C Preferred Shares of the Merger Redemption Price
concurrent with the closing of the Merger Transaction. All Holders of Series C
Preferred Shares shall thereupon and within two (2) business days after the
Merger Election Redemption Date, or such earlier date as the Company and each
Holder of Series C Preferred Shares mutually agree, surrender all outstanding
Series C Preferred Share certificates, duly endorsed for cancellation, to the
Company. If the Company fails to pay the full Merger Redemption Price with
respect to any Series C Preferred Shares on the Merger Election Redemption Date,
the Merger Redemption Election shall be null and void with respect to such
Series C Preferred Shares and the Holder of such Series C Preferred Shares shall
be entitled to all the rights of a Holder of outstanding Series C Preferred
Shares set forth in this Certificate of Designation. "CONDITIONS TO MERGER
REDEMPTION ELECTION" means the following conditions: (i) on each day during the
period beginning on the date the Company delivers its Notice of Merger
Redemption to each Holder of the Series C Preferred Shares and ending on and
including the date immediately preceding the Merger Election Redemption Date,
(A) no Permitted Blackout Period (as defined in the Registration Rights
Agreement) shall be in effect and the Registration Statement shall have been
effective and available for the sale of all of the Registrable Securities on
each such date or (B) all Underlying Common Stock may be sold without
restriction under Rule 144(k) (assuming cashless exercise of the Warrants)
during such period; (ii) during the period beginning on the Initial Issuance
Date and ending on and including the date immediately preceding the Merger
Election Redemption Date, the Company shall have delivered Conversion Shares
upon conversion of the Preferred Shares and Warrant Shares upon exercise of the
Warrants to the Buyers on a timely basis as set forth in this Certificate of
Designation and in the Warrant; (iii) the Company shall have received the
Stockholder Approval (as defined in the Purchase Agreement); and (iv) the
-17-
<PAGE> 18
Company shall not have failed to timely make any payments within 5 business days
of when such payment is due, whether as interest or penalty payments, pursuant
to this Certificate of Designation, the Purchase Agreement, the Registration
Rights Agreement or the Warrants, including, but not limited to, Dividends,
whether in shares of Preferred Stock or cash, default interest and cash payments
due. Notwithstanding the above, any Holder of Series C Preferred Shares may
convert such shares (including Series C Preferred Shares selected for
redemption) into Common Stock pursuant to Section 2 on or prior to the date that
is the business day immediately preceding the Merger Election Redemption Date.
For purposes of this Section 3(a)(ii), "MERGER TRANSACTION" means the
consolidation, merger or other business combination of the Company with or into
another Person (other than (A) 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, or (B) pursuant to a migratory
merger effected solely for the purpose of changing the jurisdiction of
incorporation of the Company).
(b) REDEMPTION OPTION UPON TRIGGERING EVENT. In addition to
all other rights of the Holders contained herein, after a Triggering Event (as
defined below), to the extent the Company is not prohibited pursuant to the
terms of the Credit Facility (as defined below), each Holder shall have the
right in accordance with Section 3(f), at such Holder's option, to require the
Company to redeem all or a portion of such Holder's Series C Preferred Shares at
a price per Series C Preferred Share equal to the sum of (i) 130% of the Stated
Value plus (ii) accrued but unpaid dividends thereon (the "TRIGGERING EVENT
REDEMPTION PRICE" and, collectively with the "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 or merger of the Company with
or into another Person (other than pursuant to a migratory merger
effected solely for the purpose of changing the jurisdiction of
incorporation of the Company or pursuant to a merger after which the
holders of the Company's outstanding capital stock immediately prior to
the merger own a number of shares of the resulting company's
outstanding capital stock sufficient to elect a majority of the
resulting company's board of directors) ;
(ii) the sale, transfer, lease, disposal or
abandonment (whether in one transaction or in a series of transactions)
of all or substantially all of the Company's assets (other than a sale
or transfer to an entity controlling, controlled by or under common
control with the Company);
(iii) a purchase, tender or exchange offer for more
than 50% of the outstanding shares of Common Stock or other voting
securities of the Company is made and accepted by the holders thereof;
or
(iv) any change of control or any other similarly
defined event in the Credit Facility which gives any lender under the
Credit Facility the right to accelerate payment of the obligations
under the Credit Facility.
