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EXHIBIT 3.3
LEVEL 8 SYSTEMS, INC.
CERTIFICATE OF DESIGNATION OF RIGHTS, PREFERENCES
AND LIMITATIONS OF PREFERRED STOCK
ARTICLE I
DESIGNATION, AMOUNT, PAR VALUE, LIQUIDATION VALUE AND RANK
1.1 The series of preferred stock shall be designated as
Series B 4% Convertible Redeemable Preferred Stock, ("Series B Preferred Stock"
or "Preferred Stock"), and the number of shares so designated shall be 30,000
(which shall not be subject to increase without the consent of the Required
Holders of the Series B Preferred Stock). Each share of Preferred Stock, $.001
par value per share, shall have a liquidation value of $1,000 per share (the
"Liquidation Value"). The Board of Directors of the Company created the Series B
Preferred Stock pursuant to the Authority conferred upon the Board of Directors
of the company by the Certificate of Incorporation of the company pursuant to
ss.151(g) of the General Corporation Law of the state of Delaware.
1.2 The Series B Preferred Stock shall rank senior to the
Junior Securities as to dividends, distributions and upon liquidation,
dissolution or winding up.
ARTICLE II
DIVIDENDS
2.1 Holders of the Series B Preferred Stock ("Holders")
shall be entitled to receive, out of funds legally available therefor, and the
Company shall pay, cumulative cash dividends at the rate per share (as a
percentage of the Liquidation Value per share) equal to 4% per annum, payable
quarterly, on January 15, April 15, July 15 and October 15 (if any such day is
not a Business Day, then the next Business Day) of each year (each a "Dividend
Payment Date") commencing on October 15, 2000, in cash. The "Record Date" for
any dividend payment is the close of business on January 1, April 1, July 1 or
October 1, as the case may be, whether or not a Business Day, immediately
preceding the Dividend Payment Date on which such dividend is payable. Dividends
on the Series B Preferred Stock shall be calculated on the basis of a 365-day
year (or 366-day year for any leap year), shall accrue daily commencing on the
Issuance Date, and shall be deemed to accrue from such date and be cumulative
whether or not earned or declared and whether or not there are profits, surplus
or other funds of the Company legally available for the payment of dividends. No
interest, or sum of money in lieu of interest shall be payable in respect of any
dividend payment on shares of Preferred Stock which may be in arrears. Accrued
and unpaid dividends of the Preferred Stock for any shares which are being
converted shall be paid to the extent of the funds legally available therefor on
the date on which such Preferred Stock is converted. Except as otherwise
provided herein, if at any time the Company pays less than the total amount of
dividends then accrued on account of the Preferred Stock, such payment shall be
distributed ratably among the Holders based upon the number of shares held by
each Holder.
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2.2 So long as any Preferred Stock shall remain
outstanding or unconverted, except pursuant to existing agreements of the
Company on the date hereof, neither the Company nor any Subsidiary thereof
shall, without the prior written consent of the Required Holders, redeem,
purchase or otherwise acquire directly or indirectly any Junior Securities, nor
shall the Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described herein) upon, nor
shall any distribution be made in respect of, any Junior Securities, nor shall
any monies be set aside for or applied to the purchase or redemption (through a
sinking fund or otherwise) of any Junior Securities. The provisions of this
Section 2.2 shall not, however, apply to (a) the acquisition of shares of any
Junior Stock in exchange for shares of other Junior Stock, (b) the payment of
cash dividends on the Common Stock to the extent that equivalent dividends are
paid on the Preferred Stock as provided above, (c) any repurchase from former
employees, directors or consultants in connection with the termination of
employment or services as an employee, director or consultant that is approved
by the Company's Board of Directors, (d) the redemption of or the payment of
cash dividends on the Series A Preferred Stock or (e) the redemption of those
certain Warrants issued by the Company on June 29, 1999 in connection with the
issuance of the Series A Preferred Stock.
ARTICLE III
VOTING RIGHTS
3.1 Except as expressly otherwise provided herein and as
otherwise required by law, the Holders of Preferred Stock shall be entitled to
one vote per share and shall vote together with the holders of the Series A
Preferred Stock and the holders of the Common Stock as a single class on all
matters on which holders of Common Stock are entitled to vote. Furthermore, so
long as not less than 85% of the shares of Preferred Stock issued pursuant to
the Purchase Agreement are outstanding, the Company shall not and shall cause
its subsidiaries not to, without the affirmative vote or consent of the Holders
of more than 85% of the shares of the Preferred Stock then outstanding (the
"Required Holders"), (a) alter or change adversely the absolute or relative
powers, preferences or rights given to the Preferred Stock, (b) alter or amend
this Certificate of Designation, (c) amend its, or their, Certificate of
Incorporation, bylaws or other charter documents so as to affect adversely any
rights of any Holders; provided, however, that amendment of other provisions of
the Certificate of Incorporation so as to authorize or create, or to increase
the authorized amount of, any Junior Stock or any shares of any class or series
ranking pari passu with the Preferred Stock shall not be deemed to affect
adversely any rights of any Holder, (d) increase the authorized number of shares
of Preferred Stock, (e) create a new class of securities pari passu with or
senior to the Preferred Stock, or (f) enter into any agreement with respect to
the foregoing.
ARTICLE IV
LIQUIDATION
4.1 Upon any liquidation, dissolution or winding-up of
the Company, whether voluntary or involuntary (a "Liquidation"), the Holders
shall be entitled to receive out of the assets of the Company legally available
therefor, whether such assets are capital or surplus, for
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each share of Preferred Stock an amount equal to the Liquidation Value, plus all
accrued but unpaid dividends per share, whether declared or not, before any
distribution or payment shall be made to the Holders of any Junior Securities.
If the assets of the Company shall be insufficient to pay in full all amounts
due to the Holders then the entire assets shall be distributed ratably to the
Holders and the Holders of all securities ranking pari passu to the Preferred
Stock in accordance with the respective amounts that would be payable on such
shares if all amounts payable thereon were paid in full. The Company shall mail
written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each Holder. A sale, conveyance, lease, transfer
or disposition of all or substantially all of the assets of the Company or the
consummation by the Company of a transaction or series of related transactions
in which more than 40% of the voting power of the Company (excluding the
Preferred Stock) is disposed of, or a consolidation or merger of the Company
with or into any other company or companies shall not be treated as a
Liquidation, but instead shall be subject to the provisions of Article VII.
ARTICLE V
CONVERSION
5.1 RIGHT OF HOLDERS TO CONVERT PREFERRED STOCK INTO
COMMON STOCK.
(a) Conversion Price. Subject to and upon compliance with
the provisions of this Section 5.1, each share of Preferred Stock at a price per
share equal to the purchase price per share as set forth in the Purchase
Agreement plus any and all accrued but unpaid dividends thereon may, at any
time, be converted into that number of duly authorized, validly issued,
fully-paid and nonassessable shares of Common Stock as is determined by the
Conversion Ratio. The initial per share conversion price shall be $25.0625,
subject to adjustment from time to time as set forth in Section 5.1(b), and
subject to the provisions of this Article V (the "Conversion Price").
(b) Notice of Conversion. If an adjustment in the
Conversion Price and, if applicable, a change in the securities or other
property issuable upon conversion has taken place pursuant to Articles V or VII,
then the conversion described in Section 5.1(a) shall be at the applicable
Conversion Price and in such securities or other property as so adjusted. The
Holder desiring to make a conversion shall deliver to the Company, during usual
business hours of the Company's office, or, at the Holder's option, to the
Company's transfer agent during its usual business hours (with a copy to the
Company), a written notice of election to convert, as provided in the form
attached hereto as Exhibit A (a "Notice of Conversion"), accompanied, if
required, by the stock certificate(s) evidencing the shares of Preferred Stock
which are to be converted.
5.2 ADJUSTMENT FOR DIVIDENDS; INTEREST PAYMENT AFTER
CONVERSION. No payment or adjustment will be made for dividends on any Common
Stock except as provided herein. On conversion of shares of Preferred Stock, any
declared but unpaid dividends thereon attributable to the period from the
Original Issuance Date to the Conversion Date with respect to the converted
shares of Preferred Stock shall not be canceled, extinguished or forfeited, but
rather to the extent of the funds legally available therefor shall be paid in
full to the Holder thereof by the payment of an amount of shares of Common Stock
valued at the Average Price
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equal thereto; provided, however, that the Company shall pay such amount in cash
if the Holder provides the Company with ten (10) days prior written notice of
its intention to be paid in cash, to the extent of the funds legally available
therefor.
