HAWKER PACIFIC AEROSPACE
CERTIFICATE OF DETERMINATION
OF RIGHTS, PREFERENCES, PRIVILEGES, AND
RESTRICTIONS OF 8% SERIES C CONVERTIBLE PREFERRED STOCK
David L. Lokken and Daniel J. Lubeck certify that:
A) They are the president and secretary, respectively, of Hawker Pacific
Aerospace, a California corporation.
B) The Board of Directors has duly adopted the following resolution:
RESOLVED, that a series of the class of authorized Preferred Stock of the
Corporation hereby is created, and that the designation and amount thereof and
the rights, preferences and restrictions of the shares of the series are as
follows:
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of preferred
stock all be designated as its 8% Series C Convertible Preferred Stock (the
"PREFERRED STOCK") and the number of shares so designated shall be 300 (which
shall not be subject to increase without the consent of the holders of 66-2/3%
of the Preferred Stock (each, a "HOLDER" and collectively, the "HOLDERS")). Each
share of Preferred Stock shall have no par value and a stated value equal to the
sum of $10,000 plus all accrued dividends to the date of determination to the
extent not previously paid in cash in accordance with the terms hereof (the
"STATED VALUE").
Section 2. DIVIDENDS.
(a) Holders shall be entitled to receive, out of funds legally available
therefor, and the Company shall pay, cumulative dividends at the rate per share
(as a percentage of the Stated Value per share) of 8% per annum, payable on the
Conversion Date (as defined herein) for such share, in cash or shares of Common
Stock (as defined in Section 8). Payment in the form of Common Stock shall be
valued at the then applicable Conversion Price. Subject to the terms and
conditions herein, the decision whether to pay dividends hereunder in Common
Stock or cash shall be at the discretion of the Company. The Company shall
provide the Holders written notice of its intention to pay dividends in cash or
shares of Common Stock not less than ten (10) days prior to each Conversion Date
for so long as shares of Preferred Stock are outstanding. Failure to timely
provide such written notice shall be deemed (if permitted hereunder) an election
by the Company to pay dividends for such period in shares of Common Stock
pursuant to the terms hereof. Dividends on the Preferred Stock shall be
calculated on the basis of a 360-day year, shall accrue daily commencing on the
Original Issue Date (as defined in Section 8), and shall be deemed to accrue
from such date whether or not earned or declared and whether or not there are
profits, surplus or other funds of the Company legally available for the payment
of dividends. 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 of Preferred Stock held by each Holder. Any
dividends to be paid in cash hereunder that are not paid within three (3)
Trading Days (as defined in Section 8) following a Conversion Date shall
continue to accrue and shall entail a late fee, which must be paid in cash, at
the rate of 18% per annum or the lesser maximum
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rate permitted by applicable law (such fees to accrue daily, from the date such
dividend is due hereunder through and including the date of payment).
(b) Notwithstanding anything to the contrary contained herein, the Company
must pay dividends in cash if, as permitted under applicable law:
(i) the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes is insufficient to pay such dividends
in shares of Common Stock;
(ii) after the Dividend Effectiveness Date (as defined in Section 8),
Underlying Shares (as defined in Section 8) (x) are not registered for resale
pursuant to an effective Underlying Shares Registration Statement (as defined in
Section 8) or (y) may not be sold without volume restrictions pursuant to
Rule 144 promulgated under the Securities Act (as defined in Section 8), as
determined by counsel to the Company pursuant to a written opinion letter,
addressed to the Company's transfer agent in the form and substance acceptable
to the applicable Holder and such transfer agent (if the Company is permitted
and elects to pay dividends in shares of Common Stock under this clause (ii)
prior to the Dividend Effectiveness Date and thereafter an Underlying Shares
Registration Statement shall be declared effective by the Commission (as defined
in Section 8), the Company shall, within three (3) Trading Days after the date
of such declaration of effectiveness, exchange such Underlying Shares for shares
of Common Stock that are free of restrictive legends of any kind);
(iii) the Common Stock is not then listed or quoted on the Nasdaq
National Market ("NASDAQ"), or on the New York Stock Exchange, American Stock
Exchange or Nasdaq SmallCap Market (each, a "SUBSEQUENT Market");
(iv) the Company has failed to timely satisfy its conversion
obligations hereunder; or
(v) the issuance of the Underlying Shares issuable as payment of such
dividend would result in a violation of Section 5(a)(ii) or the rules of the
Nasdaq Stock Market or any other rules and regulations governing any Subsequent
Market on which the Common Stock is then listed or quoted for trading.