(d) "TRIGGERING EVENT". A "TRIGGERING EVENT" shall be deemed
to have occurred at such time as any of the following events:
-18-
<PAGE> 19
(i) notice from the Company that Common Stock issued or
issuable upon conversion of the outstanding Series C Preferred Shares
cannot be sold under the Registration Statement covering such Common
Stock (the "SUSPENSION PERIOD"), for any period of five (5) consecutive
trading days or any thirty (30) non-consecutive trading days in any
period of 365 consecutive days due to a suspension in trading (other
than by reason of a general suspension of trading of all securities on
the applicable exchange or market) (a "SUSPENSION PERIOD DEFAULT");
(ii) failure of the Common Stock issued or issuable upon
conversion of the outstanding Series C Preferred Shares to be saleable
under the Initial Registration Statement or the Additional Registration
Statement, as the case may be (the "EFFECTIVENESS SUSPENSION PERIOD"),
for any period of five (5) trading days (whether or not consecutive) in
any period of 365 consecutive days after the occurrence of any
Permitted Blackout Period (as defined in the Registration Rights
Agreement) following the effectiveness of the Initial Registration
Statement or the Additional Registration Statement, as applicable, due
to a suspension of the effectiveness of the applicable Registration
Statement or a suspension of the use of the applicable Registration
Statement by the Company by delivery of a notice that the applicable
Registration Statement should not be used ("EFFECTIVENESS SUSPENSION
PERIOD DEFAULT") unless during the Effectiveness Suspension Period, the
Holders of Preferred Stock could have sold all such Underlying Common
Stock without registration pursuant to Rule 144(k) of the Securities
Act (assuming cashless exercise of the Warrants);
(iii) the failure of the Common Stock or the Conversion Shares
issuable upon conversion of outstanding Series C Preferred Shares to be
listed on the American Stock Exchange, The New York Stock Exchange, or
the Nasdaq National Market (the "DELISTING PERIOD") for a period of ten
(10) consecutive trading days or any 30 non-consecutive trading days
during any period of 365 consecutive days (a "DELISTING PERIOD
DEFAULT");
(iv) subject to Section 2(b)(iii), the Company's failure to
deliver shares of Common Stock pursuant to a Conversion Notice within
five (5) business days or the Company's notice to any Holder, including
by way of public announcement or by failure to respond within three (3)
days to a written demand from such Holder, at any time, of its
intention not to comply with proper requests for conversion of any
Series C Preferred Shares into shares of Common Stock, including due to
any of the reasons set forth in Section 4(a) below other than Section
4(a)(y);
(v) the Company's failure to obtain Stockholder Approval (as
defined in the Purchase Agreement) if such Stockholder Approval would
then be required to permit the conversion of then outstanding shares of
Preferred Stock and the exercise of all then outstanding Warrants,
without regard to any limitations on conversion or exercise, unless (x)
within 6 months from the Initial Issuance Date the Holders exercise
their right to purchase Series C-2 Preferred Shares at an Additional
Closing pursuant to the terms of the Purchase Agreement, (y) the
-19-
<PAGE> 20
Closing Price of the Company's Common Stock is below $5.00 and (z) the
Company is then in full compliance with its obligations in respect of
the calling of a stockholders' meeting which are set forth in Section
4(o) of the Purchase Agreement;
(vi) the Company shall have failed to make any Triggering Event
Daily Payment (as defined in Section 3(k)) in a timely manner in
accordance with Section 3(k);
(vii) either, (A) an event of default has occurred under the
Credit Facility (as defined in Section 3(k) below) or other senior
credit facilities where the aggregate amount of all such other senior
credit facilities is equal to or exceeds $5,000,000 (the "OTHER SENIOR
CREDIT FACILITIES"), which default has resulted in indebtedness
thereunder becoming, whether by declaration or otherwise, due and
payable prior to the date on which it would otherwise become due and
payable, or (B) a default by the Company in any payment when due at
final maturity of any indebtedness under the Credit Facility or Other
Senior Credit Facilities;
(viii) the Company's failure to deliver shares of Common Stock
upon the Company's receipt of a Conversion Notice, due to the
provisions of Section 11;
(ix) the failure of the Initial Registration Statement to be
declared effective on or prior to the date that is 180 days, or 240
days in the event of an underwritten offering elected by the Holders,
after the Initial Issuance Date;
(x) the failure of the Additional Registration Statement to be
declared effective on or prior to the date that is 180 days, or 240
days in the event of an underwritten offering elected by the Holders,
after the Additional Closing Date;
(xi) the Company's failure to retain a Transfer Agent that
participates in the DTC Fast Automated Securities Transfer Program on
or prior to the date that is 90 days after the Initial Issuance Date;
or
(xii) the Company's failure to file the Initial Registration
Statement on Form S-3 by the later of (A) November 21, 2000 or (B) the
time specified in a waiver obtained by the Company from the SEC.
(e) MECHANICS OF CONVERSION/REDEMPTION UPON MAJOR TRANSACTION. No
sooner than thirty (30) days nor later than ten (10) days prior to the
consummation of a Major Transaction, but not prior to the public announcement of
such Major Transaction, the Company shall deliver written notice thereof via
facsimile and overnight courier ("NOTICE OF MAJOR TRANSACTION") to each Holder.