5.3 ISSUANCE OF SHARES UPON CONVERSION.
(a) As promptly as practicable, but in any event no later
than three (3) Trading Days after delivery of a Notice of Conversion and, if
required, the surrender, as herein provided, of any certificates for shares of
Preferred Stock for conversion, the Company shall deliver or cause to be
delivered to the Holder of the Preferred Stock delivering such Notice of
Conversion, or such Holder's designee, a certificate or certificates
representing the number of duly authorized, validly issued, fully-paid and
nonassessable shares of Common Stock, into which such shares of Preferred Stock
may be converted in accordance with the provisions of this Article V. Such
conversion shall be deemed to have been made at the time and on the date the
Notice of Conversion is delivered to the Company and the shares of Preferred
Stock being converted are promptly delivered to the Company (the "Conversion
Date"), and the rights of the Holder of such Preferred Stock as a Holder
(subject to the Company's satisfaction of its obligations hereunder with respect
to such conversion) shall cease at such time with respect to the shares of
Preferred Stock that such Holder would have held had the shares of Preferred
Stock converted into Underlying Shares not been so converted (the "Converted
Preferred Stock"), the Person or Persons entitled to receive the shares of
Common Stock, upon conversion of such Preferred Stock, shall be treated for all
purposes as having become the record holder or holders of such shares of Common
Stock at such time, and such conversion shall be at the Conversion Price in
effect on the Conversion Date. Subject to paragraph 5.3(b), if any certificated
shares of Preferred Stock are converted in part only, upon such conversion the
Company shall execute and deliver to the Holder thereof, as requested by such
Holder, a new Preferred Stock certificate for the number of shares of Preferred
Stock equal to the unconverted portion of such Preferred Stock certificate.
Without in any way limiting the Holder's right to pursue other remedies,
including actual damages and/or equitable relief, the parties hereto agree that
if the Company fails to deliver the shares of Common Stock required to be issued
upon the conversion of such shares of Preferred Stock under this Section 5.3
within the three (3) Trading Day period referred above for any reason other than
the failure to have a sufficient number of shares authorized and reserved (in
which case the Conversion Default Payment provisions in Section 6.2 hereof shall
apply), the Company shall pay to the Holder upon demand an amount of cash (at
the Holder's option) equal to the product of (w) the number of shares of Common
Stock required to be issued upon the conversion of the Preferred Stock, (x) the
Per Share Market Value of such shares on the Conversion Date, (y) the number of
days after such three (3) Trading Day period that such shares are not delivered
to the Holder, and (z) 0.005; provided, however, that the Company shall not be
obligated to make any payments to a Holder pursuant to this sentence if the
Company makes a payment to such in accordance with Section 5.3(c) hereof and
provided further that any payment otherwise required by this sentence need not
be made to a Holder until the end of business on the fifth Trading Day after
which shares of Common Stock are required to be delivered to the Holder and that
such payment is not required to be made if the Company delivers to the Holder
the total number of shares of Common Stock required to be issued upon the
conversion of such shares of Preferred Stock.
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(b) In lieu of delivering physical certificates
representing the Conversion Shares, provided the Company's transfer agent is
participating in the Depositary Trust Company Fast Automated Securities Transfer
("FAST") program, upon request of the Holder and in compliance with the
provisions of Sections 5.1 and 5.3, the Company shall use its best efforts to
cause its transfer agent to electronically transmit the shares of Common Stock
issuable upon conversion of the Preferred Stock to the Holder by crediting the
account of the Holder's Prime Broker with DTC through its Deposit Withdrawal
Agent Commission system. The time period for delivery described in the
immediately preceding paragraph shall apply to the electronic transmittals
described herein. The Company and its transfer agent shall be entitled to rely
in good faith on delivery instructions which reasonably appear on their face to
be issued on behalf of a Holder, and will have no liability with respect to any
misdeliveries of shares of Common Stock if such instructions are followed.
(c) In addition to any other rights available to the
Holder, if the Company fails to deliver to the Holder such certificate or
certificates for shares of Common Stock pursuant to Section 5.3(a), including
for purposes hereof, any shares of Common Stock to be issued on the Conversion
Date on account of any declared but unpaid dividends hereunder, by the third
(3rd) Trading Day after the Conversion Date, and if after such third (3rd)
Trading Day the Holder purchases (in an open market transaction or otherwise)
Common Stock to deliver in satisfaction of a sale (in accordance with the
Securities Act of 1933) by such Holder of the Underlying Shares which the Holder
was entitled to receive upon such conversion (a "Buy-In"), then the Company
shall (A) pay in cash to the Holder the amount by which (x) the Holder's total
purchase price (including reasonable brokerage commissions actually incurred, if
any) for the Common Stock so purchased exceeds (y) the product of (1) the
aggregate number of shares of Common Stock that such Holder was entitled to
receive from the conversion at issue multiplied by (2) the market price of the
Common Stock at the time of the sale giving rise to such purchase obligation and
(B) at the option of the Holder, either return the Preferred Stock for which
such conversion was not honored or deliver to such Holder the number of shares
of Common Stock that would have been issued had the Company timely complied with
its conversion and delivery obligations under Section 5.3(a). For example, if
the Holder purchases Common Stock having a total purchase price of $11,000 to
cover a Buy-In with respect to an attempted conversion of Preferred Stock with
respect to which the market price of the Underlying Shares on the date of
conversion totaled $10,000, under clause (A) of the immediately preceding
sentence the Company shall be required to pay the Holder $1,000. The Holder
shall provide the Company written notice indicating the amounts payable to the
Holder in respect of the Buy-In.
ARTICLE VI
REGISTRATION REQUIREMENTS
6.1 RESERVATION OF SHARES. The Company covenants that it
will at all times reserve and keep available out of its authorized shares of
Common Stock, free from preemptive rights, solely for the purpose of issue upon
conversion of the Preferred Stock as herein provided, such number of shares of
the Common Stock as shall then be issuable upon the conversion of all
outstanding shares of Preferred Stock into Common Stock (the "Reserved Amount").
The Company covenants that all shares of the Common Stock issued upon conversion
of the
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Preferred Stock which shall be so issuable shall, when issued, be duly and
validly issued and fully paid and non-assessable.
6.2 If, at any time a Holder of Preferred Stock submits a
Notice of Conversion, and the Company 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 Section 7.9, the Company shall issue to the Holder all of the shares
of Common Stock which are then available to effect such conversion. The portion
of Preferred Stock which the Holder included in its Conversion Notice and 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 Company to permit such
conversion at which time the Conversion Price in respect thereof shall be the
lesser of (i) the Per Share Market Value on the Conversion Default Date (as
defined below) and (ii) the Per Share Market Value on the Conversion Date
thereafter elected by the Holder in respect thereof. In addition, the Company
shall pay to the Holder payments ("Conversion Default Payments") for a
Conversion Default in the amount of (x) the sum of (1) the number of the
Holder's Excess Amount Preferred Stock plus (2) any declared and unpaid
dividends on such shares of Preferred Stock through the Authorization Date (as
defined below) multiplied by (y) .24, multiplied by (z) (N/365), where N equals
the number of days from the Fourth (4th) Trading Day following the date of which
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
Company authorizes a sufficient number of shares of Common Stock to effect
conversion of the full number of outstanding shares of Preferred Stock. The
Company shall use its best efforts to authorize a sufficient number of shares of
Common Stock as soon as practicable following the earlier of (i) such time that
the Holder notifies the Company or that the Company 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. The Company shall send
notice to the Holder of the authorization of additional shares of Common Stock,
the Authorization Date and the amount of Holder's accrued Conversion Default
Payments. The accrued Conversion Default Payments for each calendar month shall
be paid in cash or shall be convertible into Common Stock (at such time as there
are sufficient authorized shares of Common Stock following the Authorization
Date) at the applicable Conversion Price, at the Holder's option, as follows:
(a) In the event Holder elects to take such payment in
cash, cash payment shall be made to Holder by the fifth (5th) Business Day of
the month following the month in which it has accrued; and
(b) In the event Holder elects to take such payment in
Common Stock, the Holder may convert such payment amount into Common Stock at
the lesser of the Conversion Price (as in effect at the time of conversion) and
the Per Share Market Value (on the fifth day of the month referred to below) 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).
