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EXHIBIT 3.2
CERTIFICATE OF
DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES C 8% CONVERTIBLE PREFERRED STOCK
OF
STORAGE COMPUTER CORPORATION
(Pursuant to Section 151 of the
Delaware General Corporation Law)
STORAGE COMPUTER CORPORATION, a corporation organized and existing under
the Delaware General Corporation Law (the "CORPORATION"), hereby certifies that
the following resolutions were adopted by the Board of Directors of the
Corporation on October 26, 2000 pursuant to authority of the Board of Directors
as required by Section 151 of the Delaware General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested in the Board
of Directors of this Corporation (the "BOARD OF DIRECTORS" or the "BOARD") in
accordance with the provisions of its Certificate of Incorporation, the Board of
Directors hereby authorizes a series of the Corporation's previously authorized
Preferred Stock, par value $.001 per share (the "PREFERRED STOCK"), and hereby
states the designation and number of shares, and fixes the relative rights,
preferences, privileges, powers and restrictions thereof as follows:
Series C 8% Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 12,000 shares of
Preferred Stock, is Series C 8% Convertible Preferred Stock (the "SERIES C
PREFERRED STOCK") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "STATED VALUE").
II. RANK
The Series C Preferred Stock shall rank (i) prior to the Corporation's
common stock, par value $.001 per share (the "COMMON STOCK"); (ii) prior to any
class or series of capital stock of the Corporation hereafter created (unless,
with the consent of the holders of Series C Preferred Stock obtained in
accordance with Article IX hereof, such class or series of capital stock
specifically, by
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its terms, ranks senior to or PARI PASSU with the Series C Preferred Stock)
(collectively, with the Common Stock, "JUNIOR SECURITIES"); (iii) PARI PASSU
with (a) the Corporation's Series A 8% Convertible Preferred Stock and Series B
8% Convertible Preferred Stock, (b) with the Series D 8% Convertible Preferred
Stock issued or issuable pursuant to the Purchase Agreement (as defined below)
(the "SERIES D PREFERRED STOCK"), (c) any class or series of capital stock of
the Corporation hereafter created (with the consent of the holders of Series C
Preferred Stock obtained in accordance with Article IX hereof) specifically
ranking, by its terms, on parity with the Series C Preferred Stock (collectively
the "PARI PASSU SECURITIES"); and (iv) junior to any class or series of capital
stock of the Corporation hereafter created (with the consent of the holders of
Series C Preferred Stock obtained in accordance with Article IX hereof)
specifically ranking, by its terms, senior to the Series C Preferred Stock
("SENIOR SECURITIES"), in each case as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation, whether voluntary or
involuntary.
III. DIVIDENDS
The Series C Preferred Stock shall not bear any dividends. In no event, so
long as any Series C Preferred Stock shall remain outstanding, shall any
dividend whatsoever be declared or paid upon, nor shall any distribution be made
upon, any Junior Securities, nor shall any shares of Junior Securities be
purchased or redeemed by the Corporation nor shall any moneys be paid to or made
available for a sinking fund for the purchase or redemption of any Junior
Securities (other than a distribution of Junior Securities), without, in each
such case, the written consent of the holders of a majority of the outstanding
shares of Series C Preferred Stock, voting together as a class.
IV. LIQUIDATION PREFERENCE
A. LIQUIDATION EVENT. If the Corporation shall commence a voluntary case
under the Federal bankruptcy laws or any other applicable Federal or State
bankruptcy, insolvency or similar law, or consent to the entry of an order for
relief in an involuntary case under any law or to the appointment of a receiver,
liquidator, assignee, custodian, trustee, sequestrator (or other similar
official) of the Corporation or of any substantial part of its property, or make
an assignment for the benefit of its creditors, or admit in writing its
inability to pay its debts generally as they become due, or if a decree or order
for relief in respect of the Corporation shall be entered by a court having
jurisdiction in the premises in an involuntary case under the Federal bankruptcy
laws or any other applicable Federal or state bankruptcy, insolvency or similar
law resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"LIQUIDATION EVENT"), no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities) upon
liquidation, dissolution or winding up unless prior thereto, the holders of
shares of Series C Preferred Stock, subject to Article VI, shall have received
the Liquidation Preference (as defined in Article IV.C) with respect to each
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share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series C Preferred Stock and
holders of PARI PASSU Securities (including any dividends or distribution paid
on any PARI PASSU Securities after the date of filing of this Certificate of
Designation) shall be insufficient to permit the payment to such holders of the
preferential amounts payable thereon, then the entire assets and funds of the
Corporation legally available for distribution to the Series C Preferred Stock
and the PARI PASSU Securities shall be distributed ratably among such shares in
proportion to the ratio that the Liquidation Preference payable on each such
share bears to the aggregate liquidation preference payable on all such shares.
Any prior dividends or distribution made after the date of filing of this
Certificate of Designation shall offset, dollar for dollar, the amount payable
to the class or series to which such distribution was made.
B. CERTAIN ACTS DEEMED LIQUIDATION EVENT. At the option of any holder of
Series C Preferred Stock, the sale, conveyance or disposition of all or
substantially all of the assets of the Corporation, the effectuation by the
Corporation of a transaction or series of related transactions in which more
than 50% of the voting power of the Corporation is disposed of, or the
consolidation, merger or other business combination of the Corporation with or
into any other Person (as defined below) or Persons when the Corporation is not
the survivor shall either: (i) be deemed to be a liquidation, dissolution or
winding up of the Corporation pursuant to which the Corporation shall be
required to distribute upon consummation of and as a condition to such
transaction an amount equal to 120% of the Liquidation Preference with respect
to each outstanding share of Series C Preferred Stock or (ii) be treated
pursuant to Article VI.C(ii) hereof. "PERSON" shall mean any individual,
corporation, limited liability company, partnership, association, trust or other
entity or organization.
C. LIQUIDATION PREFERENCE. For purposes hereof, the "LIQUIDATION
PREFERENCE" with respect to a share of the Series C Preferred Stock shall mean
an amount equal to the sum of (i) the Stated Value thereof plus (ii) an amount
equal to eight percent (8%) per annum of such Stated Value for the period
beginning on the date of issuance of the Series C Preferred Stock (the "ISSUE
DATE") and ending on the date of final distribution to the holder thereof
(prorated for any portion of such period) plus (iii) all Conversion Default
Payments (as defined in Article VI.E below), Delivery Default Payments (as
defined in Article VI.D below) and any other amounts owed to such holder
pursuant to Section 2(c) of the Registration Rights Agreement. The liquidation
preference with respect to any PARI PASSU Securities shall be as set forth in
the certificate of designation filed in respect thereof.