(c) So long as any Preferred Stock shall remain outstanding, neither the
Company nor any subsidiary thereof shall redeem, purchase or otherwise acquire
directly or indirectly any Junior Securities (as defined in Section 8), nor
shall the Company directly or indirectly pay or declare any dividend or make any
distribution (other than a dividend or distribution described in Section 5 or
dividends due and paid in the ordinary course on preferred stock of the Company
at such times when the Company is in compliance with its payment and other
obligations hereunder) upon, nor shall any distribution be made in respect of,
any Junior Securities, nor shall any monies be set aside for or applied to the
purchase or redemption (through a sinking fund or otherwise) of any Junior
Securities or shares pari passu with the Preferred Stock.
Section 3. VOTING RIGHTS. Except as otherwise provided herein and as
otherwise required by law, the Preferred Stock shall have no voting rights.
However, so long as any shares of Preferred Stock are outstanding, the Company
shall not, without the affirmative vote of the
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Holders of a majority of the shares of the Preferred Stock then outstanding,
(a) alter or change adversely the powers, preferences or rights given to the
Preferred Stock or alter or amend this Certificate of Determination, (b)
authorize or create any class of stock ranking as to dividends or distribution
of assets upon a Liquidation (as defined in Section 4) senior to or otherwise
pari passu with the Preferred Stock, (c) amend its articles of incorporation or
other charter documents so as to affect adversely any rights of the Holders, (d)
increase the authorized number of shares of Preferred Stock, or (e) enter into
any agreement with respect to the foregoing.
Section 4. LIQUIDATION. Upon any liquidation, dissolution or winding-up
of the Company, whether voluntary or involuntary (a "LIQUIDATION"), the Holders
shall be entitled to receive out of the assets of the Company, whether such
assets are capital or surplus, for each share of Preferred Stock an amount equal
to the Stated Value per share before any distribution or payment shall be made
to the holders of any Junior Securities, and if the assets of the Company shall
be insufficient to pay in full such amounts, then the entire assets to be
distributed to the Holders shall be distributed among the Holders ratably in
accordance with the respective amounts that would be payable on such shares if
all amounts payable thereon were paid in full. A sale, conveyance or disposition
of 50% or more of the assets of the Company or the effectuation by the Company
of a transaction or series of related transactions in which more than 33% of the
voting power of the Company is disposed of, or a consolidation or merger of the
Company with or into any other company or companies into one or more companies
not wholly-owned by the Company shall not be treated as a Liquidation, but
instead shall be subject to the provisions of Section 5. The Company shall mail
written notice of any such Liquidation, not less than 45 days prior to the
payment date stated therein, to each record Holder.
Section 5. CONVERSION.
(a)(i) CONVERSIONS AT OPTION OF HOLDER. Shares of Preferred Stock shall be
convertible into shares of Common Stock (subject to the limitations set forth in
Section 5(a)(ii)), at the Conversion Ratio (as defined in Section 8), at the
option of the Holder at any time and from time to time commencing on the
Original Issue Date on the terms and at the conversion prices set forth herein.
Holders shall effect conversions by surrendering the certificate or certificates
representing the shares of Preferred Stock to be converted to the Company,
together with the form of conversion notice (a "CONVERSION NOTICE") in the form
of Exhibit G of the Purchase Agreement. Each Conversion Notice shall specify the
number of shares of Preferred Stock to be converted and the date on which such
conversion is to be effected, which date may not be prior to the date the Holder
delivers such Conversion Notice by facsimile (the "CONVERSION DATE"). If no
Conversion Date is specified in a Conversion Notice, the Conversion Date shall
be the date that the Conversion Notice is deemed delivered hereunder. If the
Holder is converting less than all shares of Preferred Stock represented by the
certificate or certificates tendered by the Holder with the Conversion Notice,
or if a conversion hereunder cannot be effected in full for any reason, the
Company shall promptly deliver to such Holder (in the manner and within the time
set forth in Section 5(b)) a certificate representing the number of shares of
Preferred Stock as have not been converted.