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6.3 The Holder's election shall be made in writing to the
Company at any time prior to 9:00 p.m., New York City Time, on the third 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 Company'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 degree of specific performance and/or injunctive relief).
6.4 Notwithstanding the foregoing, the provisions of
Section 2(d) of the Registration Rights Agreement are incorporated herein by
reference.
ARTICLE VII
ADJUSTMENT OF CONVERSION PRICE
7.1 ADJUSTMENT OF CONVERSION PRICE. In addition to any
adjustment to the Conversion Price provided elsewhere in this Certificate of
Designation, the Conversion Price in effect at any time shall be subject to
adjustment from time to time upon the happening of certain events, as follows:
(a) Common Stock Dividends; Common Stock Splits; Reverse
Common Stock Splits. If the Company, at any time while the Preferred Stock is
outstanding, (a) shall pay a stock dividend on its Common Stock, (b) subdivide
outstanding shares of Common Stock into a larger number of shares, (c) combine
outstanding shares of Common Stock into a smaller number of shares, or (d) issue
by reclassification of shares of Common Stock any shares of capital stock of the
Company, the Conversion Price shall be multiplied by a fraction the numerator of
which shall be the number of shares of Common Stock (excluding treasury shares,
if any) outstanding before such event and the denominator of which shall be the
number of shares of Common Stock outstanding after such event. Any adjustment
made pursuant to this Section 7.1(a) shall become effective on the effective
date of any dividend, distribution, subdivision, combination or
re-classification.
(b) Rights; Warrants. If the Company, at any time while
the Preferred Stock is outstanding, shall issue rights or warrants to all of the
holders of Common Stock entitling them to subscribe for or purchase shares of
Common Stock at a price per share less than the Conversion Price and similar
rights are not concurrently distributed to the Holders, the Conversion Price
shall be multiplied by a fraction, the denominator of which shall be the number
of shares of Common Stock (excluding treasury shares, if any) outstanding on the
date of issuance of such rights or warrants plus the number of additional shares
of Common Stock offered for subscription or purchase, and the numerator of which
shall be the number of shares of Common Stock (excluding treasury shares, if
any) outstanding on the date of issuance of such rights or warrants plus the
number of shares which the aggregate offering price of the total number of
shares so offered would purchase at the Conversion Price. Such adjustment shall
be made whenever such rights or warrants are issued, and shall become effective
immediately after the record date for the determination of shareholders entitled
to receive such rights or warrants.
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(c) Subscription Rights. If the Company, at any time
while the Preferred Stock is outstanding, shall distribute to all of the holders
of Common Stock evidence of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
7.1(a) and (b) above) and similar rights are not concurrently distributed to the
Holders, then in each such case the Conversion Price at which the Preferred
Stock shall thereafter be exercisable shall be determined by multiplying the
Conversion Price in effect immediately prior to the record date fixed for
determination of shareholders entitled to receive such distribution by a
fraction, the denominator of which shall be the Per Share Market Value of Common
Stock determined as of the record date mentioned above, and the numerator of
which shall be such Per Share Market Value of the Common Stock on such record
date less the then fair market value at such record date of the portion of such
assets or evidence of indebtedness so distributed applicable to one outstanding
share of Common Stock as determined by the Board of Directors in good faith;
provided, however, that in the event of a distribution exceeding ten percent
(10%) of the net assets of the Company, such fair market value shall be
determined by one Appraiser selected in good faith by the Holder; and provided,
further, that the Company, after receipt of the determination by such Appraiser
shall have the right to select an additional Appraiser meeting similar
qualifications, in good faith, in which case the fair market value shall be
equal to the average of the determinations by each such Appraiser. Such
adjustment shall be made whenever any such distribution is made and shall become
effective immediately after the record date mentioned above.
(d) Rounding. All calculations under Section 7.1 shall be
made to the nearest cent or the nearest l/l00th of a share, as the case may be.
(e) Notice of Adjustment. Whenever the Conversion Price
is adjusted pursuant to paragraphs 7.1(a), (b) or (c), the Company shall
promptly deliver to the Holder a notice setting forth the Conversion Price after
such adjustment and setting forth a brief statement of the facts requiring such
adjustment.
(f) Events Triggering Dividend Adjustment. The following
are "Triggering Events" under this Section 7.1(f): (A) any reclassification of
the Common Stock which would have a material adverse affect on the rights of
holders of the securities into which the Preferred Stock is convertible, (B) any
suspension from listing or delisting of the Common Stock such that the Common
Stock is not listed on Nasdaq or any Subsequent Market for a period of ten
consecutive Trading Days, or (C) a breach by the Company of its obligations to
pay dividends when due pursuant to Article II of this Certificate of Designation
or to issue Common Stock upon conversion of the Preferred Stock pursuant to
Article V of this Certificate of Designation, but only if such breach continues
for a period of at least 10 Trading Days after the Company is notified by any
Holder of such breach.
Following the occurrence of any Triggering Event (a "Dividend
Adjustment Event"), dividends on the Preferred Stock shall accrue on the
Preferred Stock from the date of such Triggering Event at a rate per share equal
to 18% per annum (as a percentage of the Liquidation Value per share) until such
date as such Triggering Event has been cured. In the event Holders of the
Preferred Stock would otherwise also be entitled to any other payments or an
adjustment to the Conversion Price as a result of the Dividend Adjustment Event,
Holders of the Preferred Stock shall be entitled to receive the dividend
adjustment described in this paragraph or such
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other payment or Conversion Price adjustment, whichever shall provide the
greater economic benefit to the Holders, but not both. In the event that it
cannot be readily determined which adjustment would provide the greater economic
benefit to the Holders, the Holders of a majority of the outstanding Preferred
Stock shall determine which adjustment the Holders of the Preferred Stock shall
receive, which determination shall be binding on Holders of the Preferred Stock.
In the case of a Dividend Adjustment Event, up to one-third of the aggregate
amount of the dividends (representing up to 6% per annum as a percentage of
Liquidation Value per share) that accrue during the 60-day period commencing on
the Triggering Event may be payable by, at the option of the Company, in shares
of Common Stock valued at the Average Price on the Record Date; all other
amounts of dividends shall be paid in cash from funds legally available
therefor.
(g) Adjustment to Conversion Price.
(i) If the Company, at any time while the
Preferred Stock is outstanding, takes any of the actions described in
this Section 7.1(g), then, in order to prevent dilution of the rights
granted under this Certificate of Designation, the Conversion Price
will be subject to adjustment from time to time as provided in this
Section 7.1(g).
(ii) Adjustment of Conversion Price upon Issuance
of Common Stock. If at any time while the Preferred Stock is
outstanding the Company issues or sells, or is deemed to have issued or
sold, any shares of Common Stock (other than the shares of Common Stock
underlying the Warrants or the Preferred Stock or shares issued upon
exercise of the Warrants or conversion of the Preferred Stock
(collectively, the "Underlying Shares") or other shares of Common Stock
issued to any Holder or shares of Common Stock deemed to have been
issued by the Company in connection with a Stock Option Plan, or shares
of Common Stock issuable upon conversion of the Series A Preferred
Stock or shares of Common Stock issuable upon the exercise of any
options or warrants outstanding on the date hereof and listed in
Schedule 2.1(c) of the Purchase Agreement or the securities to be
issued in the transactions set forth on such Schedule 2.1(c) or any
securities to be issued in an Underwritten Offering (as defined in the
Registration Rights Agreement) before December 31, 2001 or shares of
Common Stock issued or deemed to have been issued as consideration for
an acquisition by the Company of a division, assets or business (or
stock constituting any portion thereof) from another Person), for a
consideration per share less than the Conversion Price in effect
immediately prior to such issuance or sale, then immediately after such
issuance or sale the Conversion Price then in effect shall be reduced
to an amount equal to the lesser of: (A) the Adjusted Price in such
issuance or sale, or (B) the Average Price on the date of such issuance
or sale. For the purpose of determining the adjusted Conversion Price
under this Section 7.1(g), the following shall be applicable:
(A) Issuance of Options. If at any time
while the Preferred Stock is outstanding the Company in any
manner grants any rights or options to subscribe for or to
purchase Common Stock or any stock or other securities
convertible into or exchangeable for Common Stock (other than
the Underlying Shares or shares of Common Stock deemed to have
been issued by the Company in connection with a Stock Option
Plan, or shares of Common Stock issuable
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upon the exercise of any options or warrants outstanding on
the date hereof and listed in Schedule 2.1(c) of the Purchase
Agreement, or the securities to be issued in the transactions
set forth on such Schedule 2.1(c), or any securities to be
issued in an Underwritten Offering (as defined in the
Registration Rights Agreement) before December 31, 2001, or
shares of Common Stock issued or deemed to have been issued as
consideration for an acquisition by the Company of a division,
assets or business (or stock constituting any portion thereof)
from another Person) (such rights or options being herein
called "Options" and such convertible or exchangeable stock or
securities being herein called "Convertible Securities") and
the price per share for which Common Stock is issuable upon
the exercise of such Options or upon conversion or exchange of
such Convertible Securities is less than the Conversion Price
in effect immediately prior to such grant, then the Conversion
Price then in effect shall be reduced to equal the lesser of:
(A) the Adjusted Price upon the exercise of such Options or
upon the conversion or exchange of such Convertible
Securities, or (B) the Average Price on the date of such
grant. No adjustment of the Conversion Price shall be made
upon the actual issuance of such Common Stock upon conversion
or exchange of such Options.