V. REDEMPTION
A. MANDATORY REDEMPTION. If any of the following events (each, a
"MANDATORY REDEMPTION EVENT") shall occur:
(i) The Corporation (a) fails to issue shares of Common Stock to the
holders of Series C Preferred Stock upon exercise by the holders of their
conversion rights in accordance with the terms of this Certificate of
Designation (for a period of at least sixty (60) days if such failure is
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solely as a result of the circumstances governed by the second paragraph of
Article VI.E below and the Corporation is using its best efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable), (b) fails
to transfer or to cause its transfer agent to transfer (electronically or in
certificated form) any certificate for shares of Common Stock issued to the
holders upon conversion of the Series C Preferred Stock as and when required by
this Certificate of Designation or the Registration Rights Agreement, dated as
of October 31, 2000, by and among the Corporation and the other signatories
thereto (the "REGISTRATION RIGHTS AGREEMENT"), (c) fails to remove any
restrictive legend (or to withdraw any stop transfer instructions in respect
thereof) on any certificate or any shares of Common Stock issued to the holders
of Series C Preferred Stock upon conversion of the Series C Preferred Stock as
and when required by this Certificate of Designation, the Securities Purchase
Agreement dated as of October 31, 2000, by and between the Corporation and the
other signatories thereto (the "PURCHASE AGREEMENT") or the Registration Rights
Agreement, or (d) fails to fulfill its obligations pursuant to Sections 4(c),
4(d), 4(e), 4(h), 4(i), 4(j), 4(l), or 5 of the Purchase Agreement (or makes any
announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for ten (10) days after the Corporation shall
have been notified thereof in writing by any holder of Series C Preferred Stock;
(ii) The Corporation fails to obtain effectiveness with the Securities
and Exchange Commission (the "SEC"), prior to May 1, 2001 of the Registration
Statement (as defined in the Registration Rights Agreement, the "REGISTRATION
STATEMENT") required to be filed pursuant to Section 2(a) of the Registration
Rights Agreement, or fails to obtain the effectiveness of any additional
Registration Statement (required to be filed pursuant to Section 3(b) of the
Registration Rights Agreement) within sixty (60) days after the Registration
Trigger Date (as defined in the Registration Rights Agreement), or any such
Registration Statement, after its initial effectiveness and during the
Registration Period (as defined in the Registration Rights Agreement), lapses in
effect or sales of all of the Registrable Securities (as defined in the
Registration Rights Agreement, the "REGISTRABLE SECURITIES") otherwise cannot be
made thereunder (whether by reason of the Corporation's failure to amend or
supplement the prospectus included therein in accordance with the Registration
Rights Agreement, the Corporation's failure to file and obtain effectiveness
with the SEC of an additional Registration Statement required to be filed
pursuant to Section 3(b) of the Registration Rights Agreement or otherwise) for
more than thirty (30) consecutive days or more than sixty (60) days in any
twelve (12) month period after such Registration Statement becomes effective;
(iii) The Corporation or any subsidiary of the Corporation shall make
an assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for all or substantially all of
its property or business; or such a receiver or trustee shall otherwise be
appointed;
(iv) Bankruptcy, insolvency, reorganization or liquidation proceedings
or other proceedings for relief under any bankruptcy law or any law for the
relief of debtors shall be instituted by or against the Corporation or any
subsidiary of the Corporation; or
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(v) The Corporation shall fail to maintain the listing of the Common
Stock on the Nasdaq National Market ("NASDAQ"), the Nasdaq SmallCap Market
("NASDAQ SMALLCAP"), the New York Stock Exchange ("NYSE") or the American Stock
Exchange ("AMEX"):
then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs (i), (ii), (v) or (vi), at the
option of the holders of at least 50% of the then outstanding shares of Series C
Preferred Stock exercisable by delivery of written notice (the "MANDATORY
REDEMPTION NOTICE") to the Corporation of such Mandatory Redemption Event, or
upon the occurrence of any Mandatory Redemption Event specified in subparagraphs
(iii) or (iv), the then outstanding shares of Series C Preferred Stock shall
become immediately redeemable and the Corporation shall purchase each holder's
outstanding shares of Series C Preferred Stock for an amount per share equal to
the greater of (1) 120% multiplied by the sum of (a) the Stated Value of the
shares to be redeemed plus (b) an amount equal to eight percent (8%) per annum
of such Stated Value for the period beginning on the Issue Date and ending on
the date of payment of the Mandatory Redemption Amount (the "MANDATORY
REDEMPTION DATE") plus (c) all Conversion Default Payments (as defined in
Article VI.E below), Delivery Default Payments (as defined in Article VI.D
below) and any other amounts owed to such holder pursuant to Section 2(c) of the
Registration Rights Agreement, and (2) the "PARITY VALUE" of the shares to be
redeemed, where parity value means the product of (x) the highest number of
shares of Common Stock issuable upon conversion of such shares of Series C
Preferred Stock in accordance with Article VI below (without giving any effect
to any limitations on conversion of shares contained herein, and treating the
Trading Day (as defined in Article VI.B(i)) immediately preceding the Mandatory
Redemption Date as the "CONVERSION DATE" (as defined in Article VI.D(iv)) for
purposes of determining the lowest applicable Conversion Price, unless the
Mandatory Redemption Event arises as a result of a breach in respect of a
specific Conversion Date in which case such Conversion Date shall be the
Conversion Date), multiplied by (y) the highest Closing Price (as defined below)
for the Common Stock during the period beginning on the date of first occurrence
of the Mandatory Redemption Event and ending one day prior to the Mandatory
Redemption Date, (the greater of such amounts set forth in clause (1) and (2)
being referred to as the "MANDATORY REDEMPTION AMOUNT"). "CLOSING PRICE," as of
any date, means the last sale price of the Common Stock on the AMEX as reported
by Bloomberg Financial Markets or an equivalent reliable reporting service
mutually acceptable to and hereafter designated by the holders of a majority in
interest of the shares of Series C Preferred Stock and the Corporation
("BLOOMBERG") or, if the AMEX is not the principal trading market for such
security, the last sale price of such security on the principal securities
exchange or trading market where such security is listed or traded as reported
by Bloomberg, or if the foregoing do not apply, the last sale price of such
security in the over-the-counter market on the electronic bulletin board for
such security as reported by Bloomberg, or, if no last sale price of such
security is available in the over-the-counter market on the electronic bulletin
board for such security or in any of the foregoing manners, the average of the
bid prices of any market makers for such security that are listed in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Price cannot be
calculated for such security on such date in the manner provided above, the
Closing Price shall be the fair market
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value as mutually determined by the Corporation and the holders of a majority in
interest of shares of Series C Preferred Stock for which the calculation of the
Closing Price is required.
B. TRADING MARKET REDEMPTION. If the Series C Preferred Stock ceases to
be convertible by any holder as a result of the limitations described in Article
VI.A(ii) below (a "TRADING MARKET REDEMPTION EVENT"), and the Corporation has
not, prior to, or within one hundred eighty (180) days of, the date that such
Trading Market Redemption Event arises, (i) obtained the Stockholder Approval
(as defined in Article VI.A(ii)) or (ii) eliminated any prohibitions under
applicable law or the rules or regulations of any stock exchange, interdealer
quotation system or other self-regulatory organization with jurisdiction over
the Corporation or any of its securities on the Corporation's ability to issue
shares of Common Stock in excess of the Maximum Share Amount (as defined in
Article VI.A(ii)) (provided that such Stockholder Approval or other elimination
of prohibitions may not occur prior to the ninetieth (90th) day preceding to the
Automatic Conversion Date without approval of the holders of at least 50% of the
then outstanding Series C Preferred Stock), then the Corporation shall be
obligated to redeem immediately all of the then outstanding Series C Preferred
Stock, in accordance with this Article V.B. In such event, an irrevocable
redemption notice (the "TRADING MARKET REDEMPTION NOTICE") shall be delivered
promptly to the holders of Series C Preferred Stock at their registered address
appearing on the records of the Corporation and shall state (i) that the Maximum
Share Amount (as defined in Article VI.A(ii)) has been issued upon exercise of
the Series C Preferred Stock, (ii) that the Corporation is obligated to redeem
all of the outstanding Series C Preferred Stock and (iii) the Trading Market
Redemption Date, which shall be on the earliest of (x) one hundred eighty (180)
days from the date of the Trading Market Redemption Event, (y) the Automatic
Conversion Date and (z) such earlier date as the Corporation shall elect (the
earliest of such dates being referred to as the "TRADING MARKET REDEMPTION
DATE"). Solely for purposes of this Article V.C., the Automatic Conversion Date
shall be October 31, 2003 and shall not be subject to extension as provided in
Article VII hereof without the written consent of the holders of at least 50% of
the then outstanding shares of Series C Preferred Stock delivered to the
Corporation prior to October 31, 2003. On the Trading Market Redemption Date,
the Corporation shall make payment to the holders of an amount in cash equal to
the sum of (i) the Stated Value of the shares of Series C Preferred Stock to be
redeemed plus (ii) an amount equal to eight percent (8%) per annum of such
Stated Value for the period beginning on the Issue Date and ending on the
Trading Market Redemption Date plus (iii) all Conversion Default Payments (as
defined in Article VI.E below), Delivery Default Payments (as defined in Article
VI.D below) and any other amounts owed to such holder pursuant to Section 2(c)
of the Registration Rights Agreement, for each share of Series C Preferred Stock
then held.