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(ii) CERTAIN CONVERSION RESTRICTIONS.
(A) A Holder may not convert shares of Preferred Stock to the extent
such conversion would result in the Holder, together with any affiliate thereof,
beneficially owning (as determined in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT") and the rules
promulgated thereunder) in excess of 4.999% or 9.999% of the then issued and
outstanding shares of Common Stock, including shares issuable upon such
conversion and held by such Holder after application of this Section. Since the
Holder will not be obligated to report to the Company the number of shares of
Common Stock it may hold at the time of a conversion hereunder, unless the
conversion at issue would result in the issuance of shares of Common Stock in
excess of 4.999% or 9.999% of the then outstanding shares of Common Stock
without regard to any other shares which may be beneficially owned by the Holder
or an affiliate thereof (including as a result of any other exercise or
conversion of other derivative or convertible instruments of the Company), the
Holder shall have the authority and obligation to determine whether the
restriction contained in this Section will limit any particular conversion
hereunder and to the extent that the Holder determines that the limitation
contained in this Section applies, the determination of which portion of the
shares of Preferred Stock are convertible shall be the responsibility and
obligation of the Holder. If the Holder has delivered a Notice of Conversion for
a number of shares of Preferred Stock that would result in the issuance in
excess of the permitted amount hereunder, the Company shall notify the Holder of
this fact and shall honor the exercise for the maximum number of shares of
Preferred Stock permitted to be converted on such Conversion Date in accordance
with the periods described herein and disregard the balance of such Conversion
Notice, as if never delivered. The provisions of this Section with respect to
either the 4.999% or the 9.999% restriction may be waived by a Holder (but only
as to itself and not to any other Holder) upon not less than 61 days prior
notice to the Company. Other Holders shall be unaffected by any such waiver. The
existence of this restriction is generally required by the staff of the
Securities and Exchange Commission to be contained in the Certificate of
Determination or similar instrument defining the rights of the Holders.
(B) [Intentionally left blank]
(C) If the Common Stock is then listed for trading on the NASDAQ or
the Nasdaq National Market and the Company has not obtained the Shareholder
Approval (as defined below), then the Company may not issue in excess of
1,164,386 shares of Common Stock upon conversions of Preferred Stock (such
number of shares, the "ISSUABLE MAXIMUM"). The Issuable Maximum equals 19.999%
of the number of shares of Common Stock outstanding immediately prior to the
closing of transactions set forth in the Purchase Agreement multiplied by the
quotient obtained by dividing (x) the number of shares of Preferred Stock issued
and sold to the original Holder on the Original Issue Date by (y) the number of
shares of Preferred Stock issued and sold by the Company on the Original Issue
Date. If on any Conversion Date (A) the shares of Common Stock are listed for
trading on the NASDAQ or the Nasdaq National Market, (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 all then outstanding shares of
Preferred Stock, together with any shares of Common Stock previously issued upon
conversion of shares of Preferred Stock, would exceed the Issuable Maximum, and
(C) the Company shall not have previously obtained the vote of shareholders (the
"SHAREHOLDER APPROVAL"), if any,
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as may be required by the applicable rules and regulations of the Nasdaq Stock
Market (or any successor entity) applicable to approve the issuance of shares of
Common Stock in excess of the Issuable Maximum pursuant to the terms hereof,
then the Company shall issue to the Holder requesting a conversion a number of
shares of Common Stock equal to the Issuable Maximum and, with respect to the
remainder of the aggregate Stated Value of the shares of Preferred Stock then
held by such Holder for which a conversion in accordance with the Conversion
Price would result in an issuance of shares of Common Stock in excess of the
Issuable Maximum (the "EXCESS STATED VALUE"), the converting Holder shall have
the option to require the Company to either (1) use its best efforts to obtain
the Shareholder Approval applicable to such issuance as soon as is possible, but
in any event not later than the 60th day after such request, or (2) redeem for
an amount in cash equal to the Mandatory Redemption Amount (as defined in
Section 8) for the Excess Stated Value. If the converting Holder shall have
elected the first option pursuant to the immediately preceding sentence and the
Company shall have failed to obtain the Shareholder Approval on or prior to the
60th day after the delivery of the proxy materials, then within three (3)
Business Days of such 60th day, the Company shall redeem the excess Stated Value
for an amount in cash equal to the Mandatory Redemption Amount for the Excess
Stated Value. If the Company fails to pay the Mandatory Redemption Amount in
full pursuant to this Section within seven (7) days after the date payable, the
Company will pay interest thereon at a rate of 18% per annum or such lesser
maximum amount that is permitted to be paid by applicable law, to the converting
Holder, accruing daily from the Conversion Date until such amount, plus all such
interest thereon, is paid in full. The Company and the Holder understand and
agree that shares of Common Stock issued to and then held by the Holder as a
result of conversions of Preferred Stock shall not be entitled to cast votes on
any resolution to obtain Shareholder Approval pursuant hereto.