(B) Issuance of Convertible Securities.
If at any time while the Preferred Stock is outstanding the
Company in any manner issues or sells any Convertible
Securities (other than the Underlying Shares or shares of
Common Stock deemed to have been issued by the Company in
connection with a Stock Option Plan, shares of Common Stock
issuable upon the exercise of any options or warrants
outstanding on the date hereof and listed in Schedule 2.1(c)
of the Purchase Agreement, or the securities to be issued in
the transactions set forth on such Schedule 2.1(c) or any
securities to be issued in an Underwritten Offering (as
defined in the Registration Rights Agreement) before December
31, 2001 or shares of Common Stock issued or deemed to have
been issued as consideration for an acquisition by the Company
of a division, assets or business (or stock constituting any
portion thereof) from another Person) and the price per share
for which Common Stock is issuable upon such conversion or
exchange is less than the Conversion Price in effect
immediately prior to issuance or sale, then the Conversion
Price then in effect shall be reduced to an amount equal to
the lesser of: (A) the Adjusted Price upon the conversion or
exchange of such Convertible Securities, or (B) the Average
Price on the date of such issuance or sale. No adjustment of
the Conversion Price shall be made upon the actual issuance of
such Common Stock upon conversion or exchange of such
Convertible Securities.
(C) Change in Option Price or Rate of
Conversion. If there is a change at any time in (i) the
Purchase Price provided for in any Options, (ii) the
additional consideration, if any, payable upon the issue,
conversion or exchange of any Convertible Securities or (iii)
the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock, then immediately after
such change in option price or rate of conversion the
Conversion Price in effect at the time of such change shall be
readjusted to the lesser of: (A) the Conversion Price which
would have been in effect at such time had such Options or
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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, or (B) the Average Price on the date
of such change; provided that no adjustment shall be made if
such adjustment would result in an increase of the Conversion
Price then in effect.
(D) Effect on Conversion Price of
Certain Events. For purposes of determining the adjusted
Conversion Price under Section 7.1, the following shall be
applicable:
(I) Calculation of
Consideration Received. If any Common Stock, Options
or Convertible Securities are issued or sold or
deemed to have been issued or sold for cash, the
consideration received therefor will be deemed to be
the net amount received by the Company therefor. In
case any Common Stock, Options or Convertible
Securities are issued or sold for a consideration
other than cash, the amount of the consideration
other than cash received by the Company will be the
fair value of such consideration, except where such
consideration consists of securities, in which case
the amount of consideration received by the Company
will be the Average Price of such security
immediately preceding the date of receipt. In case
any Common Stock, Options or Convertible Securities
are issued to the owners of the non-surviving entity
in connection with any merger in which the Company is
the surviving entity the amount of consideration
therefor will be deemed to be the fair value of such
portion of the net assets and business of the
non-surviving entity as is attributable to such
Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration
other than cash or securities will be determined
jointly by the Company and the Holders of Preferred
Stock representing a majority of the aggregate number
of shares of Preferred Stock then outstanding. If
such parties are unable to reach agreement within ten
(10) days after the occurrence of an event requiring
valuation (a "Valuation Event"), the fair value of
such consideration will be determined within
forty-eight (48) hours of the tenth (10th) day
following the Valuation Event by an Appraiser
selected in good faith by the Company and agreed upon
by the Holders of Preferred Stock representing a
majority of the aggregate number of shares of
Preferred Stock then outstanding. The determination
of such Appraiser shall be binding upon all parties
absent manifest error.
(II) Integrated Transactions.
In case any Option is issued in connection with the
issue or sale of other securities of the Company,
together comprising one integrated transaction in
which no specific consideration is allocated to such
Options by the parties thereto, the Options will be
deemed to have been issued for an aggregate
consideration of $.001.
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(III) Treasury Shares. The
number of shares of Common Stock outstanding at any
given time does not include shares owned or held by
or for the account of the Company, and the
disposition of any shares so owned or held will be
considered an issue or sale of Common Stock.
(IV) Record Date. If the
Company takes a record of the holders of Common Stock
for the purpose of entitling them (1) to receive a
dividend or other distribution payable in Common
Stock, Options or in Convertible Securities or (2) to
subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be
deemed to be the date of the issue or sale of the
shares of Common Stock deemed to have been issued or
sold upon the declaration of such dividend or the
making of such other distribution or the date of the
granting of such right of subscription or purchase,
as the case may be.
(V) "Common Stock Deemed
Outstanding" means, at any given time, the number of
shares of Common Stock issued and outstanding at such
time, plus the number of shares of Common Stock
deemed to be outstanding pursuant to Sections
7.1(g)(ii)(A) and 7(g)(ii)(B) hereof regardless of
whether the Options or Convertible Securities are
actually exercisable at such time, but excluding any
shares of Common Stock issuable upon exercise of the
Warrants.
(E) Certain Events. If any event occurs
of the type contemplated by the provisions of Section 7.1(g)
(subject to the exceptions stated therein) but not expressly
provided for by such provisions (including, without
limitation, the granting of stock appreciation rights, phantom
stock rights or other rights with equity features), then the
Company's Board of Directors will make an appropriate
adjustment in the Conversion Price so as to protect the rights
of the Holder, or assigns, of the Preferred Stock; provided,
however, that no such adjustment will increase the Conversion
Price as otherwise determined pursuant to this Section 7.1(g).
(F) Notices. The Company shall give the
Holder written notice of the occurrence of any of the events
specified in this Section 7.1(g) as soon as practicable, but
in no event later than three (3) Business Days, after such
event and shall publicly disclose such event prior to or
concurrently with the giving of such notice. Such notice shall
contain at least: (A) a description of the event, (B) the
adjusted Conversion Price with a reference to the applicable
paragraph in Section 7.1(g), and (C) the dates of the five (5)
Trading Day period during which the adjusted Conversion Price
is in effect.
(h) Delay in Payment to Holder. If the Company fails for
any reason, voluntarily or involuntarily, to pay the declared dividends on the
Preferred Stock in full on the date such amount is due to the Holder (the
"Payment Due Date"), then, as partial relief for the delay in such payment to
the Holder (which remedy shall not be exclusive of any other remedies available
at law or in equity and shall not excuse or waive the Company's obligation to
make
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such payment), from and after the Payment Due Date the Conversion Price in
effect on the Payment Due Date shall be adjusted to the lesser of (i) the
Conversion Price in effect on the Payment Due Date and (ii) the lowest Per Share
Market Value on any day during the period beginning on and including the Payment
Due Date and ending on the including the date, if ever, the Company pays in full
to the Holder all amounts the Company's failure of which to pay is the basis for
this adjustment, subject to further adjustment pursuant to this paragraph or
other provisions of this Certificate of Designation. No adjustments will be made
under this paragraph if the Company's failure to pay is due solely to delays
caused by the Commission, so long as the Company has not breached or failed to
observe or perform any covenant or agreement contained in this Certificate of
Designation, the Warrant(s), the Purchase Agreement or the Registration Rights
Agreement.