C. OPTIONAL REDEMPTION. Notwithstanding anything to the contrary
contained in this Article V, so long as for at all times during the period
beginning sixty (60) days prior to the Optional Redemption Date (as defined
below) (i) no Mandatory Redemption Event or Trading Market Redemption Event
shall have occurred and be continuing, (ii) any Registration Statement required
to be filed and be effective pursuant to the Registration Rights Agreement is
then in effect and has been in effect and sales of all of the Registrable
Securities can be made thereunder and (iii) the Corporation has a sufficient
number of authorized shares of Common Stock reserved for issuance
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upon full conversion of the Series C Preferred Stock, then the Corporation shall
have the right on any Trading Day on which, and for a period of five (5)
consecutive Trading Days prior thereto, the Closing Bid Price (as defined in
Article VI.B(i)) is less than $13.25 (subject to adjustment for stock splits,
stock dividends, recapitalization and similar transactions) to deliver written
notice to the holders of Series C Preferred Stock (which notice may not be sent
to the holders of the Series C Preferred Stock (a) until the Corporation is
permitted to redeem the Series C Preferred Stock pursuant to this Article V.C
and (b) during any period of time in which the Corporation is in possession of
any information the disclosure of which could cause a material increase in the
Trade Price of the Corporation's Common Stock) of its intention to redeem all of
the outstanding shares of Series C Preferred Stock in accordance with this
Article V.C. Any notice (the "OPTIONAL REDEMPTION NOTICE") of redemption
hereunder (an "OPTIONAL REDEMPTION") shall be delivered to the holders of Series
C Preferred Stock at their registered addresses appearing on the books and
records of the Corporation and shall state (1) that the Corporation is
exercising its right to redeem all of the outstanding shares of Series C
Preferred Stock issued and (2) the date of redemption (the "OPTIONAL REDEMPTION
DATE"), which date shall be twenty (20) Trading Days after the date of delivery
of the Optional Redemption Notice. On the Optional Redemption Date, the
Corporation shall make payment of the Optional Redemption Amount (as defined
below) to or upon the order of the holders of the Series C Preferred Stock as
specified by the holders in writing to the Corporation at least one (1) business
day prior to the Optional Redemption Date. If the Corporation exercises its
right to redeem the Series C Preferred Stock, the Corporation shall make payment
to the holders of an amount in cash (the "OPTIONAL REDEMPTION AMOUNT") equal to
the Applicable Percentage (as defined below) multiplied by the sum of (i) the
Stated Value of the shares of Series C Preferred Stock to be redeemed plus (ii)
an amount equal to eight percent (8%) per annum of such Stated Value for the
period beginning on the Issue Date and ending on the Optional Redemption Date
plus (iii) all Conversion Default Payments (as defined in Article VI.E below),
Delivery Default Payments (as defined in Article VI.D below) and any other
amounts owed to such holder pursuant to Section 2(c) of the Registration Rights
Agreement, for each share of Series C Preferred Stock then held. Notwithstanding
notice of an Optional Redemption, the holders shall at all times prior to the
Optional Redemption Date maintain the right to convert all or any shares of
Series C Preferred Stock in accordance with Article VI and any shares of Series
C Preferred Stock so converted after receipt of an Optional Redemption Notice
and prior to the Optional Redemption Date set forth in such notice and payment
of the aggregate Optional Redemption Amount shall be deducted from the shares of
Series C Preferred Stock which are otherwise subject to redemption pursuant to
such notice. If the Corporation delivers an Optional Redemption Notice and fails
to pay the Optional Redemption Amount due to the holders of the Series C
Preferred Stock within two (2) business days following the Optional Redemption
Date, the Corporation shall forever forfeit its right to redeem the Series C
Preferred Stock pursuant to this Article V.C. "APPLICABLE PERCENTAGE" shall mean
one hundred twenty percent (120%) on or prior to October 31, 2001 and one
hundred twenty-five percent (125%) thereafter.
D. FAILURE TO PAY REDEMPTION AMOUNTS. In the case of a Mandatory
Redemption Event or the delivery of an Optional Redemption Notice, if the
Corporation fails to pay the Mandatory Redemption Amount or Optional Redemption
Amount, as applicable, within five (5)
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business days of written notice that such amount is due and payable, then
(assuming there are sufficient authorized shares) in addition to all other
available remedies, each holder of Series C Preferred Stock shall have the right
at any time, so long as the Mandatory Redemption Event continues or at any time
after the Mandatory Redemption Date or Optional Redemption Date, as applicable,
to require the Corporation, upon written notice, to immediately issue (in
accordance with and subject to the terms of Article VI below), in lieu of the
Mandatory Redemption Amount or Optional Redemption Amount, as applicable, the
number of shares of Common Stock of the Corporation equal to such applicable
redemption amount divided by any Conversion Price (as defined below), as chosen
in the sole discretion of the holder of Series C Preferred Stock, in effect from
the date of the Mandatory Redemption Event (or the date of delivery of the
Optional Redemption Notice) until the date such holder elects to exercise its
rights pursuant to this Article V.D.
VI. CONVERSION AT THE OPTION OF THE HOLDER
A. OPTIONAL CONVERSION
(i) CONVERSION AMOUNT. Subject to Article VI.A(iii) below, each
holder of shares of Series C Preferred Stock may, at its option at any time and
from time to time, upon surrender of the certificates therefor, convert any or
all of its shares of Series C Preferred Stock into Common Stock as set forth
below (an "OPTIONAL CONVERSION"). Each share of Series C Preferred Stock shall
be convertible into such number of fully paid and nonassessable shares of Common
Stock as such Common Stock exists on the Issue Date, or any other shares of
capital stock or other securities of the Corporation into which such Common
Stock is thereafter changed or reclassified, as is determined by dividing (1)
the sum of (a) the Stated Value thereof plus (b) the Premium Amount (as defined
below), by (2) the then effective Conversion Price (as defined below); PROVIDED,
HOWEVER, that in no event (other than pursuant to the Automatic Conversion (as
defined in Article VIII)) shall a holder of shares of Series C Preferred Stock
be entitled to convert any such shares in excess of that number of shares upon
conversion of which the sum of (x) the number of shares of Common Stock
beneficially owned by the holder and its affiliates (other than shares of Common
Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the shares of Series C Preferred Stock, or the
unexercised or unconverted portion of any other securities of the Corporation
(including, without limitation, the Series D Preferred Stock and the warrants
issued by the Corporation pursuant to the Purchase Agreement (the "WARRANTS"))
subject to a limitation on conversion or exercise analogous to the limitations
contained herein) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series C Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by a holder and such holder's affiliates of more than 4.9% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in clause
(x) of such proviso. The "PREMIUM AMOUNT" means the product of the Stated Value,
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multiplied by .08, multiplied by (N/365), where "N" equals the number of days
elapsed from the Issue Date to and including the Conversion Date (as defined in
Article VI.D(iv)).
(ii) TRADING MARKET LIMITATION. Unless the Corporation either (a) is
permitted by the applicable rules and regulations of the principal securities
market on which the Common Stock is listed or traded to issue shares of Common
Stock upon conversion or otherwise pursuant to the Series C Preferred Stock and
Series D Preferred Stock in excess of the Maximum Share Amount (as defined
below) or (b) has obtained stockholder approval of the issuance of the Common
Stock upon conversion of or otherwise pursuant to the Series C Preferred Stock
and Series D Preferred Stock in excess of the Maximum Share Amount in accordance
with applicable law and the rules and regulations of any stock exchange,
interdealer quotation system or other self-regulatory organization with
jurisdiction over the Corporation or any of its securities (the "STOCKHOLDER
APPROVAL"), in no event shall the total number of shares of Common Stock issued
upon conversion of or otherwise pursuant to the Series C Preferred Stock
(including any shares of capital stock or rights to acquire shares of capital
stock issued by the Corporation which are aggregated or integrated with the
Common Stock issued or issuable upon conversion of or otherwise pursuant to the
Series C Preferred Stock for purposes of any such rule or regulation, including
the Series D Preferred Stock) exceed the maximum number of shares of Common
Stock that the Corporation can so issue pursuant to any rule of the principal
United States securities market on which the Common Stock trades (including
Section 7.13 of the AMEX or any successor rule) (the "MAXIMUM SHARE AMOUNT")
which, as of the Issue Date, shall be 2,932,690 (19.99% of the total shares of
Common Stock outstanding on the Issue Date), subject to equitable adjustments
from time to time for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring after
the Issue Date. With respect to each holder of Series C Preferred Stock, the
Maximum Share Amount shall refer to such holder's PRO RATA share thereof
determined in accordance with Article XI below. In the event that the sum of (x)
the aggregate number of shares of Common Stock actually issued upon conversion
of or otherwise pursuant to the outstanding Series C Preferred Stock and any
shares of capital stock or rights to acquire shares of capital stock issued by
the Corporation which are aggregated or integrated with the Common Stock issued
or issuable upon conversion of or otherwise pursuant to the Series C Preferred
Stock for purposes of any such rule or regulations, including the Series D
Preferred Stock PLUS (y) the aggregate number of shares of Common Stock that
remain issuable upon conversion of or otherwise pursuant to the Series C
Preferred Stock at the then effective Conversion Price and any shares of capital
stock or rights to acquire shares of capital stock issued by the Corporation
which are aggregated or integrated with the Common Stock issued or issuable upon
conversion of or otherwise pursuant to the Series C Preferred Stock for purposes
of any such rule or regulations, including the Series D Preferred Stock,
represents at least one hundred percent (100%) of the Maximum Share Amount (the
"TRIGGERING EVENT"), the Corporation will use its best efforts to seek and
obtain Stockholder Approval (or obtain such other relief as will allow
conversions hereunder in excess of the Maximum Share Amount) as soon as
practicable following the Triggering Event.