The Holders shall have the option to elect redemption of the Series C Preferred
Shares as set forth in Section 3(a).
(f) MECHANICS OF REDEMPTION AT OPTION OF HOLDER UPON TRIGGERING EVENT.
Within one (1) business day after the occurrence of a Triggering Event, the
Company shall deliver written notice thereof (specifying the Triggering Event)
via facsimile and overnight courier ("NOTICE OF TRIGGERING EVENT") to each
Holder. At any time after receipt by a Holder of a Notice of Triggering Event or
a Holder becoming aware of the existence of a Triggering Event, any Holder of
Series C Preferred Shares then outstanding may require the Company to redeem, to
the extent the Company is not prohibited pursuant to the terms of the Credit
-20-
<PAGE> 21
Facility, all or any portion of such Holder's Series C Preferred Shares by
delivering written notice thereof via facsimile and overnight courier ("NOTICE
OF REDEMPTION AT OPTION OF HOLDER UPON TRIGGERING EVENT") to the Company, which
Notice of Redemption at Option of Holder Upon Triggering Event shall indicate
(i) the number of Series C Preferred Shares that such Holder is requesting
redemption for and (ii) the applicable Triggering Event Redemption Price, as
calculated pursuant to Section 3(b) above. Within one (1) business day of
receipt of a Notice of Redemption at Option of Holder Upon Triggering Event, the
Company shall deliver written notice via facsimile and overnight courier to such
Holder of the Company's election to either redeem such Holder's Series C
Preferred Shares in accordance with the Notice of Redemption at Option of Holder
Upon Triggering Event or to be subject to the provisions of Section 3(k) herein.
(g) FORCED DELISTING. After the occurrence of a Triggering Event
described in Section 3(d)(viii), each Holder shall notify the Company by
facsimile within three (3) business days of receipt of the applicable Notice of
Triggering Event (a "DELISTING NOTICE") as to whether such Holder is requiring
the Company to delist the Common Stock from the Principal Market. If so directed
in one or more Delisting Notices by the Holders of at least a majority of the
Series C Preferred Shares then outstanding, the Company shall, as promptly as
practicable, but in no event more than five (5) business days after receipt of
such Delisting Notices, delist the Common Stock from the Principal Market so
that the Exchange Cap (as defined in Section 11) no longer applies and is of no
force and effect after such fifth business day and have the Common Stock, at
such Holders' option, traded on the electronic bulletin board or the "pink
sheets."
(h) CONVERSION CAP: REDEMPTION AT OPTION OF THE COMPANY. Except as
otherwise provided herein, the Company shall not be obligated to issue any
Conversion Shares with respect to the Series C-1 Preferred Shares in excess of
18,342,152 or Conversion Shares with respect to the Series C-2 Preferred Shares
in excess of 20.8 million shares (subject to equitable adjustment for any stock
split, stock dividend, recapitalization, exchange or similar event) (the
"INITIAL CONVERSION Cap"), subject to increase as described below (the "ADJUSTED
CONVERSION CAP" and, collectively with the Initial Conversion Cap, the
"CONVERSION CAP"). No Holder of Series C-1 Preferred Shares or Series C-2
Preferred Shares, as applicable, shall be issued, upon conversion of such Series
C Preferred Shares, Conversion Shares in an amount greater than the product of
(i) the Conversion Cap then in effect multiplied by (ii) a fraction, the
numerator of which is the original principal amount of the Series C-1 Preferred
Shares or Series C-2 Preferred Shares, as applicable, issued to such Holder
pursuant to the Purchase Agreement and the denominator of which is the aggregate
original principal amount of all the Series C-1 Preferred Shares or Series C-2
Preferred Shares, as applicable, issued to the Holders pursuant to the Purchase
Agreement (the "CONVERSION ALLOCATION AMOUNT"). In the event that any Holder
shall sell or otherwise transfer any or all of such Holder's Series C Preferred
Shares in accordance with the terms of this Certificate of Designation, the
Purchase Agreement, the Registration Rights Agreement and the Warrant, the
transferee shall be allocated a pro-rata portion of such Holder's Conversion
Allocation Amount as at the time of such sale or transfer. In the event that any
-21-
<PAGE> 22
Holder of the Series C Preferred Shares shall convert all of such Holder's
Series C Preferred Shares into a number of Conversion Shares which, in the
aggregate, is less than such Holder's Conversion Allocation Amount, then the
difference between such Holder's Conversion Allocation Amount and the number of
Conversion Shares actually issued to such Holder shall be allocated to the
respective Conversion Allocation Amounts of the remaining Holders on a pro-rata
basis in proportion to the outstanding principal amount of Series C Preferred
Shares then held by each such Holder. Notwithstanding the foregoing, the
conversion restriction set forth in this Section 3(h) shall not apply at any
time on and after the date on which the Company issues or notifies any Holder
that the Company has elected to issue a number of Conversion Shares to such
Holder in excess of such Holder's Conversion Allocation Amount unless the
Company gives such Holder a Notice of Change of Election (as defined below). The
Company shall confirm to a Holder, within one business day of a request
therefor, the number of outstanding Series C Preferred Shares held by such
Holder.