(i) Notice of Certain Events. If:
(i) the Company shall declare a dividend (or any
other distribution) on its Common Stock; or
(ii) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock; or
(iii) the Company shall authorize the granting to
the holders of the Common Stock rights or warrants to subscribe for or
purchase any shares of capital stock of any class or of any rights; or
(iv) the approval of any shareholders of the
Company shall be required in connection with any reclassification of
the Common Stock of the Company, any consolidation or merger to which
the Company is a party, any sale or transfer of all or substantially
all of the assets of the Company, or any compulsory share exchange
whereby the Common Stock is converted into other securities, cash or
property; or
(v) the Company shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the affairs of
the Company;
then the Company shall cause to be filed at each office or agency
maintained for the purpose of exercise of shares of Preferred Stock,
and shall cause to be delivered to the Registered Owner, at least 10
Business Days prior to the applicable record or effective date
hereinafter specified, a notice stating (x) the date on which a record
is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the
date as of which the holders of Common Stock of record to be entitled
to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to
become effective or close, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities, cash or other property
deliverable upon such reclassification, consolidation, merger, sale,
transfer or share exchange; provided, however, that the failure to mail
such notice or any defect therein or in the
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mailing thereof shall not affect the validity of the corporate action
required to be specified in such notice.
(j) Adjustment of Number of Shares. Upon each adjustment
of the Conversion Price as a result of the calculations made in this Section 7,
each share of Preferred shall thereafter evidence the right to receive, at the
adjusted Conversion Price, that number of shares of Common Stock (calculated to
the nearest one-hundredth) obtained by dividing (i) the product of the aggregate
number of shares covered by such share immediately prior to such adjustment and
the Conversion Price in effect immediately prior to such adjustment of the
Conversion Price by (ii) the Conversion Price in effect immediately after such
adjustment of the Conversion Price.
(k) Expiration or Termination. On the expiration or
termination of any rights, warrants, subscription rights, options or convertible
securities, or any change in the number of shares of Common Stock deliverable
upon exercise, conversion or exchange of such rights, warrants, subscription
rights, options or convertible securities, the Conversion Price then in effect
shall forthwith be readjusted to such Conversion Price as would have been
obtained had the adjustments made upon the issuance of such rights, warrants,
subscription rights, options or convertible securities been made upon the basis
of the delivery of only the number of shares of Common Stock actually delivered
or to be delivered upon the exercise, conversion or exchange of such rights,
warrants, subscription rights, options or convertible securities.
7.2 RESTRICTION ON CONVERSION BY EITHER THE HOLDER OR THE
COMPANY. Notwithstanding anything herein to the contrary, in no event shall any
Holder have the right or be required to convert any or all of the aggregate
purchase price of the Preferred Stock if as a result of such conversion the
aggregate number of shares of Common Stock beneficially owned by such Holder and
its Affiliates would exceed 4.99% of the outstanding shares of the Common Stock
following such conversion. The Company shall be entitled to rely on a Notice of
Conversion in the form of Exhibit A hereto in issuing shares of Common Stock to
a Holder; provided, however, that this Section 7.2 shall not apply to Seneca
Capital, L.P. or Seneca Capital International, Ltd. For purposes of this Section
7.2, beneficial ownership shall be calculated in accordance with Section 13(d)
of the Securities Exchange Act of 1934, as amended. The provisions of this
Section 7.2 may be waived by a Holder as to itself (and solely as to itself)
upon not less than 65 days prior written notice to the Company, and the
provisions of this Section 7.2 shall continue to apply until such 65th day (or
later, if stated in the notice of waiver).
7.3 OFFICER'S CERTIFICATE. Whenever the number of shares
purchasable upon conversion shall be adjusted as required by the provisions of
Section 7.1, the Company shall forthwith file in the custody of its Secretary or
an Assistant Secretary at its principal office and with its stock transfer
agent, if any, an officer's certificate showing the adjusted number of shares
determined as herein provided, setting forth in reasonable detail the facts
requiring such adjustment and the manner of computing such adjustment. Each such
officer's certificate shall be signed by the chairman, president or chief
financial officer of the Company and by the secretary or any assistant secretary
of the Company. Each such officer's certificate shall be made available at all
reasonable times for inspection by any holder of the Preferred Stock and the
Company shall, forthwith after each such adjustment, deliver a copy of such
certificate to the each of the Holders.
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7.4 COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. The
Company covenants that if any shares of Common Stock required to be reserved for
purposes of conversion of Preferred Stock hereunder require registration with or
approval of any governmental authority under any Federal or state law, or any
national securities exchange, before such shares may be issued upon conversion,
the Company will use its best efforts to cause such shares to be duly registered
or approved, as the case may be.
7.5 FRACTIONAL SHARES. Upon a conversion hereunder, the
Company shall not be required to issue stock certificates representing fractions
of shares of the Common Stock, but may if otherwise permitted, make a cash
payment in respect of any final fraction of a share based on the Per Share
Market Value at such time. If the Company elects not, or is unable, to make such
a cash payment, the holder shall be entitled to receive, in lieu of the final
fraction of a share, one whole share of Common Stock.
7.6 PAYMENT OF TAX UPON ISSUE OR TRANSFER. The issuance
of certificates for shares of the Common Stock on conversion of the Preferred
Stock shall be made without charge to the Holders thereof for any documentary
stamp or similar taxes that may be payable in respect of the issue or delivery
of such certificate, provided that the Company shall not be required to pay any
tax that may be payable in respect of any transfer involved in the issuance and
delivery of any such certificate upon conversion in a name other than that of
the Holder of such Preferred Stock so converted and the Company shall not be
required to issue or deliver such certificates unless or until the Person or
Persons requesting the issuance thereof shall have paid to the Company the
amount of such tax or shall have established to the satisfaction of the Company
that such tax has been paid.
7.7 NOTICES. Any notice or other communication required
or permitted to be given hereunder shall be in writing and shall be deemed to
have been received (a) upon hand delivery (receipt acknowledged) or delivery by
telex (with correct answer back received), telecopy or facsimile (with
transmission confirmation report) at the address or number designated below (if
received by 5:00 p.m. eastern time where such notice is to be received), or the
first Business Day following such delivery (if received after 5:00 p.m. eastern
time where such notice is to be received) or (b) on the second Business Day
following the date of mailing by express courier service, fully prepaid,
addressed to such address, or upon actual receipt of such mailing, whichever
shall first occur. The addresses for such communications are (i) if to the
Company to Level 8 Systems, Inc., 8000 Regency Parkway, Cary, North Carolina
27511 Telephone: (919) 380-5005, Facsimile: (919) 461-2690, Attention: Dennis
McKinnie with copies to Powell, Goldstein, Frazer & Murphy LLP, 16th Floor, 191
Peachtree Street, Atlanta, GA 30303, Attention: Scott D. Smith, Esq., Facsimile:
(404) 572-6999, and (ii) if to any Holder to the address set forth on Schedule
II to the Purchase Agreement with copies to the addressees set forth on Schedule
II to the Registration Rights Agreement or such other address as may be
designated in writing hereafter, in the same manner, by such Person.
7.8 ALLOCATIONS OF RESERVED AMOUNT. The Reserved Amount
shall be allocated pro rata among the Holders based on the number of shares of
Preferred Stock issued to each Holder. Each increase to the Reserved Amount
shall be allocated pro rata among the Holders based on the number of shares of
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
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such Holder's Preferred Stock, each 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
Preferred Stock shall be allocated to the remaining Holders, pro rata, based on
the number of shares of Preferred Stock then held by such Holders.
7.9 NASDAQ LIMITATION. If on any date (the "Determination
Date") (a) the Common Stock is listed for trading on Nasdaq, (b) the Conversion
Price then in effect is such that the aggregate number of shares of Common Stock
that would then be issuable upon conversion in full of the then outstanding
shares of Preferred Stock as if all such shares of Preferred Stock were
converted on such Determination Date (without regard to any limitations on
conversions) and as payment of interest thereon, as would equal or exceed 20% of
the number of shares of the Common Stock outstanding immediately prior to the
"Closing Date" (the "Issuable Maximum"), and (c) the Company shall not have
previously obtained the vote of the shareholders of the Company (the
"Shareholder Approval"), if any, as may be required by the applicable rules and
regulations of Nasdaq (or any successor entity) to approve the issuance of
shares of Common Stock in excess of the Issuable Maximum in a private placement
whereby shares of Common Stock are deemed to have been issued at a price that is
less than the greater of book value or fair market value of the Common Stock,
then with respect to the aggregate shares of Preferred Stock then held by the
Holders for which a conversion in accordance with the Conversion Price would
result in an issuance of shares of Common Stock in excess of such Holder's pro
rata allocation (as described below) of the Issuable Maximum (the "Excess
Shares") the Company may elect to pay cash to the Holders in an amount equal to
the product of the Average Price on the Determination Date multiplied by the
number of shares of Common Stock that would be issued upon the conversion of the
Excess Shares of the Preferred Stock (the "Prepayment Amount"). Any such
election by the Company must be made in writing to the Holders within five (5)
Trading Days after the first such Determination Date and the payment of such
Prepayment Amount applicable to such prepayment must be made in full to the
Holders within ten (10) Business Days after the date such notice is delivered.