(iii) CONVERSION RESTRICTIONS. No conversions shall be permitted at a
Conversion Price (as defined in
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Article VI.B(ii)) that is less than the Fixed Conversion Price (as defined in
Article VI.B(ii)) prior to July 31, 2001; PROVIDED, HOWEVER that such
restriction on the conversion of this Series C Preferred Stock shall not apply
to conversions taking place on any Conversion Date (i) occurring on or after the
date the Corporation makes a public announcement that it intends to merge or
consolidate with any other corporation or sell or transfer substantially all of
the assets of the Corporation or (ii) occurring on or after the date any person,
group or entity (including the Corporation) publicly announces a tender offer to
purchase 50% or more of the Corporation's Common Stock (or any other takeover
scheme) or (iii) occurring on or after the date on which there is a material
adverse change in the business, operation, assets, financial condition or
prospects of the Corporation or its subsidiaries, taken as a whole, or (iv)
occurring on or after the occurrence of any Mandatory Redemption Event or on or
after the delivery of any Optional Redemption Notice by the Corporation.
B. CONVERSION PRICE.
(i) CALCULATION OF CONVERSION PRICE. Subject to subparagraph (ii)
below, the "CONVERSION PRICE" shall be the lesser of the Market Price (as
defined herein) and the Fixed Conversion Price (as defined herein), subject to
adjustments pursuant to the provisions of Article VI.C below. "MARKET PRICE"
shall mean the average of the five (5) lowest Closing Bid Prices (the "MARKET
PRICE DAYS"), during the twenty (20) consecutive Trading Day period ending one
(1) Trading Day prior to the date the Notice of Conversion (as defined in
Article VI.D) is sent by a holder to the Corporation via facsimile (the "PRICING
PERIOD"). The Market Price Days shall be designated by the converting holder
(from among the days comprising the Pricing Period) in the Notice of Conversion.
"FIXED CONVERSION PRICE" shall mean $13.25. "CLOSING BID PRICE" means, for any
security as of any date, the closing bid price on the AMEX as reported by
Bloomberg or, if the AMEX is not the principal trading market for such security,
the closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the closing bid price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no closing bid price of such security is available
in the over-the-counter market on the electronic bulletin board for such
security or in any of the foregoing manners, the average of the bid prices of
any market makers for such security that are listed in the "pink sheets" by the
National Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated
for such security on such date in the manner provided above, the Closing Bid
Price shall be the fair market value as mutually determined by the Corporation
and the holders of a majority in interest of shares of Series C Preferred Stock
being converted for which the calculation of the Closing Bid Price is required
in order to determine the Conversion Price of such Series C Preferred Stock.
"TRADING DAY" shall mean any day on which the Common Stock is traded for any
period on the AMEX, or on the principal securities exchange or other securities
market on which the Common Stock is then being traded.
(ii) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS. Notwithstanding
anything contained in subparagraph (i) of this Paragraph B to the contrary, in
the event the Corporation (a) makes a public announcement that it intends to
consolidate or merge with any other
<PAGE> 11
corporation (other than a merger in which the Corporation is the surviving or
continuing corporation and its capital stock is unchanged) or sell or transfer
all or substantially all of the assets of the Corporation or (b) any person,
group or entity (including the Corporation) publicly announces a tender offer to
purchase 50% or more of the Corporation's Common Stock (or any other takeover
scheme) (the date of the announcement referred to in clause (a) or (b) is
hereinafter referred to as the "ANNOUNCEMENT DATE"), then the Conversion Price
shall, effective upon the Announcement Date and continuing through the Adjusted
Conversion Price Termination Date (as defined below), be equal, for each such
date, to the lower of (x) the Conversion Price which would have been applicable
for an Optional Conversion occurring on the Announcement Date and (y) the
Conversion Price that would otherwise be in effect. From and after the Adjusted
Conversion Price Termination Date, the Conversion Price shall be determined as
set forth in subparagraph (i) of this Article VI.B. For purposes hereof,
"ADJUSTED CONVERSION PRICE TERMINATION DATE" shall mean, with respect to any
proposed transaction or tender offer (or takeover scheme) for which a public
announcement as contemplated by this subparagraph (ii) has been made, the date
upon which the Corporation (in the case of clause (a) above) or the person,
group or entity (in the case of clause (b) above) consummates or publicly
announces the termination or abandonment of the proposed transaction or tender
offer (or takeover scheme) which caused this subparagraph (ii) to become
operative.
C. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be subject
to adjustment from time to time as follows:
(i) ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK
DIVIDEND, ETC. If at any time when Series C Preferred Stock is issued and
outstanding, the number of outstanding shares of Common Stock is increased or
decreased by a stock split, stock dividend, combination, reclassification,
rights offering below the Trading Price (as defined below) to all holders of
Common Stock or other similar event, which event shall have taken place during
the reference period for determination of the Conversion Price for any Optional
Conversion or Automatic Conversion of the Series C Preferred Stock, then the
Conversion Price shall be calculated giving appropriate effect to the stock
split, stock dividend, combination, reclassification or other similar event. In
such event, the Corporation shall notify the Transfer Agent of such change on or
before the effective date thereof. "TRADING PRICE," which shall be measured as
of the record date in respect of the rights offering, means (i) the average of
the last reported sale prices for the shares of Common Stock on the AMEX as
reported by Bloomberg, as applicable, for the five (5) Trading Days immediately
preceding such date, or (ii) if the AMEX is not the principal trading market for
the shares of Common Stock, the average of the last reported sale prices on the
principal trading market for the Common Stock during the same period as reported
by Bloomberg, or (iii) if market value cannot be calculated as of such date on
any of the foregoing bases, the Trading Price shall be the fair market value as
reasonably determined in good faith by (a) the Board of Directors of the
Corporation or, (b) at the option of a majority-in-interest of the holders of
the outstanding Series C Preferred Stock by an independent investment bank of
nationally recognized standing in the valuation of businesses similar to the
business of the Corporation.
<PAGE> 12
(ii) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time
when Series C Preferred Stock is issued and outstanding and prior to the
conversion of all Series C Preferred Stock, there shall be any merger,
consolidation, exchange of shares, recapitalization, reorganization, or other
similar event, as a result of which shares of Common Stock of the Corporation
shall be changed into the same or a different number of shares of another class
or classes of stock or securities of the Corporation or another entity, or in
case of any sale or conveyance of all or substantially all of the assets of the
Corporation other than in connection with a plan of complete liquidation of the
Corporation (each, a "CHANGE OF CONTROL TRANSACTION"), then the holders of
Series C Preferred Stock shall thereafter have the right to receive upon
conversion of the Series C Preferred Stock upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common Stock
immediately theretofore issuable upon conversion, such stock, securities or
assets which the holders of Series C Preferred Stock would have been entitled to
receive in such transaction had the Series C Preferred Stock been converted in
full immediately prior to such transaction (without regard to any limitations on
conversion contained herein), and in any such case appropriate provisions shall
be made with respect to the rights and interests of the holders of Series C
Preferred Stock to the end that the provisions hereof (including, without
limitation, provisions for adjustment of the Conversion Price and of the number
of shares of Common Stock issuable upon conversion of the Series C Preferred
Stock shall thereafter be applicable, as nearly as may be practicable in
relation to any securities or assets thereafter deliverable upon the conversion
of Series C Preferred Stock. The Corporation shall not effect any transaction
described in this subsection (ii) unless (a) it first gives, to the extent
practical, thirty (30) days' prior written notice (but in any event at least
fifteen (15) business days prior written notice) of the record date of the
special meeting of stockholders to approve, or if there is no such record date,
the consummation of, such Change of Control Transaction (during which time the
holders of Series C Preferred Stock shall be entitled to convert the Series C
Preferred Stock and (b) the resulting successor or acquiring entity (if not the
Corporation) and, if an entity different from the successor or acquiring entity,
the entity whose capital stock or assets the holders of the Common Stock are
entitled to receive as a result of such Change of Control Transaction, assumes
by written instrument the obligations of this Certificate of Designation
(including this subsection (ii)). The above provisions shall similarly apply to
successive consolidations, mergers, sales, transfers or share exchanges.