If any Holder of the Series C Preferred Shares submits a Conversion
Notice which would require the Company to issue Conversion Shares in excess of
such Holder's Conversion Allocation Amount ("EXCESS CONVERSION AMOUNT"), the
Company shall within five (5) business days of the Company's receipt of such
Conversion Notice, send written notice by facsimile and first class post or
airmail to all Holders stating the Company's election to either waive the
Conversion Cap or redeem the Excess Conversion Amount ("NOTICE OF COMPANY
REDEMPTION") at a price per Series C Preferred Share equal to the Stated Value
plus accrued but unpaid dividends ("CONVERSION CAP REDEMPTION PRICE") which
election to waive or redeem shall be binding on the Company with respect to all
subsequent conversions by all Holders in respect of their Excess Conversion
Amounts unless a notice of change of election is given by the Company at least
30 days in advance (a "NOTICE OF CHANGE OF ELECTION"). In the event that the
Company elects to redeem the Excess Conversion Amounts, the Company shall pay
the Conversion Cap Redemption Price to the Holder within ten (10) days after
delivering the Notice of Company Redemption, which notice shall specify the
mechanics of the delivery of such Holder's Preferred Stock Certificates to the
Company and such Holder shall thereafter promptly send such Holder's Preferred
Stock Certificates to be redeemed to the Company. If the Company fails to
provide written notice within five (5) business days of the Company's receipt of
the applicable Conversion Notice of the Company's election to redeem the Excess
Conversion Amount then the Company shall be deemed to have irrevocably waived
the Conversion Cap with respect to all conversions submitted thereafter by any
of the Holders at any time prior to a Notice of Change of Election.
(i) PAYMENT OF REDEMPTION PRICE. Upon (i) the occurrence of a Major
Transaction, (ii) the Company's receipt of a Notice(s) of Redemption at Option
of Holder Upon Triggering Event from any Holder or (iii) the delivery by the
Company of a Notice of Company Redemption, the Company shall immediately notify
each Holder by facsimile of the mechanics of the delivery of each Holder's
Preferred Stock Certificates and each Holder shall thereafter promptly (or in
the case of a Notice of Company Redemption, prior to the specified date) send
such Holder's Preferred Stock Certificates to be redeemed to the Company. The
Company shall deliver the Major Transaction Redemption Price, Triggering Event
Redemption Price or Conversion Cap Redemption Price, as applicable, to such
Holder (i) within ten (10) days after the Company's receipt of notices to affect
a redemption or (ii) in the case of a Major Transaction, upon consummation
thereof; 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 Series C Preferred Shares, (i) in the case of the occurrence
of a Major Transaction or receipt of a Notice of Redemption at Option of Holder
Upon Triggering Event, the Company shall redeem an amount from each Holder equal
to such Holder's pro-rata amount (based on the number of Series C Preferred
Shares to be redeemed by such Holder relative to the number of Series C
-22-
<PAGE> 23
Preferred Shares to be redeemed by all Holders) of all Series C Preferred Shares
being redeemed and (ii) in the case of the Company Redemption Option, the
Company's redemption election shall be null and void if it is unable to redeem
all shares submitted for redemption. If the Company has elected to redeem Series
C Preferred Shares and does not deliver the applicable Major Transaction
Redemption Price, Triggering Event Redemption Price or the Conversion Cap
Redemption Price to a Holder in accordance with the provisions of this Section
3(i), then the Company shall no longer be entitled to redeem Series C Preferred
Shares at its option pursuant to Section 3(h).