If the Company does not deliver timely a notice of its election to prepay under
this Section or shall, if it shall have delivered such a notice, fail to pay the
Prepayment Amount hereunder within ten (10) Business Days thereafter, then each
Holder shall have the option by written notice to the Company, to, if
applicable, declare any such notice given by the Company, if given, to be null
and void and require the Company to either: (i) use its best efforts to obtain
the Shareholder Approval applicable to such issuance as soon as is possible, but
in any event not later than the 60th day after such request unless the Company
has previously used its best efforts to, but has failed to, obtain such approval
(provided, that if the Company shall fail to obtain the Shareholder Approval
during such 60-day period, the Holder may demand the cash payment set forth in
Section 7.9(ii) herein) or (ii) pay cash to such Holder, within five (5)
Business Days of such Holder's notice, in an amount equal to the Prepayment
Amount for such Holder's portion of the Excess Shares. The payment of the
Prepayment Amount to each Holder pursuant to this Section shall be determined on
a pro rata basis upon the number of shares of Preferred Stock held by such
Holder on the Determination Date which is in excess of the pro rata allocation
of the Issuable Maximum. If the Company fails to pay the Prepayment Amount in
full pursuant to this Section within five (5) Business Days after the date
payable, the Company will pay interest thereon at a rate of 20% per annum to the
converting Holder, accruing interest daily from the date of conversion until
such amount, plus all such interest thereon, if any, is paid in full. Until
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the Company has received the Shareholder Approval no Holder shall be issued,
upon conversion of shares of Preferred Stock, shares of Common Stock in an
amount greater than such Holder's allocated portion of the Issuable Maximum
pursuant to Section 7.8.
7.10 MERGER OR BUSINESS COMBINATION. In the event of any
Change of Control, the Holder shall be entitled upon such event to receive the
amount, if any, of securities, cash or property as if the Holder had converted
the shares of the Common Stock into which the Preferred Stock could have been
converted immediately prior to such Change of Control (without taking into
account any limitations or restrictions on the convertibility of the Preferred
Stock).
ARTICLE VIII
OPTIONAL REDEMPTION
8.1 OPTIONAL REDEMPTION.
(a) The shares of Preferred Stock are redeemable, in
whole or in part, at the option of the Company during the following time
periods, from time to time, under the following conditions and subject also to
the conditions set forth in Section 8.1(b) (the "Optional Redemption"):
(i) After the first anniversary of the Original
Issue Date, the Company may redeem the shares of Preferred Stock
subject to the other conditions herein, if the closing price of the
Company's Common Stock over twenty (20) consecutive Trading Days is
greater than $50.125 per share.
(ii) At any time after the Original Issue Date,
the Company may redeem the shares of Preferred Stock subject to the
other conditions herein, if less than 5% of the shares of Preferred
Stock issued on the Original Issue Date remain outstanding, excluding
from such calculation any shares of Preferred Stock held by Affiliates
of the Company as of such date (other than any Holder or transferees or
successors or assigns thereof if such Holder is deemed to be an
Affiliate solely by reason of its holdings of Preferred Stock and
Warrants).
(b) Subject to the conditions set forth in Section
8.1(a), so long as (i) 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 for at least twenty (20) days prior to the Redemption Notice Date (as
defined below) and (ii) the Company has a sufficient number of authorized shares
of Common Stock reserved for issuance upon full conversion of the Preferred
Stock, upon ten (10) Business Days' prior written notice to the Holder (a
"Redemption Notice"), shares of Preferred Stock may be redeemed by the Company,
in whole or in part in a minimum amount of at least $5,000,000 Liquidation Value
at a price per share equal to the original purchase price of the Preferred Stock
(the "Redemption Price"), together with any declared but unpaid dividends and
all liquidated damages and other amounts due in respect thereof up to the
Redemption Date (as defined below)
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(subject to the right of the Holder on the Record Date to receive dividends due
on the Dividend Payment Date).
8.2 MECHANICS OF REDEMPTION. The Company shall exercise
its right to redeem by delivering its Redemption Notice by facsimile and
overnight courier to each Holder (such date that the notice is given, the
"Redemption Notice Date"). Such Redemption Notice shall indicate (A) the
Redemption Price, (B) each Holder's pro rata allocation of such maximum amount,
and (C) a confirmation of the date ("Redemption Date") that the Company shall
effect the redemption, which date shall be not less than thirty (30) calendar
days and not more than sixty (60) calendar days after the Redemption Notice
Date. Notwithstanding anything in this Section 8.2, the Company shall convert
any Preferred Stock pursuant to Article VIII if the Conversion Notice for shares
of Preferred Stock submitted for conversion is (i) received by the Company
before the Redemption Date, (ii) for a Conversion Price greater than or equal to
the Redemption Price (appropriately adjusted in accordance with the terms
hereof) or (iii) in excess of such Holder's pro rata allocation of the maximum
Redemption Price indicated in its Redemption Notice.
8.3 PAYMENT OF REDEMPTION PRICE. The Company shall pay
the applicable Redemption Price to the Holder of the shares of Preferred Stock
being redeemed in cash on the Redemption Date (or, if later, the Business Day
following the Business Day upon which the Company receives the share
certificates representing the Preferred Stock). If the Company shall fail to pay
the applicable Redemption Price to such Holder on the Redemption Date, in
addition to any remedy such Holder may have under this Certificate of
Designation and the Purchase Agreement, such unpaid amount shall bear interest
at the rate of 2.0% per month until paid in full. Until the Company pays such
unpaid applicable Redemption Price in full to each Holder, each Holder of shares
of Preferred Stock submitted for redemption pursuant to this Article VIII and
for which the applicable Redemption Price has not been paid, shall have the
option, in lieu of redemption, to require the Company to promptly return to such
Holder all of the shares of Preferred Stock that were submitted for redemption
by such Holder under this Article VIII and for which the applicable Redemption
Price has not been paid sending written notice to the Company via facsimile
requesting the return to such Holder of all such shares of Preferred Stock (the
"Void Redemption Notice"). Upon the Company's receipt of such Void Redemption
Notice(s) and prior to payment of the full applicable Redemption Price to each
Holder, (i) the redemption shall be null and void with respect to those shares
of Preferred Stock submitted for redemption and for which the applicable
Redemption Price has not been paid, (ii) the Company shall immediately return
any Preferred Stock certificates submitted to the Company by each Holder for
redemption under this Article VIII and for which the applicable Redemption Price
has not been paid and (iii) the Conversion Price of such returned shares of
Preferred Stock shall be equal to the Conversion Price in effect on the
Redemption Date. If the Company fails to timely effect a redemption in
accordance with this Article VIII, the Company shall not be allowed to submit
another Redemption Notice without the prior written consent of the Required
Holders.
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ARTICLE IX
DEFINITIONS
9.1 DEFINITIONS. For the purposes hereof, the following
terms shall have the following meanings:
"Act" means the Securities Act of 1993, as amended.
"Adjusted Price" means the product of (x) the Conversion Price
in effect immediately prior to such issuance or sale or grant multiplied by (y)
the quotient determined by dividing (1) the sum of (I) the product of (A) the
Conversion Price in effect immediately before the issuance or sale or grant
multiplied by (B) the number of shares of Common Stock Deemed Outstanding (as
defined below) immediately prior to such issuance or sale or grant, plus (II)
the consideration, if any, received by the Company upon such issue or sale, by
(2) the product of (I) the Conversion Price in effect immediately before the
issuance or sale or grant, multiplied by (II) number of shares of Common Stock
Deemed Outstanding (as defined below) immediately after such issue or sale or
grant.
"Affiliate" of any Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such Person. For the purposes of this definition, "control" when
used with respect to any Person means the possession, directly or indirectly, of
the power to direct or cause the direction of the management and policies of
such Person, whether through the ownership of voting securities, by contract or
otherwise; and the terms "controlling" and "controlled" have meanings
correlative to the foregoing.
