Exhibit 2
CERTIFICATE
OF
RIGHTS AND PREFERENCES
OF
CLASS A CONVERTIBLE PREFERRED STOCK
OF
NAVARRE CORPORATION
The undersigned, being the President and Secretary, respectively, of
Navarre Corporation, a Minnesota corporation (the "Corporation"), hereby
certifies that (a) the following resolution was duly adopted on April 24, 1998,
by the Board of Directors of the Corporation, acting pursuant to the provisions
of Section 302A.401, subdivision 3 of the Minnesota Business Corporation Act for
the purposes of establishing a separate series of the Corporation's authorized
preferred stock and fixing the relative rights and preferences of such series of
preferred stock, and (b) such resolution has not been subsequently modified or
rescinded:
RESOLVED, that 1,600,000 shares of this Corporation's authorized
preferred stock no par value shall be designated as "Class A Convertible
Preferred Stock" and the rights, preferences, privileges and restrictions
granted to or imposed upon the Class A Convertible Preferred Stock are as
follows:
1. DIVIDENDS.
(a) The holders of the Class A Convertible Preferred Stock shall be
entitled to receive cumulative dividends of 10% per annum payable quarterly,
beginning on June 30, 1998. At the option of the preferred stockholder, the
dividend can be paid in cash or accrued and converted into Common Stock at a
conversion price equal to the average closing bid price of the Common Stock on
the last three (3) trading days of the quarter in which such dividend was
accrued (the "Accrued Dividend Conversion Price"). In the event that a holder
elects to convert a quarterly dividend payment into shares of Common Stock, the
holder shall notify the Company of such election within five (5) business days
after the end of the quarter in which such dividend was due. The Company shall
pay cash dividends within ten days of the end of each quarter, or if the
preferred shareholder has so elected, issue Common Stock in the amount of
accrued cash dividends on the same date the preferred shareholder elects to
convert the Class A Convertible Preferred Stock in accordance with Section 4.
(b) In the event that a holder of the Class A Convertible Preferred
Stock elects to exercise conversion rights in accordance with Section 4, the
Company shall pay the holder the amount of cash dividends as determined on a per
diem basis for the number of days of the quarter that have elapsed before the
date the holder elects to exercise conversion rights.
(c) In the event the Corporation shall declare a distribution (other
than any distribution
described in Section 2) payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights to purchase any such securities or evidences of
indebtedness, then, in each such case the holders of the Class A Convertible
Preferred Stock shall be entitled to a proportionate share of any such
distribution as though the holders of the Class A Convertible Preferred Stock
were the holders of the number of shares of Common Stock of the Corporation into
which their respective shares of Class A Convertible Preferred Stock are
convertible as of the record date fixed for the determination of the holders of
Common Stock of the Corporation entitled to receive such distribution.
2. LIQUIDATION PREFERENCE.
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of the Class A
Convertible Preferred Stock shall be entitled to receive, prior and in
preference to any distribution of any of the assets or surplus funds of the
Corporation to the holders of the Common Stock by reason of their ownership
thereof, the amount of $13.125 per share (as adjusted for any stock dividends,
combinations or splits with respect to such shares), plus all declared but
unpaid dividends on such share for each share of Class A Convertible Preferred
Stock then held by them. If upon the occurrence of such event, the assets and
funds thus distributed among the holders of the Class A Convertible Preferred
Stock shall be insufficient to permit the payment to such holders of the full
aforesaid preferential amount, then the entire assets and funds of the
Corporation legally available for distribution shall be distributed ratably
among the holders of the Class A Convertible Preferred Stock in proportion to
the preferential amount each such holder is otherwise entitled to receive.
(b) In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, and subject to the payment in
full of the liquidation preferences with respect to the Class A Convertible
Preferred Stock as provided in subparagraph (a) of this Section 2 and the
Corporation's Articles of Incorporation, the holders of the Common Stock shall
be entitled to receive an amount per share equal to their paid-in capital for
such shares divided by the number of shares of Common Stock outstanding; and
thereafter the holders of Common Stock shall be entitled to receive the entire
remaining assets and funds of the Corporation legally available for
distribution, such assets and funds to be distributed among such holders in
proportion to the shares then held by them on an as-if and fully converted basis
provided, however, that the holders of the Class A Convertible Preferred Stock
shall not have the right to participate in any such distribution under this
subparagraph (b) of this Section 2 unless they first waive, in writing, the
right to receive the amounts that would be due them as their liquidation
preference under this subparagraph (a) of this Section 2.