(j) In the case of the occurrence of a Major Transaction or the receipt
of Notice(s) of Redemption at Option of Holder Upon Triggering Event, if the
Company shall fail to redeem all of the Series C 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 may have under this
Certificate of Designation and the Purchase Agreement, the Redemption Price
payable in respect of such unredeemed Series C Preferred Shares shall bear
interest at the rate of 1.25% per month (prorated for partial months) until paid
in full. In the case of a Major Transaction, a Triggering Event or delivery of a
Notice of Company Redemption, until the Company pays such unpaid Major
Transaction Redemption Price, Triggering Event Redemption Price or Conversion
Cap Redemption Price, as applicable, in full to each Holder, Holders of the
Series C Preferred Shares submitted for redemption pursuant to this Section 3
and for which the applicable Major Transaction Redemption Price, Triggering
Event Redemption Price or Conversion Cap Redemption Price, as applicable, has
not been paid, shall have the option (the "VOID OPTIONAL REDEMPTION OPTION") to,
in lieu of redemption, require the Company to promptly return to each Holder all
of the Series C Preferred Shares that were submitted for redemption by such
Holder under this Section 3 and for which the Major Transaction Redemption
Price, Triggering Event Redemption Price or Conversion Cap Redemption Price, as
applicable, 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 Major Transaction Redemption Price, Triggering Event Redemption Price or
Conversion Cap Redemption Price, as applicable, to each Holder, (i) redemption
elections relating to a Major Transaction, the Notice(s) of Redemption at Option
of Holder Upon Triggering Event or Notice of Company Redemption shall be null
and void with respect to those Series C Preferred Shares submitted for
redemption and for which the Major Transaction Redemption Price, Triggering
Event Redemption Price or Conversion Cap Redemption Price, as applicable, has
not been paid, and (ii) the Company shall immediately return any Series C
Preferred Shares submitted to the Company by each Holder for redemption under
this Section 3(j) and for which the Major Transaction Redemption Price,
Triggering Event Redemption Price or Conversion Cap Redemption Price, as
applicable, has not been paid. Notwithstanding the foregoing, in the event of a
dispute as to the determination of the arithmetic calculation of the Major
Transaction Redemption Price, Triggering Event Redemption Price, or Conversion
Cap Redemption Price, as applicable, such dispute shall be resolved pursuant to
Section 2(b)(iii) above. Payments provided for in this Section 3 shall have
priority to payments in respect of any securities of the Company that are junior
in rank to the Series C Preferred Shares in connection with a Major Transaction.
-23-
<PAGE> 24
(k) ADDITIONAL RIGHTS OF THE HOLDERS OF THE SERIES C PREFERRED SHARES
UPON THE OCCURRENCE OF A TRIGGERING EVENT. Subject to Section 3(f), in addition
to any other remedies the Holders of the Series C Preferred Shares may have at
law or in equity or pursuant to this Certificate of Designation, if a Triggering
Event occurs then:
(i) on each day during the period beginning on and including
the first day following the occurrence of a Triggering Event and ending on and
including the date on which such Triggering Event is cured or all the
outstanding Series C Preferred Shares are redeemed, the Company shall pay to
each Holder of Series C Preferred Shares an amount in cash per Series C
Preferred Share equal to two percent (2%) of the Liquidation Value (as defined
in Section 8) of such Series C Preferred Share (each such payment, a "TRIGGERING
EVENT DAILY PAYMENT");
(ii) immediately upon the occurrence of a Triggering Event and
during the entire Reset Conversion Price Period (as defined below), the
Conversion Price of the outstanding Series C Preferred Shares shall be reset
(subject to further adjustment pursuant to this Certificate of Designation
subsequent to such adjustment) (the "RESET CONVERSION PRICE") to equal the
lesser of (I) the Conversion Price in effect for such Series C Preferred Shares
on the date of the initial occurrence of such Triggering Event; (II) the
Conversion Price in effect for such Series C Preferred Shares on the day prior
to the date of the initial occurrence of such Triggering Event; or (III) the
product of (a) 0.50 multiplied by (b) the lowest Closing Price of the Common
Stock during the Reset Conversion Price Period. The Reset Conversion Price shall
apply on each day during the period (the "RESET CONVERSION PRICE PERIOD")
beginning on and including the date of the initial occurrence of such Triggering
Event and ending on and including any date prior to the date on which the
Company cures such Triggering Event and delivers written notice to each Holder
stating that such Triggering Event has been cured, the Conversion Date or other
date of determination with respect to which the determination is being made with
respect to this Section 3(k)(ii); and
(iii) if the Triggering Event is pursuant to Section
3(d)(viii), and the Company has not yet obtained Stockholder Approval, then with
the written consent of the Holders of at least a majority of the Series C
Preferred Shares then outstanding, the Company shall issue the Conversion Shares
notwithstanding that it might result in the de-listing of the Common Stock of
the Company.
Notwithstanding anything to the contrary in clause (i) of this Section 3(k), the
Company shall not be required to make Triggering Event Daily Payments in excess
of an amount (the "TRIGGERING EVENT PAYMENT MAXIMUM") equal to the greater of
$6,000,000, or such greater amount that the Company may pay without being in
breach of the Second Amended and Restated Term and Revolving Credit Agreement
dated as of October 17, 2000 among the Company, IBM Credit Corporation, IBM
Financing (a division of IBM Canada Limited) and Ground Effects Ltd. (the
"CREDIT FACILITY"). The Triggering Event Daily Payments shall be made by the
Company in amounts up to the Triggering Event Payment Maximum on a daily basis
based upon a fraction, the numerator of which is the number of Series C
Preferred Shares then held by such Holder and the denominator of which is the
aggregate number of all then outstanding Series C Preferred Shares held by all
Holders.