"Appraiser" means a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants of
recognized standing.
"Authorization Date" has the meaning set forth in Section 6.2.
"Average Price" on any date means (x) the sum of the Per Share
Market Value for the ten (10) Trading Days immediately preceding such date minus
(y) the highest and lowest Per Share Market Value during the ten (10) Trading
Days immediately preceding such date, divided by (z) eight (8), or a similar
calculation if another figure for the number of Trading Days is set forth for
clause (x) of this definition.
"Business Day" means any day except a Saturday, Sunday or
other day on which commercial banks in the City of New York are authorized or
required by law to close.
"Change of Control" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Section 13(d)(3) of the Exchange Act) of in excess of 25% of
the voting securities of the Issuer, (ii) a replacement of more than one-half of
the members of the Issuer's Board of Directors which is not approved by a
majority of those individuals who are members of the Board of Directors on the
date hereof, or their duly elected successors who are directors immediately
prior to such transaction, in one or a series of related transactions, (iii) the
merger of the Issuer with or into another entity, unless
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following such transaction, the Holders of the Issuer's securities continue to
hold at least 67% of such securities following such transaction, (iv) the
consolidation or sale of all or substantially all of the assets of the Issuer in
one or a series of related transactions, or (v) the execution by the Issuer of
an agreement to which the Issuer is a party or by which it is bound, providing
for any of the events set forth above in (i), (ii), (iii) or (iv).
"Closing Date" means the date of the closing of the purchase
and sale of the Preferred Stock.
"Commission" means the United States Securities and Exchange
Commission, or any successor to such agency.
"Common Stock" means the Company's common stock, $0.001 par
value per share, of the Company and stock of any other class into which such
shares may hereafter have been reclassified or changed.
"Common Stock Deemed Outstanding" has the meaning set forth in
Section 7.1(g)(ii)(D)(v).
"Conversion Date" has the meaning set forth in Section 5.3(a).
"Conversion Default" has the meaning set forth in Section 6.2.
"Conversion Default Date" has the meaning set forth in Section
6.2.
"Conversion Default Payments" has the meaning set forth in
Section 6.2.
"Conversion Price" has the meaning set forth in Section 5.1.
"Conversion Ratio" means, at any time, a fraction, the
numerator of which is the Liquidation Value and the denominator of which is the
Conversion Price at such time.
"Conversion Shares" has the meaning set forth in the Purchase
Agreement.
"Converted Preferred Stock" has the meaning set forth in
Section 5.3(a).
"Convertible Securities" has the meaning set forth in Section
7.1(g)(ii)(A).
"Determination Date" has the meaning set forth in Section
7.10.
"Dividend Payment Date" has the meaning set forth in Section
2.1.
"DTC" means the Depositary Trust Corporation.
"Excess Amount" has the meaning set forth in Section 6.2.
"Excess Shares" has the meaning set forth in Section 7.10.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
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"Holder" or other similar terms means the registered holder of
any share of Preferred Stock.
"Issuable Maximum" has the meaning set forth in Section 7.10.
"Issuance Date" means the date of first issue of any shares of
Preferred Stock.
"Junior Securities" means the Series A Preferred Stock, the
Common Stock and all other equity securities of the Company which are not
expressly by their terms senior in rights and liquidation preference to
Preferred Stock.
"Liquidation Value" has the meaning set forth in Section 1.1.
"Nasdaq" means the Nasdaq National Market.
"Notice of Conversion" has the meaning set forth in Section
5.1(b).
"Options" has the meaning set forth in Section 7.1(g)(ii)(A).
"Original Issue Date" shall mean the date of the first
issuance of any shares of the Preferred Stock regardless of the number of
transfers of any particular shares of Preferred Stock and regardless of the
number of certificates which may be issued to evidence such Preferred Stock.
"Payment Due Date" has the meaning set forth in Section
7.1(h).
"Per Share Market Value" means (i) on any particular date the
closing bid price per share of the Common Stock on such date (as reported by
Bloomberg Information Services, Inc., or any successor reporting service) on
Nasdaq or, if the Common Stock is not then quoted on Nasdaq, any Subsequent
Market on which the Common Stock is then listed or if there is no such price on
such date, then the closing bid price on such exchange or quotation system on
the date nearest preceding such date or (ii) if the Common Stock is not listed
then on Nasdaq or any Subsequent Market, the closing bid price for a share of
Common Stock in the over-the-counter market, as reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding to
its functions of reporting prices) at the close of business on such date, or
(iii) if the Common Stock is not then publicly traded the fair market value of a
share of Common Stock as determined by an Appraiser selected in good faith by
the Holders; provided, however, that the Company, after receipt of the
determination by such Appraiser, shall have the right to select in good faith an
additional Appraiser, in which case, the fair market value shall be equal to the
average of the determinations by each such Appraiser; and provided, further that
all determinations of the Per Share Market Value shall be appropriately adjusted
for any stock dividends, stock splits or other similar transactions during such
period.
"Person" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"Prepayment Amount" has the meaning set forth in Section 7.10.
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"Purchase Agreement" means the Securities Purchase Agreement,
dated as of the Original Issue Date, among the Company and the original Holders
of the Preferred Stock.
"Record Date" has the meaning set forth in Section 2.1.
"Redemption Date" has the meaning set forth in Section 8.2.
"Redemption Notice" has the meaning set forth in Section
8.1(b).
"Redemption Notice Date" has the meaning set forth in Section
8.2.
"Redemption Price" has the meaning set forth in Section
8.1(b).
"Registrable Securities" has the meaning set forth in the
Registration Rights Agreement.
"Registration Rights Agreement" means the Registration Rights
Agreement, dated as of the Original Issue Date, by and among the Company and the
original Holders.
"Registration Statement" has the meaning set forth in the
Registration Rights Agreement.
"Required Holders" has the meaning set forth in Section 3.1
"Reserved Amount" has the meaning set forth in Section 6.1
"Series A Preferred Stock" means the Series A Preferred Stock
of the Company.
"Shareholder Approval" has the meaning set forth in Section
7.10.
"Stock Option Plan" means any contract, plan or agreement
which has been approved by the Board of Directors of the Company, pursuant to
which the Company's securities may be issued to any employee, officer, director
or consultant.
"Subsidiary" means, with respect to any Person, any
corporation or other entity of which a majority of the Capital Stock or other
ownership interests having ordinary voting power to elect a majority of the
Board of Directors or other persons performing similar functions are at the time
directly or indirectly owned by such Person.
"Subsequent Market" means the New York Stock Exchange,
American Stock Exchange or Nasdaq Smallcap Market.
"Trading Day" means (a) a day on which the Common Stock is
traded on Nasdaq or, if the Common Stock is not then designated on Nasdaq, on
such Subsequent Market on which the Common Stock is then listed or quoted or (b)
if the Common Stock is not listed on Nasdaq or a Subsequent Market, a day on
which the Common Stock is traded in the over-the-counter Market, as reported by
the OTC Bulletin Board, or (c) if the Stock is not quoted on the OTC Bulletin
Board, a day on which the Common Stock is quoted in the over-the-counter market
as
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reported by the National Quotation Bureau Incorporated (or any similar
organization or agency succeeding its functions or reporting prices) provided,
however that in any event that the Common Stock is not listed or quoted as set
forth in (a), (b), or (c) hereof, then a Trading Day shall mean any Business
Day.
"Underlying Shares" means the number of shares of Common Stock
into which the shares of Preferred Stock are convertible or converted in
accordance with the terms hereof and the Purchase Agreement.
"Valuation Event" has the meaning set forth in Section
7.1(g)(ii)(D)(I).
"Void Redemption Notice" has the meaning set forth in Section
8.3.
"Warrant" or "Warrants" has the meaning set forth in the
Purchase Agreement.
ARTICLE X
MISCELLANEOUS
10.1 MODIFICATION OF CERTIFICATE OF DESIGNATION. This
Certificate of Designation may be modified without prior notice to any Holder
upon the written consent of the Company and the Required Holders. The Required
Holders may waive compliance by the Company with any provision of this
Certificate of Designation without prior notice to any Holder. However, without
the consent of each Holder affected, an amendment, supplement or waiver may not
(1) reduce the number of shares of Preferred Stock whose Holders must consent to
an amendment, supplement or waiver, or (2) make any shares of Preferred Stock
payable in money or property other than as stated in this Certificate of
Designation.