(c) For purposes of this Section 2, (i) any acquisition of the
Corporation by means of merger or other form of corporate reorganization in
which outstanding shares of the Corporation are exchanged for securities or
other consideration issued, or caused to be issued, by the acquiring corporation
or its subsidiary (other than a mere reincorporation transaction) in which the
shareholders of the Corporation immediately prior to the transaction described
above hold less
than fifty percent (50%) of the combined entity, or (ii) a sale of all or
substantially all of the assets of the Corporation, shall be treated as a
liquidation, dissolution or winding up of the Corporation and shall entitle the
holders of Class A Convertible Preferred Stock and Common Stock to receive at
the closing in cash, securities or other property (valued as provided in Section
2(d) below) the amounts and in the order of priority as specified in Sections
2(a) and 2(b) above.
(d) Whenever the distribution provided for in this Section 2 shall be
payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or other property
as determined in good faith by the Board of Directors.
3. VOTING RIGHTS.
In addition to the rights provided herein, each holder of shares of the
Class A Convertible Preferred Stock shall be entitled to the number of votes
equal to the number of shares of Common Stock into which such shares of Class A
Convertible Preferred Stock could be converted and shall have voting rights and
powers equal to the voting rights and powers of the Common Stock and shall be
entitled to notice of any shareholders' meeting in accordance with the Bylaws of
the Corporation. Fractional votes shall not, however, be permitted and any
fractional voting rights resulting from the above formula (after aggregating all
shares into which shares of Class A Convertible Preferred Stock held by each
holder could be converted) shall be rounded to the nearest whole number (with
one-half being rounded upward).
4. CONVERSION.
The holders of the Class A Convertible Preferred Stock shall have
conversion rights as follows (the "Conversion Rights"):
(a) RIGHT TO CONVERT. Each share of Class A Convertible Preferred Stock
shall be convertible, at the option of the holder thereof, at any time after
June 30, 1998, at the office of the Corporation or any transfer agent for such
stock, into such number of fully paid and nonassessable shares of Common Stock
as are determined by dividing $13.125 by $2.625 (the "Conversion Price");
however, cash dividends that the holder has elected to take in the form of
Common Stock pursuant to Section 1(a) shall be converted into Common Stock at
the respective Accrued Dividend Conversion Price in accordance with Section
1(a). The Class A Conversion Price is herein sometimes referred to as the
"Conversion Price."
(b) MECHANICS OF CONVERSION. Before any holder of Class A Convertible
Preferred Stock shall be entitled to convert the same into shares of Common
Stock, such holder shall surrender the certificate or certificates therefor,
duly endorsed, at the office of the Corporation or of any transfer agent for
such stock, and shall give written notice to the Corporation at such office that
he elects to convert the same and shall state therein the name or names in which
he wishes the certificate or certificates for shares of Common Stock to be
issued. The Corporation shall, as soon as practicable thereafter, issue and
deliver at such office to such holder of Class A Convertible Preferred Stock, a
certificate or certificates for the number of shares of Common
Stock to which he shall be entitled as aforesaid. Such conversion shall be
deemed to have been made immediately prior to the close of business on the date
of surrender of the shares of Class A Convertible Preferred Stock to be
converted, and the person or persons entitled to receive the shares of Common
Stock issuable upon such conversion shall be treated for all purposes as the
record holder or holders of such shares of Common Stock on such date.
(c) ADJUSTMENTS TO CONVERSION PRICES FOR STOCK DIVIDENDS AND FOR
COMBINATIONS OR SUBDIVISIONS OF COMMON STOCK. In the event that this Corporation
at any time or from time to time after the original issuance date of the Class A
Preferred Stock shall declare or pay, without consideration, any dividend on the
Common Stock payable in Common Stock or in any right to acquire Common Stock for
no consideration, or shall effect a subdivision of the outstanding shares of
Common Stock into a greater number of shares of Common Stock (by stock split,
reclassification or otherwise than by payment of a dividend in Common Stock or
in any right to acquire Common Stock), or in the event the outstanding shares of
Common Stock shall be combined or consolidated, by reclassification or
otherwise, into a lesser number of shares of Common Stock, then the Conversion
Price for the Class A Convertible Preferred Stock in effect immediately prior to
such event shall, concurrently with the effectiveness of such event, be
proportionately decreased or increased, as appropriate. In the event that this
Corporation shall declare or pay, without consideration, any dividend on the
Common Stock payable in any right to acquire Common Stock for no consideration,
then the Corporation shall be deemed to have made a dividend payable in Common
Stock in an amount of shares equal to the maximum number of shares issuable upon
exercise of such rights to acquire Common Stock.