-24-
<PAGE> 25
(4) INABILITY TO FULLY CONVERT.
(a) HOLDER'S OPTION IF COMPANY CANNOT FULLY CONVERT. If, upon
the Company's receipt of a Conversion Notice, the Company cannot issue shares of
Common Stock either (i) registered for resale under the Registration Statement
or (ii) that may be sold under Rule 144(k) of the Securities Act 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, the Nasdaq National Market 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 from issuing all or any portion of the Common Stock which is to be
issued to a Holder 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 or Rule 144(k), then the Company shall issue as many
registered shares of Common Stock as it is able to issue in accordance with such
Holder's Conversion Notice and pursuant to Section 2(b) above and, with respect
to the unconverted Series C Preferred Shares, the Holder, solely at such
Holder's option, can elect to (unless the Company issues and delivers the
Conversion Shares underlying the unconverted Series C Preferred Shares prior to
the Holder's election hereunder, in which case such Holder shall only be
entitled to receive Buy In Actual Damages under Section 2(b)(v)):
(i) if the Company's inability to fully convert
Series C Preferred Shares is pursuant to Section 4(a)(z) above, subject
to Section 11 hereof, require the Company to issue restricted shares of
Common Stock in accordance with such Holder's Conversion Notice and
pursuant to Section 2(b) above; or
(ii) void its Conversion Notice and retain or have
retained, as the case may be, the nonconverted Series C Preferred
Shares that were to be converted pursuant to such Holder's Conversion
Notice.
(b) MECHANICS OF FULFILLING HOLDER'S ELECTION. The Company
shall forthwith send via facsimile to a Holder, 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 Series C Preferred Shares which cannot be converted and (iii) the
applicable Required Redemption Price. Such Holder must within five (5) business
days of receipt of such Inability to Fully Convert Notice deliver written notice
via facsimile to the Company ("NOTICE IN RESPONSE TO INABILITY TO CONVERT") of
its election pursuant to Section 4(a) above. Failure to deliver a Notice in
Response to Inability to Convert shall be deemed an election pursuant to Section
4(a)(i).
(c) PRO-RATA CONVERSION AND REDEMPTION. In the event the
Company receives a Conversion Notice from more than one Holder on the same day
and the Company can convert and redeem some, but not all, of the Series C
Preferred Shares pursuant to this Section 4, the Company shall convert and
redeem from each Holder electing to have Series C Preferred Shares converted and
redeemed at such time an amount equal to such Holder's pro-rata amount (based on
-25-
<PAGE> 26
the number of Series C Preferred Shares held by such Holder relative to the
number of Series C Preferred Shares outstanding) of all Series C Preferred
Shares being converted and redeemed at such time.
(5) REISSUANCE OF CERTIFICATES. In the event of a conversion or
redemption pursuant to this Certificate of Designation of less than all of the
Series C-1 Preferred Shares or the Series C-2 Preferred Shares, as the case may
be, represented by a particular Preferred Stock Certificate, the Company shall
promptly cause to be issued and delivered to the Holder of such Series C
Preferred Shares a Preferred Stock Certificate representing the remaining Series
C-1 Preferred Shares or the Series C-2 Preferred Shares, as the case may be,
which have not been so converted or redeemed.
(6) RESERVATION OF SHARES. As of the date hereof, the Company has
reserved out of its authorized and unissued Common Stock, solely for the purpose
of effecting the conversion of the Series C Preferred Shares, such number of
shares of Common Stock as shall be sufficient to effect the conversion of 200%
of all of the number of shares of Common Stock into which the Series C-1
Preferred Shares that are issuable on the Initial Issuance Date are then
convertible, without regard to restrictions on conversion. Subsequent to the
date hereof, the Company shall reserve out of its authorized and unissued Common
Stock, solely for the purpose of effecting the conversion of the Series C
Preferred Shares, such number of shares of Common Stock as shall be sufficient
to effect the conversion of 150% of all of the number of shares of Common Stock
into which the outstanding Series C Preferred Shares are then convertible,
without regard to restrictions on conversion.