10.2 MISCELLANEOUS. This Certificate of Designation shall
be governed by and construed and enforced in accordance with the internal laws
of the State of Delaware without regard to the principles of conflicts of law
thereof. Each party hereby irrevocably submits to the nonexclusive jurisdiction
of the state and federal courts sitting in the City of New York, Borough of
Manhattan, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is improper. The parties
hereto, including all guarantors or endorsers, hereby waive presentment, demand,
notice, protest and all other demands and notices in connection with the
delivery, acceptance, performance and enforcement of this Certificate of
Designation, except as specifically provided herein, and assent to extensions of
the time of payment, or forbearance or other indulgence without notice. The
Holder of Preferred Stock by acceptance of a share of Preferred Stock agrees to
be bound by the provisions of this Certificate of Designation which are
expressly binding on such Holder.
10.3 PREFERRED STOCK OWNED BY COMPANY DEEMED NOT
OUTSTANDING. In determining whether the holders of the requisite number of
shares of Preferred Stock have concurred in any direction, consent or waiver
under this Certificate of Designation, shares of Preferred Stock which are owned
by the Company or any other obligor on the Preferred Stock or
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by any Person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Company or any other obligor on the
Preferred Stock shall be disregarded and deemed not to be outstanding for the
purpose of any such determination; provided that any shares of Preferred Stock
owned by the Purchasers shall be deemed outstanding for purposes of making such
a determination. Shares of Preferred Stock so owned which have been pledged in
good faith may be regarded as outstanding if the pledgee establishes to the
satisfaction of the Company the pledgee's right so to act with respect to such
shares of Preferred Stock and that the pledgee is not the Company or any other
obligor upon the Preferred Stock or any Person directly or indirectly
controlling or controlled by or under direct or indirect common control with the
Company or any other obligor on the Preferred Stock.
10.4 NOTICE TO HOLDERS PRIOR TO TAKING CERTAIN TYPES OF
ACTION. In case:
(a) the Company shall authorize the issuance, at any time
from and after the Original Issue Date, to all holders of any class or series of
its Capital Stock, of rights or warrants to subscribe for or purchase shares of
its capital stock or of any other right;
(b) the Company shall authorize, at any time from and
after the Original Issue Date, the distribution to all holders of any class or
series of its Capital Stock, of evidences of its indebtedness or assets;
(c) the Company shall declare a dividend (or other
distribution) on its Common Stock or the Company shall declare a special
nonrecurring dividend on or a redemption of its Common Stock;
(d) of any subdivision, combination or reclassification
of any class or series of Capital Stock of the Company at any time from and
after the Original Issue Date or of any consolidation or merger to which the
Company is a party and for which approval by the shareholders of the Company is
required, or of the sale or transfer of all or substantially all of the assets
of the Company or any compulsory share exchange whereby the Common Stock is
converted into other securities, cash or property; or
(e) of the voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then the Company shall cause to be mailed to the Holders, at their last
addresses as they shall appear upon the registration books of the Company, at
least 10 days prior to the applicable record date hereinafter specified, a
notice stating (i) the date as of which the holders of record of such class or
series of Capital Stock are to be entitled to receive any such rights, warrants
or distribution are to be determined, or (ii) the date on which any such
subdivision, combination, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation, winding up or other action is expected to
become effective, and the date as of which it is expected that holders of record
of such class or series of Capital Stock record shall be entitled to exchange
their stock for securities or other property, if any, deliverable upon such
subdivision, combination, reclassification, consolidation, merger, sale,
transfer, dissolution, liquidation, winding up or other action.
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The failure to give the notice required by this Section 10.4 or any
defect therein shall not affect the legality or validity of any distribution,
right, warrant, subdivision, combination, reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation, winding up or other action, or
the vote upon any of the foregoing.
10.5 EFFECT OF HEADINGS. The Section headings herein are
for convenience only and shall not affect the construction hereof.
10.6 REFERENCES. References to Sections and Articles are
to Sections and Articles of this Certificate of Designation, unless otherwise
expressly provided.
10.7 FAILURE OR INDULGENCE NOT WAIVER. No failure or delay
on the part of the Holder in the exercise of any power, right or privilege
hereunder shall operate as a waiver thereof, nor shall any single or partial
exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privileges. All rights and
remedies existing hereunder are cumulative to, and not exclusive of, any rights
or remedies otherwise available.
10.8 LOST OR STOLEN CERTIFICATES. Upon receipt by the
Company of evidence reasonably satisfactory to the Company (including any bond
the Company's transfer agent requires the Holders to post) of the loss, theft,
destruction or mutilation of any stock certificates representing Preferred
Stock, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the Holder to the Company in customary form and, in the case of
mutilation, upon surrender and cancellation of such Series B Preferred Stock
certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall not
be obligated to re-issue preferred stock certificates if the Holder
contemporaneously requests the Company to convert such Preferred Stock into
Common Stock.
10.9 REMEDIES CHARACTERIZED; OTHER OBLIGATIONS, BREACHES
AND INJUNCTIVE RELIEF. The remedies provided in this Certificate of Designation
shall be cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a Holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designation. The Company covenants to each Holder of Preferred Stock that there
shall be no characterization concerning this instrument other than as expressly
provided herein. The Company further covenants that it will not take any action
which might materially and adversely affect the rights of the Holders of
Preferred Stock. Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the Holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the Holders of the
Preferred Stock and that the remedy at law in the event of any such breach may
be inadequate. The Company therefore agrees that, in the event of any such
breach or threatened breach, the Holders of the Preferred Stock shall be
entitled, in addition to all other available remedies, to an injunction
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restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.
10.10 SPECIFIC SHALL NOT LIMIT GENERAL; CONSTRUCTION. No
specific provision contained in this Certificate of Designation shall limit or
modify any more general provision contained herein. This Certificate of
Designation shall be deemed to be jointly drafted by the Company and all
Purchasers (as defined in this Purchase Agreement) and shall not be construed
against any person as the drafter hereof.
10.11 LIMITATION ON CASH PAYMENTS. Notwithstanding anything
in the Certificate of Designation to the contrary, in no event at any time shall
the amount of cash to which any Holder is entitled in respect of a share of
Preferred Stock or a Warrant exceed nineteen percent (19%) per annum of the
Liquidation Value of the aggregate number of shares of Preferred Stock (the
"Maximum Cash Payment") held by such Holder. To the extent any provision in the
Certificate of Designation requires payment in excess of the Maximum Cash
Payment, such provision is superseded by this Section 10.11 such that no amount
in excess of the Maximum Cash Payment shall at anytime be due, payable, or
otherwise accrue.
[SIGNATURE PAGE(S) TO FOLLOW]
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IN WITNESS WHEREOF Level 8 Systems, Inc. has caused this Certificate of
Designation to be signed by its President and Secretary on this 20th day of
July, 2000.
By: /s/ Steven Dmiszewicki
------------------------------
Name: Steven Dmiszewicki
Title: President
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EXHIBIT A
NOTICE OF CONVERSION
AT THE ELECTION OF HOLDER
(To be Executed by the Registered Holder in
order to convert shares of Series B
Convertible Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series
B Convertible Preferred Stock ("Series B Preferred Stock") indicated below, into
shares of common stock, par value $.001 per share (the "Common Stock"), of Level
8 Systems, Inc. (the "Company") according to the conditions hereof, as of the
date written below. If shares are to be issued in the name of a person other
than undersigned, the undersigned will pay all transfer taxes payable with
respect thereto and is delivering herewith such certificates and opinions as
reasonably requested by the Company in accordance therewith. No fee will be
charged to the Holder for any conversion, except for such transfer taxes, if
any.
___ The undersigned hereby certifies that the Common Stock issuable
pursuant to this Conversion Notice has been sold pursuant to a registration
statement under the Securities Act of 1933 which identifies the Holder as a
selling security holder. THIS MUST BE CHECKED FOR SHARES FREE OF RESTRICTIVE
LEGENDS TO BE ISSUED.
Conversion calculations:
--------------------------------------------------
Date to effect conversion
--------------------------------------------------
Number of shares of Series B Preferred Stock to be
converted
--------------------------------------------------
Number of shares of Common Stock to be issued
--------------------------------------------------
Applicable Conversion Price
--------------------------------------------------
Signature of Holder
--------------------------------------------------
Name
--------------------------------------------
Address
28