(d) ADJUSTMENTS FOR RECLASSIFICATION AND REORGANIZATION. If the Common
Stock issuable upon conversion of the Class A Convertible Preferred Stock shall
be changed into the same or a different number of shares of any other class or
classes of stock or other securities or assets, whether by capital
reorganization, reclassification, consolidation or merger of the Corporation
with another corporation, or the sale of all or substantially all its assets to
another corporation, or otherwise (other than a subdivision or combination of
shares provided for in Section 4(c) above), then, as a condition of such
reorganization, reclassification, consolidation, merger or sale, lawful and
adequate provision shall be made whereby the holders of Class A Convertible
Preferred Stock shall thereafter have the right to receive upon the basis and
upon the terms and conditions specified herein and in lieu of the shares of
Common Stock of the Corporation immediately theretofore receivable upon the
conversion of Class A Convertible Preferred Stock, such shares of stock,
securities or assets as may be issued or payable with respect to or in exchange
for a number of outstanding shares of Common Stock equal to the number of shares
of such Common Stock immediately theretofore receivable upon the conversion of
Class A Convertible Preferred Stock had such reorganization, reclassification,
consolidation, merger or sale not taken place, plus all dividends unpaid and
accumulated or accrued thereon to the date of such reorganization,
reclassification, consolidation, merger or sale, and in any such case
appropriate provision shall be made with respect to the rights and interests of
the holders of Class A Convertible 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 receivable upon the conversion of
Class A Convertible Preferred Stock) shall thereafter be
applicable, as nearly as may be in relation to any shares of stock, securities
or assets thereafter receivable upon the conversion of Class A Convertible
Preferred Stock. The Corporation shall not effect any such consolidation, merger
or sale, unless prior to the consummation thereof the successor corporation (if
other than the Corporation) resulting from such consolidation or merger or the
corporation purchasing such assets shall assume by written instrument executed
and mailed to the holders of Class A Convertible Preferred Stock, at the last
addresses of such holders appearing on the books of the Corporation, the
obligation to deliver to such holder such shares of stock, securities or assets
as, in accordance with the foregoing provisions, such holder may be entitled to
receive.
(e) CERTIFICATES AS TO ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of any Conversion Price pursuant to this Section 4,
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 Class A Convertible Preferred Stock a certificate executed by the
Corporation's President or Chief Financial Officer 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 Class A Convertible Preferred Stock, furnish or cause to
be furnished to such holder of Class A Convertible Preferred Stock, furnish or
cause to be furnished to such holder a like certificate setting forth (i) such
adjustment and readjustments, (ii) the Conversion Price for such series of Class
A Convertible Preferred Stock at the time in effect, and (iii) the number of
shares of Common Stock and the amount, if any, of other property which at the
time would be received upon the conversion of the Class A Convertible Preferred
Stock.
(f) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The Corporation
shall at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, solely for the purpose of effecting the conversion of
the shares of the Class A Convertible Preferred Stock, such number of its shares
of Common Stock as shall from time to time be sufficient to effect the
conversion of all outstanding shares of the Class A Convertible Preferred Stock;
and if at any time the number of authorized but unissued shares of Common Stock
shall not be sufficient to effect the conversion of all then outstanding shares
of the Class A Convertible Preferred Stock, the Corporation will take such
corporate action as may, in the opinion of its counsel, be necessary to increase
its authorized but unissued shares of Common Stock to such number of shares as
shall be sufficient for such purpose, including, without limitation, engaging in
best efforts to obtain the requisite shareholder approval of any necessary
amendment to the Corporation's Articles of Incorporation.