(iii) [INTENTIONALLY OMITTED.]
(iv) ADJUSTMENT DUE TO DISTRIBUTION. Subject to Article III, if the
Corporation shall declare or make any distribution of its assets (or rights to
acquire its assets) to holders of Common Stock as a dividend, stock repurchase,
by way of return of capital or otherwise (including any dividend or distribution
to the Corporation's shareholders in cash or shares (or rights to acquire
shares) of capital stock of a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"),
then the holders of Series C Preferred Stock shall be entitled, upon any
conversion of shares of Series C Preferred Stock after the date of record for
determining shareholders entitled to such Distribution, to receive the amount of
such assets which would have been payable to the holder with respect to the
shares of Common Stock issuable upon such conversion had such holder been the
holder of such shares of Common Stock on the record date for the determination
of shareholders entitled to such Distribution.
<PAGE> 13
(v) PURCHASE RIGHTS. Subject to Article III, if at any time when any
Series C Preferred Stock is issued and outstanding, the Corporation issues any
convertible securities or rights to purchase stock, warrants, securities or
other property (the "PURCHASE RIGHTS") pro rata to the record holders of any
class of Common Stock, then the holders of Series C Preferred Stock will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon complete
conversion of the Series C Preferred Stock (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
(vi) ADJUSTMENT FOR RESTRICTED PERIODS. In the event that (i) the
Corporation fails to obtain effectiveness with the SEC of any Registration
Statement required to be filed pursuant to the Registration Rights Agreement on
or prior to the date on which such Registration Statement is required to become
effective pursuant to the terms of the Registration Rights Agreement, or (ii)
any such Registration Statement after its initial effectiveness and during the
Registration Period (as defined in the Registration Rights Agreement) lapses in
effect, or sales of all the Registrable Securities otherwise cannot be made
thereunder, whether by reason of the Corporation's failure or inability to amend
or supplement the prospectus (the "PROSPECTUS") included therein in accordance
with the Registration Rights Agreement or otherwise, after such Registration
Statement becomes effective (including, without limitation, during an Allowed
Delay (as defined in Section 3(f) of the Registration Rights Agreement)) or
(iii) a Trading Market Redemption Event occurs (each of such events describe in
clauses (i), (ii) and (iii) being referred to as an "EXTENDED LOOKBACK PERIOD"),
then, at the election of each holder of Series C Preferred Stock, the Pricing
Period shall be comprised of, (x) in the case of an event described in clause
(i), the twenty (20) Trading Days preceding the date on which such Registration
Statement is required to become effective pursuant to the terms of the
Registration Rights Agreement, plus all Trading Days through and including the
third (3rd) Trading Day following the date of actual effectiveness of such
Registration Statement; (y) in the case of an event described in clause (ii),
the twenty (20) Trading Days preceding the date on which the holder of the
Series C Preferred Stock is first notified that sales may not be made under the
Prospectus plus all Trading Days through and including the third (3rd) Trading
Day following the date on which the Holder is first notified that such sales may
again be made under the Prospectus; and (z) in the case of an event described in
clause (iii), the twenty (20) Trading Days preceding the occurrence of the
Trading Market Redemption Event, plus all Trading Days through and including the
third (3rd) Trading Day following the date the Stockholders' Approval is
obtained or the Borrower is permitted by the applicable rules and regulations of
the principle securities market on which the Common Stock is listed or traded to
issue shares in excess of the Maximum Share Amount (each of such periods
referred to in clauses (i), (ii) and (iii) being defined as an "EXTENDED
LOOKBACK PERIOD"). If a holder of Series C Preferred Stock determines that sales
may not be made pursuant to the Prospectus (whether by reason of the
Corporation's failure or inability to amend or supplement the Prospectus or
otherwise) it shall so notify the Corporation in writing and, unless the
Corporation
<PAGE> 14
provides such holder with a written opinion of the Corporation's counsel to the
contrary, such determination shall be binding for purposes of this paragraph. In
the event that an Extended Lookback Event occurs within the three (3) Trading
Day-period following the cure of any other Extended Lookback Event, the Extended
Lookback Periods shall be cumulative.
D. MECHANICS OF CONVERSION. In order to convert Series C Preferred Stock
into full shares of Common Stock, a holder of Series C Preferred Stock shall:
(i) submit a copy of the fully executed notice of conversion in the form
attached hereto as EXHIBIT A ("NOTICE OF CONVERSION") to the Corporation by
facsimile dispatched prior to Midnight, New York City time (the "CONVERSION
NOTICE DEADLINE") on the date specified therein as the Conversion Date (as
defined in Article VI.D(iv)) (or by other means resulting in, or reasonably
expected to result in, notice to the Corporation on the Conversion Date) to the
office of the Corporation or its designated Transfer Agent for the Series C
Preferred Stock, which notice shall specify the number of shares of Series C
Preferred Stock to be converted, the applicable Conversion Price and a
calculation of the number of shares of Common Stock issuable upon such
conversion (together with a copy of the first page of each certificate to be
converted); and (ii) surrender the original certificates representing the Series
C Preferred Stock being converted (the "PREFERRED STOCK CERTIFICATES"), duly
endorsed, along with a copy of the Notice of Conversion to the office of the
Corporation or the Transfer Agent for the Series C Preferred Stock as soon as
practicable thereafter. The Corporation shall not be obligated to issue
certificates evidencing the shares of Common Stock issuable upon such
conversion, unless either the Preferred Stock Certificates are delivered to the
Corporation or its Transfer Agent as provided above, or the holder notifies the
Corporation or its Transfer Agent that such certificates have been lost, stolen
or destroyed (subject to the requirements of subparagraph (i) below). In the
case of a dispute as to the calculation of the Conversion Price, the Corporation
shall promptly issue such number of shares of Common Stock that are not disputed
in accordance with subparagraph (ii) below. The Corporation shall submit the
disputed calculations to its outside accountant via facsimile within two (2)
business days of receipt of the Notice of Conversion. The accountant shall audit
the calculations and notify the Corporation and the holder of the results no
later than 48 hours from the time it receives the disputed calculations. The
accountant's calculation shall be deemed conclusive absent manifest error.
(i) LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation of
evidence of the loss, theft, destruction or mutilation of any Preferred Stock
Certificates representing shares of Series C Preferred Stock, and (in the case
of loss, theft or destruction) of indemnity reasonably satisfactory to the
Corporation, and upon surrender and cancellation of the Preferred Stock
Certificate(s), if mutilated, the Corporation shall execute and deliver new
Preferred Stock Certificate(s) of like tenor and date.
(ii) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the surrender of
certificates as described above together with a Notice of Conversion, the
Corporation shall issue and, within two (2) business days after such surrender
(or, in the case of lost, stolen or destroyed certificates, after provision of
agreement and indemnification pursuant to subparagraph (a) above) (the "DELIVERY
PERIOD"), deliver (or cause its Transfer Agent to so issue and deliver) in
accordance
<PAGE> 15
with the terms hereof and the Purchase Agreement (including, without limitation,
in accordance with the requirements of Section 2(g) of the Purchase Agreement)
to or upon the order of the holder (i) that number of shares of Common Stock for
the portion of the shares of Series C Preferred Stock converted as shall be
determined in accordance herewith and (ii) a certificate representing the
balance of the shares of Series C Preferred Stock not converted, if any. In
addition to any other remedies available to the holder, including actual damages
and/or equitable relief, the Corporation shall pay to a holder $2,000 per day in
cash for each day beyond a two (2) day grace period following the Delivery
Period that the Corporation fails to deliver Common Stock (a "DELIVERY DEFAULT")
issuable upon surrender of shares of Series C Preferred Stock with a Notice of
Conversion until such time as the Corporation has delivered all such Common
Stock (the "DELIVERY DEFAULT PAYMENTS"). Such Delivery Default Payments shall be
paid to such holder by the fifth day of the month following the month in which
it has accrued or, at the option of the holder (by written notice to the
Corporation by the first day of the month following the month in which it has
accrued), shall be convertible into Common Stock in accordance with the terms of
this Article VI.