(7) DIVIDENDS. The Holders of the outstanding Series C Preferred Shares
shall be entitled to receive cumulative dividends at the rate of 4% per annum of
the Stated Value per Series C-1 Preferred Share or Series C-2 Preferred Share,
as the case may be, to the Holders to whom such dividends are to be issued (the
"DIVIDEND"). Such Dividend shall be payable quarterly in arrears on the last day
of March, June, September and December of each year, commencing on December 31,
2000 (each of such dates being a "DIVIDEND PAYMENT DATE"). Such Dividend shall
accrue on each Series C Preferred Share from the date of issuance of such Series
C Preferred Shares (with appropriate proration for any partial dividend period)
and shall accrue from day-to-day, whether or not earned or declared. Dividend
payments made with respect to Series C Preferred Shares may be made, subject to
the terms hereof, in cash when and as declared by the Board of Directors of the
Company out of funds legally available therefor, or, at the option of and in the
sole discretion of the Board of Directors of the Company, in whole or in part,
by issuing fully paid and non assessable Series C-1 Preferred Shares or Series
C-2 Preferred Shares, as the case may be, to the Holders to whom such dividends
are to be issued (with the Stated Value thereof equal to the cash dividend
amount) such that such Series C Preferred Shares plus the amount of cash
dividend paid in part, if any, is equal to the amount of the cash dividend which
would otherwise be paid on such Dividend Payment Date if such Dividend were paid
entirely in cash; PROVIDED that (i) following 180 days after the Initial
Issuance Date, the Dividend may be paid in Series C-1 Preferred Shares only if
shares of Common Stock issuable upon conversion thereof is covered by an
effective Initial Registration Statement or may otherwise be sold without
limitation in accordance with Rule 144(k) under the 1933 Act, and (ii) following
180 days after the Additional Closing Date, the Dividend may be paid in Series
C-2 Preferred Shares only if shares of Common Stock issuable upon conversion
thereof is covered by an effective Initial Registration Statement, or if
necessary, an effective Additional Registration Statement, or may otherwise be
-26-
<PAGE> 27
sold without limitation in accordance with Rule 144(k) under the 1933 Act . The
issuance of such Series C Preferred Stock (plus the amount of cash dividend, if
any, paid together therewith) shall constitute full payment of such Dividend. In
no event shall an election by the Board of Directors of the Company to pay
Dividends, in whole or in part, in cash on any Dividend Payment Date preclude
the Board of Directors of the Company from electing any other available
alternative in respect of all or any portion of any subsequent Dividend. On the
Initial Issuance Date, the Company shall provide written notice to the Holders
specifying whether Dividends shall be paid in the future in cash, additional
Series C Preferred Shares or a specified combination thereof. This notice shall
remain in effect unless the Company delivers a notice changing the individual
payment method at least twenty (20) days prior to a Dividend Payment Date.
(8) LIQUIDATION, DISSOLUTION, WINDING-UP. In the event of any voluntary
or involuntary liquidation, dissolution or winding up of the Company, the
Holders 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 payment to holders of indebtedness
specifically senior in rank to the Series C Preferred Shares 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 Series C 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 Series C Preferred Share equal to
the sum of (i) Stated Value and (ii) all accrued and unpaid dividends (such sum
being referred to as the "LIQUIDATION VALUE"); provided that, if the Preferred
Funds are insufficient to pay the full amount due to the Holders and holders of
shares of other classes or series of preferred stock of the Company that are of
equal rank with the Series C Preferred Shares as to payments of Preferred Funds
(the "PARI PASSU SHARES"), then each Holder and each holder of Pari Passu Shares
shall receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Certificate of Designation, as a percentage of
the full amount of Preferred Funds payable to all Holders and holders of 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.
(9) PREFERRED RANK. All shares of Common Stock of the Company shall be
of junior rank to all Series C Preferred Shares in respect to the preferences as
to distributions and payments upon the liquidation, dissolution and winding up
of the Company. All other shares of preferred stock shall not be of senior rank
to all Series C Preferred Shares in respect to the preferences as to
distributions and payments upon the liquidation, dissolution and winding up of
the Company. As long as the Series C Preferred Shares initially issued remain
outstanding, then without the prior express written consent of the Holders of
not less than a majority of the then outstanding Series C Preferred Shares, the
Company shall not hereafter authorize or issue additional or other capital stock
that is of senior rank or that is pari passu with the Series C Preferred Shares
in respect of the preferences as to distributions and payments upon the
liquidation, dissolution and winding up of the Company. Without the prior
express written consent of the Holders of not less than a majority of the then
-27-
<PAGE> 28
outstanding Series C Preferred 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 Missouri
Secretary of State containing any provisions, which would adversely affect or
otherwise impair the rights or relative priority of the Holders relative to the
holders of the Common Stock or the holders of any other class of capital stock.
In the event of the merger or consolidation of the Company, with or into another
Corporation, if the Series C Preferred Shares are not converted or redeemed in
accordance with the terms hereof, such shares shall maintain their relative
powers, designations and preferences provided for herein and no such merger
shall result inconsistent therewith.
(10) RESTRICTION ON REDEMPTION AND CASH DIVIDENDS WITH RESPECT TO OTHER
CAPITAL STOCK. Until all of the outstanding Series C Preferred Shares have been
converted or redeemed as provided herein, the Company shall not, directly or
indirectly, redeem or declare or pay any cash dividend or distribution on its
Common Stock or any other capital stock without the prior express written
consent of the Holders of not less than a majority of the then outstanding
Series C Preferred Shares.