(g) FRACTIONAL SHARES. No fractional share shall be issued upon the
conversion of any share or shares of Class A Convertible Preferred Stock. All
shares of Common Stock (including fractions thereof) issuable upon conversion of
more than one share of Class A Convertible Preferred Stock by a holder thereof
shall be aggregated for purposes of determining whether the conversion would
result in the issuance of any fractional shares. If, after the aforementioned
aggregation, the conversion would result in the issuance of a fraction of a
share of Common Stock, the Corporation shall, in lieu of issuing any fractional
share, pay the holder otherwise
entitled to such fraction a sum in cash equal to the fair market value of such
fraction on the date of conversion.
(h) NOTICES. Any notice required by the provisions of this Section 4 to
be given to the holders of shares of Class A Convertible Preferred Stock shall
be deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at his address appearing on the books of the
Corporation.
5. REDEMPTION.
(a) OPTIONAL REDEMPTION PRIOR TO MAY 1, 2003. Commencing on the later
of June 30, 1998, or such date that the Company's registration statement on Form
S-3 for the Common Stock underlying the Class A Convertible Preferred Stock is
declared effective, and on not less than thirty (30) days prior written notice,
the Corporation shall have the option to redeem the Class A Convertible
Preferred Stock at a redemption price of $13.125 per share, if the closing bid
price for the Company's Common Stock equals or exceeds 200% of the Conversion
Price for ten (10) consecutive trading days within the ten calendar days of the
date of call. The Corporation shall be limited, however, to call only one-third
of the original Class A Convertible Preferred Stock in any 180-day period as
measured from the Redemption Date as specified in Section 5(d).
OPTIONAL REDEMPTION ON OR AFTER MAY 1, 2003. The Corporation shall also
have the option to redeem the Class A Convertible Preferred in whole or in part
at a price of $13.125 on or after May 1, 2003. Any redemption pursuant to this
Section 5 (b) shall be pro rata among all remaining preferred stockholders based
upon their holdings on the date of call.
(c) MECHANICS OF REDEMPTION. If the Corporation desires to exercise its
right to redeem the Class A Convertible Preferred Stock, it shall mail a notice
of redemption to each of the holders of the Class A Convertible Preferred Stock,
first class, postage prepaid, not later than the thirtieth day before the date
fixed for redemption, at their last address as shall appear on the records of
the Corporation. Any notice mailed in this manner shall be conclusively presumed
to have been duly given whether or not the holder receives such notice.
(d) NOTICE OF REDEMPTION. The notice of redemption shall specify (i)
the redemption price, (ii) the date fixed for redemption (the "Redemption
Date"), (iii) the place where the Class A Convertible Preferred Certificates
shall be delivered and the redemption price paid, and (iv) the right to convert
the shares of the Class A Convertible Preferred Stock into the Corporation's
Common Stock shall terminate at 5:00 pm (Minneapolis time) on the business day
immediately preceding the date fixed for redemption. No failure to mail such
notice nor any defect therein or in the mailing shall affect the validity of the
proceedings for such redemption except as to a holder (a) to whom notice was not
mailed or (b) whose notice was defective. An affidavit of the Secretary of the
Corporation that notice of redemption has been mailed shall, in the absence of
fraud, be prima facie evidence of the facts stated therein.
(e) TERMINATION OF CONVERSION RIGHTS. Any right to convert any share of
Class A
Convertible Preferred Stock into Common Stock of the Corporation that has been
called for redemption shall terminate at 5:00 p.m. (Minneapolis time) on the
business day immediately preceding the Redemption Date. On and after the
Redemption Date, holders of the redeemed Class A Convertible Preferred Stock
shall have no further rights except as to receive, upon surrender of the
redeemed Class A Convertible Preferred Stock, the Redemption Price.
(f) PAYMENT OF REDEMPTION PRICE. From and after the date specified for
redemption, the Corporation shall, at the place specified in the notice of
redemption, upon presentation and surrender to the Corporation by or on behalf
of the holder of any shares of Class A Convertible Preferred Stock to be
redeemed, deliver, or cause to be delivered to, or upon the written order of
such holder a sum in cash equal to the Redemption Price for each such share of
Class A Convertible Preferred Stock. From and after the date fixed for such
redemption and upon the deposit or setting aside by the Corporation of a sum
sufficient to redeem all of the shares of Class A Convertible Preferred Stock
called for redemption, such shares of Class A Convertible Preferred Stock shall
expire and become void and all rights hereunder, except the right to receive the
Redemption Price, shall cease.
NAVARRE CORPORATION
By: /s/ Eric H. Paulson
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Its: President
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By:/s/ Charles E. Cheney
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Its: Secretary
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