In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Corporation's Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
Transfer ("FAST") program, upon request of the holder and its compliance with
the provisions contained in Article VI.A and in this Article VI.D, the
Corporation shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of holder's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and
penalties described in the immediately preceding paragraph shall apply to the
electronic transmittals described herein.
(iii) NO FRACTIONAL SHARES. If any conversion of Series C Preferred
Stock would result in a fractional share of Common Stock or the right to acquire
a fractional share of Common Stock, such fractional share shall be disregarded
and the number of shares of Common Stock issuable upon conversion of the Series
C Preferred Stock shall be the next higher number of shares.
(iv) CONVERSION DATE. The "CONVERSION DATE" shall be the date
specified in the Notice of Conversion, provided that the Notice of Conversion is
submitted by facsimile (or by other means resulting in, or reasonably expected
to result in, notice) to the Corporation or its Transfer Agent before Midnight,
New York City time, on the date so specified, otherwise the Conversion Date
shall be the first business day after the date so specified on which the Notice
of Conversion is actually received by the Corporation or its Transfer Agent. The
person or persons entitled to receive the shares of Common Stock issuable upon
conversion shall be treated for all purposes as the record holder or holders of
such securities as of the Conversion Date and all rights with respect to the
shares of Series C Preferred Stock surrendered shall forthwith terminate except
the right to receive the shares of Common Stock or other securities or property
issuable on such conversion and except that the holders preferential rights as a
holder of Series C Preferred Stock shall survive to the extent the Corporation
fails to deliver such securities.
<PAGE> 16
E. RESERVATION OF SHARES. A number of shares of the authorized but
unissued Common Stock sufficient to provide for the conversion of the Series C
Preferred Stock outstanding (based on the lesser of the then current Market
Price and the Fixed Conversion Price in effect from time to time) shall at all
times be reserved by the Corporation, free from preemptive rights, for such
conversion or exercise. As of the date of issuance of the Series C Preferred
Stock, 1,513,877 authorized and unissued shares of Common Stock have been duly
reserved for issuance upon conversion of the Series C Preferred Stock. After the
Authorization Date (as defined in the Purchase Agreement), the Company shall use
its best efforts at all times to maintain the number of shares of Common Stock
so reserved for issuance at no less than two (2) times the number that is then
actually issuable upon conversion of the Series C Preferred Stock (the "RESERVED
AMOUNT"). The Reserved Amount shall be increased from time to time in accordance
with the Corporation's obligations pursuant to Section 4(h) of the Purchase
Agreement. In addition, if the Corporation shall issue any securities or make
any change in its capital structure which would change the number of shares of
Common Stock into which each share of the Series C Preferred Stock shall be
convertible, the Corporation shall at the same time also make proper provision
so that thereafter there shall be a sufficient number of shares of Common Stock
authorized and reserved, free from preemptive rights, for conversion of the
outstanding Series C Preferred Stock.
If at any time a holder of shares of Series C Preferred Stock submits
a Notice of Conversion, and the Corporation does not have sufficient authorized
but unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Article VI (a "CONVERSION DEFAULT"),
subject to Article XI, the Corporation shall issue to the holder all of the
shares of Common Stock which are available to effect such conversion. The number
of shares of Series C Preferred Stock included in the Notice of Conversion which
exceeds the amount which is then convertible into available shares of Common
Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to the contrary
contained herein, not be convertible into Common Stock in accordance with the
terms hereof until (and at the holder's option at any time after) the date
additional shares of Common Stock are authorized by the Corporation to permit
such conversion, at which time the Conversion Price in respect thereof shall be
the lesser of (i) the Conversion Price on the Conversion Default Date (as
defined below) and (ii) the Conversion Price on the Conversion Date elected by
the holder in respect thereof. The Corporation shall use its best efforts to
effect an increase in the authorized number of shares of Common Stock as soon as
possible following the earlier of (i) such time that a holder of Series C
Preferred Stock notifies the Corporation or that the Corporation otherwise
becomes aware that there are or likely will be insufficient authorized and
unissued shares to allow full conversion thereof and (ii) a Conversion Default.
In addition, the Corporation shall pay to the holder payments ("CONVERSION
DEFAULT PAYMENTS") for a Conversion Default in the amount of (a) .24, multiplied
by (b) the sum of the Stated Value plus the Premium Amount per share of Series C
Preferred Stock held by such holder through the Authorization Date (as defined
below), multiplied by (c) (N/365), where N = the number of days from the day the
holder submits a Notice of Conversion giving rise to a Conversion Default (the
"CONVERSION DEFAULT DATE") to the date (the "AUTHORIZATION DATE") that the
Corporation authorizes a sufficient number of shares of Common Stock to effect
conversion of the full number of shares of Series C Preferred Stock. The
Corporation shall send notice to the holder of the authorization of additional
shares of
<PAGE> 17
Common Stock, the Authorization Date and the amount of holder's accrued
Conversion Default Payments. The accrued Conversion Default Payment for each
calendar month shall be paid in cash or shall be convertible into Common Stock
at the applicable Conversion Price, at the holder's option, as follows:
(i) In the event the holder elects to take such payment in cash, cash
payment shall be made to holder by the fifth day of the month following the
month in which it has accrued; and
(ii) In the event the holder elects to take such payment in Common
Stock, the holder may convert such payment amount into Common Stock at the
Conversion Price (as in effect at the time of Conversion) at any time after the
fifth day of the month following the month in which it has accrued in accordance
with the terms of this Article VI (so long as there is then a sufficient number
of authorized shares of Common Stock).
The holder's election shall be made in writing to the Corporation at
any time prior to 9:00 p.m., New York City Time, on the third (3rd) day of the
month following the month in which Conversion Default payments have accrued. If
no election is made, the holder shall be deemed to have elected to receive cash.
Nothing herein shall limit the holder's right to pursue actual damages (to the
extent in excess of the Conversion Default Payments) for the Corporation's
failure to maintain a sufficient number of authorized shares of Common Stock,
and each holder shall have the right to pursue all remedies available at law or
in equity (including a decree of specific performance and/or injunctive relief).
F. NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article VI,
the Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series C Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series C Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustment or
readjustment, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon conversion of a share of
Series C Preferred Stock.
G. STATUS AS STOCKHOLDERS. Upon submission of a Notice of Conversion by a
holder of Series C Preferred Stock, (i) the shares covered thereby (other than
the shares, if any, which cannot be issued because their issuance would exceed
such holder's allocated portion of the Reserved Amount or Maximum Share Amount)
shall be deemed converted into shares of Common Stock and (ii) the holder's
rights as a holder of such converted shares of Series C Preferred Stock shall
cease and terminate, excepting only the right to receive certificates for such
shares of Common Stock and to any remedies provided herein or otherwise
available at law or in equity to such holder because of a failure by the
Corporation to comply with the terms of this Certificate of Designation.
<PAGE> 18
Notwithstanding the foregoing, if a holder has not received certificates for all
shares of Common Stock prior to the tenth (10th) business day after the
expiration of the Delivery Period with respect to a conversion of shares of
Series C Preferred Stock for any reason, then (unless the holder otherwise
elects to retain its status as a holder of Common Stock by so notifying the
Corporation) the holder shall regain the rights of a holder of such shares of
Series C Preferred Stock with respect to such unconverted shares of Series C
Preferred Stock and the Corporation shall, as soon as practicable, return such
unconverted shares of Series C Preferred Stock to the holder or, if such shares
of Series C Preferred Stock have not been surrendered, adjust its records to
reflect that such shares of Series C Preferred Stock have not been converted. In
all cases, the holder shall retain all of its rights and remedies (including,
without limitation, (i) the right to receive Delivery Default Payments pursuant
to Article VI.D to the extent required thereby for such Delivery Default and any
subsequent Delivery Default and (ii) the right to have the Conversion Price with
respect to subsequent conversions determined in accordance with Article VI.D.)
for the Corporation's failure to convert the Series C Preferred Stock.