(11) LIMITATION ON NUMBER OF CONVERSION SHARES. The Company shall not
be obligated to issue, in the aggregate, more than that number of shares of
Common Stock (such amount to be proportionately and equitably adjusted from time
to time in the event of stock splits, stock dividends, combinations, reverse
stock splits, reclassification, capital reorganizations and similar events
relating to the Common Stock) (the "EXCHANGE CAP") that upon conversion of the
Series C Preferred Shares and the exercise of the Warrants, would constitute a
breach of the Company's obligations under the rules or regulations of the
Principal Market or any other principal securities exchange or trading market
upon which the Common Stock becomes traded; except that such limitation shall
not apply in the event that the required number of the Holders of the Series C
Preferred Shares have exercised their rights pursuant to Section 3(g) to have
the Company remove the Common Stock from the Principal Market. The Exchange Cap
shall be allocated among the Series C Preferred Shares pro rata based on the
total number of outstanding Series C Preferred Shares.
(12) VOTE TO CHANGE THE TERMS OF SERIES C 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 a majority of the
then outstanding Series C Preferred Shares, shall be required for any change to
this Certificate of Designation or the Company's Second Restated Articles of
Incorporation which would amend, alter, change or repeal any of the rights,
preferences, qualifications, limitations, restrictions and special or relative
rights of the Series C 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 Series C
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 Series C Preferred Shares
into Common Stock.
-28-
<PAGE> 29
C. The authorized number of shares of Preferred Stock of said
corporation is five million, of which one share has been issued. The authorized
number of shares of Series C Convertible Preferred Stock of said corporation is
100,000, none of which has been issued.
I further declare under penalty of perjury under the laws of the State
of Missouri that the matters set forth in this Certificate are true and correct
of our own knowledge.
DATED: October 21, 2000
/s/ GARRETT A. SULLIVAN
-----------------------
Garrett A. Sullivan
President
Attest:
/s/ RICHARD J. SULLIVAN
-----------------------
Secretary
STATE OF FLORIDA )
) ss.
COUNTY OF PALM BEACH )
On this 21 day of October in the year 2000, before me, Lynn Anderson,
Notary Public in and for said state, personally appeared Garrett A. Sullivan,
the President of Applied Digital Solutions, Inc., a Missouri corporation, and
Richard J. Sullivan, the Secretary of the same, both known to me to be the
persons who executed the foregoing instrument on behalf of said corporation and
each acknowledged to me that they executed the same for the purposes therein
stated.
/s/ LYNN ANDERSON
-------------------------
Notary Public
My commission expires:
8-22-2004
--------------------------
-29-
<PAGE> 30
EXHIBIT I
APPLIED DIGITAL SOLUTIONS, INC.
CONVERSION NOTICE
Reference is made to the Certificate of Designation of Preferences (the
"CERTIFICATE OF DESIGNATION") of the Series C Convertible Preferred Stock of
Applied Digital Solutions, Inc., a Missouri Corporation (the "COMPANY"). In
accordance with and pursuant to the Certificate of Designations, the undersigned
hereby elects to convert the number of shares and subseries of Series C
Convertible Preferred Stock (the "SERIES C PREFERRED SHARES") of the Company
indicated below into shares of Common Stock, par value $.001 per share (the
"COMMON STOCK"), of the Company, by tendering the stock certificate(s)
representing the Series C Preferred Shares specified below as of the date
specified below.
Date of Conversion: --------------------------------
Subseries of Series C Preferred Shares
to be converted:
(Series C-1 Preferred Shares or Series C-2
Preferred Shares, as the case may be) --------------------------------
Number of Series C
Preferred Shares to be converted: --------------------------------
Stock certificate no(s). of Series C
Preferred Shares to be converted: --------------------------------
Please confirm the following information:
Circle one: Conversion Price or Alternate
Conversion Price; and state price --------------------------------
Number of shares of Common Stock
to be issued: --------------------------------
The holder of the Series C Preferred Shares hereby represents that the
conversion of such shares will not require any filing or expiration of any
waiting period under the Hart-Scott Rodino Antitrust Improvement Act of 1976, as
amended. Please issue and deliver the Common Stock and, if applicable, any check
drawn on an account of the Company into which the Series C Preferred Shares are
being converted in the following name and to the following address:
Issue to:
-------------------------------------------------
Facsimile Number:
-------------------------------------------------
Authorization:
(to be made by record holder of
Series C Preferred Shares)
-------------------------------------------------
By:
-------------------------------------------------
Title:
-------------------------------------------------
-30-
<PAGE> 31
Dated:
Account Number:
(if electronic book entry transfer)
------------------------------------------
Transaction Code Number:
(if electronic book entry transfer)
------------------------------------------
-31-