VII. CONVERSION AT THE OPTION OF THE CORPORATION
Subject to the limitations on conversion set forth in Article VI.A and so
long as for at all times during the period beginning forty-five (45) days prior
to the Forced Conversion Trigger Date (as defined below) and ending on the
Mandatory Conversion Date (as defined below) (i) all of the shares of Common
Stock issuable upon conversion of the Series C Preferred Stock are then (x)
authorized and reserved for issuance, (y) registered for resale under the 1933
Act by the Holders of the Series C Preferred Stock (or may otherwise be resold
publicly without restriction) and (z) eligible to be traded on Nasdaq, the NYSE,
the AMEX or Nasdaq SmallCap and (ii) there is not then a continuing Mandatory
Redemption Event or Trading Market Redemption Event, then, at any time after the
earlier of (A) nine (9) month anniversary of the date the Registration Statement
required to be filed pursuant to Section 2(a) of the Registration Rights
Agreement is declared effective by the SEC (subject to extension by one Trading
Day for each Trading Day following effectiveness that sales of all of the
Registrable Securities (as defined in the Registration Rights Agreement) cannot
be made pursuant to the Registration Statement (whether by reason of the
Corporation's failure to properly supplement or amend the prospectus included
therein in accordance with the terms of the Registration Rights Agreement,
during an Allowed Delay (as defined in the Registration Rights Agreement) or
otherwise)), and (B) the consummation of a Qualified Public Offering (as defined
below), the Corporation shall have the right within two (2) Trading Days of any
Trading Day (a "FORCED CONVERSION TRIGGER DATE") on which, and for a period of
fifteen (15) consecutive Trading Days prior thereto, the average of the Closing
Price of the Common Stock during such period is greater than $19.875 (subject to
adjustment for stock splits, stock dividends and similar transactions), to
deliver written notice (the "MANDATORY CONVERSION NOTICE") to all of the Holders
of the Series C Preferred Stock (which notice may not be sent to the Holders of
the Series C Preferred Stock (a) until the Corporation is permitted to convert
the Series C Preferred Stock pursuant to this Article and (b) during any period
of time in which the Corporation is in possession of any information, the
disclosure of which could cause a material increase in the Trade Price of the
Common Stock), of its intention to convert all of the outstanding Series C
Preferred Stock into shares of Common Stock
<PAGE> 19
in accordance with this Article VII and Article VI; PROVIDED, HOWEVER, that a
Mandatory Conversion shall not be permitted if during the period beginning on
the date the Mandatory Conversion Notice is delivered to the holders of the
Series C Preferred Stock and ending on the Trading Day prior to the Mandatory
Conversion Date the average Closing Price of the Common Stock during such period
is not greater than $13.25 (subject to adjustment for stock splits, stock
dividends and similar transactions). Any conversion hereunder (a "MANDATORY
CONVERSION") shall be as of the date (the "MANDATORY CONVERSION DATE") specified
in the Mandatory Conversion Notice (but in no event prior to the twentieth
(20th) Trading Day following the date of such notice). The Mandatory Conversion
Notice shall be delivered to the holders of the Series C Preferred Stock at
their registered addresses appearing on the books and records of the
Corporation, which notice shall contain substantially the same information as
the Notice of Conversion described in Article VI.D. The Mandatory Conversion
Date shall be the "CONVERSION DATE" for purposes of determining the Conversion
Price and the time within which certificates representing the Common Stock must
be delivered to the holder upon a Mandatory Conversion. Notwithstanding notice
of a Mandatory Conversion, the Holder shall at all times prior to the Mandatory
Conversion Date maintain the right to convert all or any portion of the Series C
Preferred Stock in accordance with Article VI. "TRADE PRICE" means, for any
security as of any date, the highest sale price of the Common Stock on the
Nasdaq as reported by Bloomberg or, if Nasdaq is not the principal trading
market for such security, the sale price of such security on the principal
securities exchange or trading market where such security is listed or traded as
reported by Bloomberg, or, if no sale price of such security is available in any
of the foregoing manners, the bid price of any market maker for such security
that is listed in the "pink sheet" by the National Quotation Bureau, Inc. If the
Trade Price cannot be calculated for such security on such date in the manner
provided above, the Trade Price shall be the fair market value as mutually
determined by the Corporation and the holders of a majority of the outstanding
principal amount of the Series C Preferred Stock. All conversions pursuant to
this Article VII will be subject to the limitations set forth in Article VI.A.
If, due to the limitations set forth in Article VI.A, the holder of the Series C
Preferred Stock is unable to convert any portion of the Series C Preferred Stock
pursuant to this Article VII, holder shall not convert any such portion of the
Series C Preferred Stock not converted as a result of such limitation until the
holder's beneficial ownership (as calculated in accordance with Article VI.A(i))
of Corporation is below 4.9% of the outstanding shares of Common Stock. If (i) a
Mandatory Conversion Notice has been delivered, (ii) holder's beneficial
ownership (as calculated in accordance with Article VI.A(i)) of Corporation
decreases below 4.9% of the outstanding shares of Common Stock, and (iii)
amounts (either principal or interest) remain outstanding under the Series C
Preferred Stock, at any time the holder's beneficial ownership of Corporation
decreases below 4.9% of the outstanding shares of Common Stock, without any
further notice to the Corporation, the holder shall resume conversion of the
Series C Preferred Stock pursuant to this Article VII until (i) holder's
beneficial ownership (as calculated in accordance with Article VI.A(i)) of
Corporation increases to 4.9% of the outstanding shares of Common Stock or (ii)
all amounts outstanding under the Series C Preferred Stock have been converted.
"QUALIFIED PUBLIC OFFERING" means a firm commitment underwritten public
offering, managed by an underwriter of nationally recognized standing, resulting
in gross proceeds to the Corporation of at least $50,000,000.
<PAGE> 20
VIII. AUTOMATIC CONVERSION
Each share of Series C Preferred Stock issued and outstanding on October
31, 2003 (the "AUTOMATIC CONVERSION DATE"), shall be, subject to the limitations
on conversion set forth in Article VI.A(ii) and so long as (i) all of the shares
of Common Stock issuable upon conversion of all outstanding shares of Series C
Preferred Stock are then (x) authorized and reserved for issuance, (y)
registered for re-sale under the 1933 Act by the holders of the Series C
Preferred Stock (or may otherwise be resold publicly without restriction) and
(z) eligible to be traded on Nasdaq, the NYSE, the AMEX or Nasdaq SmallCap and
(ii) there is not then a continuing Mandatory Redemption Event or Trading Market
Redemption Event, automatically converted into shares of Common Stock on such
date at the then effective Conversion Price in accordance with, and subject to,
the provisions of Article VI hereof (the "AUTOMATIC CONVERSION"). At the option
of each holder of Series C Preferred Stock, the Automatic Conversion Date shall
be delayed by one (1) Trading Day for each Trading Day occurring prior thereto
and prior to the full conversion of the Series C Preferred Stock that (i) any
Registration Statement required to be filed and to be effective pursuant to the
Registration Rights Agreement is not effective or sales of all of the
Registrable Securities otherwise cannot be made thereunder during the
Registration Period (as defined in the Registration Rights Agreement) (whether
by reason of the Corporation's failure to properly supplement or amend the
prospectus included therein in accordance with the terms of the Registration
Rights Agreement or otherwise, including during any Allowed Delays (as defined
in Section 3(f) of the Registration Rights Agreement), (ii) any Mandatory
Redemption Event or Trading Market Redemption Event exists, without regard to
whether any cure periods shall have run or (iii) that the Corporation is in
breach of any of its obligations pursuant to Section 4(h) of the Purchase
Agreement. The Automatic Conversion Date shall be the Conversion Date for
purposes of determining the Conversion Price and the time within which
certificates representing the Common Stock must be delivered to the holder.
IX. VOTING RIGHTS
The holders of the Series C Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Delaware General Corporation Law
("DGCL"), in this Article IX, and in Article IX below.
Notwithstanding the above, the Corporation shall provide each holder of
Series C Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or
<PAGE> 21
winding up of the Corporation, the Corporation shall mail a notice to each
holder, at least ten (10) days prior to the record date specified therein (or
thirty (30) days prior to the consummation of the transaction or event,
whichever is earlier), of the date on which any such record is to be taken for
the purpose of such dividend, distribution, right or other event, and a brief
statement regarding the amount and character of such dividend, distribution,
right or other event to the extent known at such time.
To the extent that under the DGCL the vote of the holders of the Series C
Preferred Stock, voting separately as a class or series as applicable, is
required to authorize a given action of the Corporation, the affirmative vote or
consent of the holders of at least a majority of the shares of the Series C
Preferred Stock represented at a duly held meeting at which a quorum is present
or by written consent of a majority of the shares of Series C Preferred Stock
(except as otherwise may be required under the DGCL) shall constitute the
approval of such action by the class. To the extent that under the DGCL holders
of the Series C Preferred Stock are entitled to vote on a matter with holders of
Common Stock, voting together as one class, each share of Series C Preferred
Stock shall be entitled to a number of votes equal to the number of shares of
Common Stock into which it is then convertible using the record date for the
taking of such vote of shareholders as the date as of which the Conversion Price
is calculated. Holders of the Series C Preferred Stock shall be entitled to
notice of all shareholder meetings or written consents (and copies of proxy
materials and other information sent to shareholders) with respect to which they
would be entitled to vote, which notice would be provided pursuant to the
Corporation's bylaws and the DGCL.
X. PROTECTIVE PROVISIONS
So long as shares of Series C Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the DGCL) of the holders of at least a majority of the
then outstanding shares of Series C Preferred Stock:
(a) alter, amend or repeal (whether by merger, consolidation or
otherwise) the rights, preferences or privileges of the Series C Preferred Stock
or any capital stock of the Corporation so as to affect adversely the Series C
Preferred Stock;
(b) create any new class or series of capital stock having a
preference over the Series C Preferred Stock as to distribution of assets upon
liquidation, dissolution or winding up of the Corporation (as previously defined
in Article II hereof, "SENIOR SECURITIES");
(c) create any new class or series of capital stock (other than the
Series D Preferred Stock) ranking PARI PASSU with the Series C Preferred Stock
as to distribution of assets upon liquidation, dissolution or winding up of the
Corporation (as previously defined in Article II hereof, "PARI PASSU
SECURITIES");
(d) increase the authorized number of shares of Series C Preferred
Stock;
<PAGE> 22
(e) issue any Senior Securities or PARI PASSU Securities (other than
the Series D Preferred Stock issued or issuable pursuant to the Purchase
Agreement);
(f) increase the par value of the Common Stock;
(g) issue any additional shares of Series C Preferred Stock except
pursuant to the Purchase Agreement; or
(h) do any act or thing not authorized or contemplated by this
Certificate of Designation which would result in taxation of the holders of
shares of the Series C Preferred Stock under Section 305 of the Internal Revenue
Code of 1986, as amended (or any comparable provision of the Internal Revenue
Code as hereafter from time to time amended).
In the event holders of at least a majority of the then outstanding shares
of Series C Preferred Stock agree to allow the Corporation to alter or change
the rights, preferences or privileges of the shares of Series C Preferred Stock,
pursuant to subsection (a) above, so as to affect the Series C Preferred Stock,
then the Corporation will deliver notice of such approved change to the holders
of the Series C Preferred Stock that did not agree to such alteration or change
(the "DISSENTING HOLDERS") and Dissenting Holders shall have the right for a
period of thirty (30) days to convert pursuant to the terms of this Certificate
of Designation as they exist prior to such alteration or change or continue to
hold their shares of Series C Preferred Stock.
XI. PRO RATA ALLOCATIONS
The Maximum Share Amount (including any increases thereto) shall be
allocated by the Corporation pro rata among the holders of Series C Preferred
Stock and Series D Preferred Stock based on the number of shares of Series C
Preferred Stock and Series D Preferred Stock issued to each holder. Each
increase to the Maximum Share Amount shall be allocated pro rata among the
holders of Series C Preferred Stock and Series D Preferred Stock based on the
number of shares of Series C Preferred Stock and Series D Preferred Stock held
by each holder at the time of the increase in the Maximum Share Amount. In the
event a holder shall sell or otherwise transfer any of such holder's shares of
Series C Preferred Stock or Series D Preferred Stock, each transferee shall be
allocated a pro rata portion of such transferor's Maximum Share Amount. Any
portion of the Maximum Share Amount which remains allocated to any person or
entity which does not hold any Series C Preferred Stock shall be allocated to
the remaining holders of shares of Series C Preferred Stock, pro rata based on
the number of shares of Series C Preferred Stock then held by such holders.
The Reserved Amount (including any increases thereto) shall be allocated by
the Corporation pro rata among the holders of Series C Preferred Stock based on
the number of shares of Series C Preferred Stock issued to each holder. Each
increase to the Reserved Amount shall be allocated pro rata among the holders of
Series C Preferred Stock based on the number of shares of Series C Preferred
Stock held by each holder at the time of the increase in the Reserved Amount. In
the event a holder shall sell or otherwise transfer any of such holder's shares
of Series C Preferred Stock, each
<PAGE> 23
transferee shall be allocated a pro rata portion of such transferor's Reserved
Amount. Any portion of the Reserved Amount which remains allocated to any person
or entity which does not hold any Series C Preferred Stock shall be allocated to
the remaining holders of shares of Series C Preferred Stock, pro rata based on
the number of shares of Series C Preferred Stock then held by such holders.
XII. REMEDIES
The Corporation acknowledges that a breach by it of its obligations under
this Certificate of Designation will cause irreparable harm to each holder of
Series C Preferred Stock by initiating the intent and purpose of the
transactions contemplated hereby. Accordingly, the Corporation acknowledges that
the remedy at law for a breach of its obligations under this Certificate of
Designation will be inadequate and agrees, in the event of a breach or
threatened breach by the Corporation of the provisions of this Certificate of
Designation, that each holder of Series C Preferred Stock shall be entitled, in
addition to all other available remedies in law or in equity, to any injunction
or injunctions to prevent or cure any breaches of the provisions of this
Certificate of Designation and to enforce specifically the terms and provisions
of this Certificate of Designation, without the necessity of showing economic
loss and without any bond or other security being required.
IN WITNESS WHEREOF, this Certificate of Designation is executed on behalf
of the Corporation this 31st day of October 2000.
STORAGE COMPUTER CORPORATION
By: /s/ William E. Kelly
----------------------------------
Name: William E. Kelly
Title: Secretary
<PAGE> 24
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series C Preferred Stock)
The undersigned hereby irrevocably elects to convert ______ shares of
Series C Preferred Stock, represented by stock certificate No(s). __________
(the "PREFERRED STOCK CERTIFICATES") into shares of common stock ("COMMON
STOCK") of STORAGE COMPUTER CORPORATION, a Delaware corporation (the
"CORPORATION") according to the conditions of the Certificate of Designation of
Series C Preferred Stock, as of the date written below. If securities are to be
issued in the name of a person other than the undersigned, the undersigned will
pay all transfer taxes payable with respect thereto and is delivering herewith
such certificates. No fee will be charged to the Holder for any conversion,
except for transfer taxes, if any. A copy of each Preferred Stock Certificate is
attached hereto (or evidence of loss, theft or destruction thereof).
The undersigned hereby irrevocably elects to convert $___________ in
Conversion Default Payments, $__________ in Delivery Default Payments and/or
$___________ in payments pursuant to Section 2(c) of the Registration Rights
Agreement at the Applicable Conversion Price set forth below.
The Corporation shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC
TRANSFER").
Name of DTC Prime Broker:
---------------------------
Account Number:
----------------------------------------------
[ ] In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Corporation issue a certificate or certificates for the
number of shares of Common Stock set forth above (which numbers are based
on the Holder's calculation attached hereto) in the name(s) specified
immediately below or, if additional space is necessary, on an attachment
hereto:
Name:
--------------------------------------------
Address:
-----------------------------------------
The undersigned represents and warrants that all offers and sales by the
undersigned of the securities issuable to the undersigned upon conversion of the
Series C Preferred Stock shall be made pursuant to registration of the
securities under the Securities Act of 1933, as amended (the "ACT"), or pursuant
to an exemption from registration under the Act.
Date of Conversion:
--------------------------------------
Market Price Days:
---------------------------------------
Applicable Conversion Price:
------------------------
Number of Shares of Common Stock to be Issued pursuant to:
(i) Conversion of Series C Preferred Stock:
(ii) Conversion of Conversion Default Payments, Delivery Default Payments
and/or payments pursuant to Section 2(c) of the Registration Rights
Agreement:
Signature:
-----------------------------------------
Name:
--------------------------------------
Address:
--------------------------------------------
* The Corporation is not required to issue shares of Common Stock until the
original Series C Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
Transfer Agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than two (2) business days following receipt
of the original Preferred Stock Certificate(s) to be converted, and shall make
payments pursuant to the Certificate of Designation for the number of business
days such issuance and delivery is late.