(b)(i) Not later than three (3) Trading Days after each Conversion Date,
the Company will deliver to the Holder (A) a certificate or certificates which
shall be free of restrictive legends and trading restrictions (other than those
required by Section 3.1(b) of the Purchase Agreement) representing the number of
shares of Common Stock being acquired upon the conversion of shares of Preferred
Stock (subject to the limitations set forth in Section 5(a)(ii) hereof), (B) one
or more certificates representing the number of shares of Preferred Stock not
converted and (C) a bank check in the amount of accrued and unpaid dividends (if
the Company has timely elected or is required to pay accrued dividends in cash).
Notwithstanding the foregoing or anything to the contrary contained herein, the
Company shall not be obligated to issue certificates evidencing the shares of
Common Stock issuable upon conversion of any shares of Preferred Stock until one
(1) Trading Day after certificates evidencing such shares of Preferred Stock are
delivered for conversion to the Company, or the Holder of such Preferred Stock
notifies the Company that such certificates have been lost, stolen or destroyed
and provides a bond (or other adequate security) reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection
therewith. The Company shall, upon request of the Holder, if available, use its
best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions.
(c)(i) The conversion price for each share of Preferred Stock in effect on
any Conversion Date (the "CONVERSION PRICE") shall equal the lesser of (1) $7.37
(the "FIXED CONVERSION PRICE") and (2) Variable Conversion Price (as defined in
Section 8).
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Notwithstanding the foregoing, the following shall govern the determination of
the Conversion Price: (i) from the Original Issue Date to the expiration of the
third month thereafter, all conversions shall be at the Fixed Conversion Price;
(ii) during the fourth month following the Original Issue Date a Holder may
convert up to 5% of the shares of Preferred Stock issued to it on the Original
Issue Date at the Variable Conversion Price, and all other conversions by such
Holder during such month shall be at the Fixed Conversion Price; (iii) during
the fifth month following the Original Issue Date a Holder may convert an
additional 5% of the shares of Preferred Stock issued to it on the Original
Issue Date, measured on a cumulative basis with prior months (accordingly, if
during the fourth month following the Original Issue Date a Holder converted no
shares of Preferred Stock, then during the fifth month up to 10% of the shares
of Preferred Stock issued to such Holder on the Original Issue Date may be
converted by such Holder at the Variable Conversion Price); (iv) during the
sixth month following the Original Issue Date a Holder can convert up to an
additional 10% of the shares of Preferred Stock issued to it on the Original
Issue Date, measured on a cumulative basis with prior months (accordingly, if
prior to the sixth month following the Original Issue Date a Holder converted no
shares of Preferred Stock, then during the sixth month up to 20% of the shares
of Preferred Stock issued to such Holder on the Original Issue Date may be
converted by such Holder at the Variable Conversion Price); (v) during the
seventh month following the Original Issue Date a Holder can convert up to an
additional 15% of the shares of Preferred Stock issued to it on the Original
Issue Date, measured on a cumulative basis with prior months (accordingly, if
prior to the seventh month following the Original Issue Date a Holder converted
no shares of Preferred Stock, then during the seventh month up to 35% of the
shares of Preferred Stock issued to such Holder on the Original Issue Date may
be converted by such Holder at the Variable Conversion Price); (vi) during the
eighth month following the Original Issue Date a Holder can convert up to an
additional 20% of the shares of Preferred Stock issued to it on the Original
Issue Date, measured on a cumulative basis with prior months (accordingly, if
prior to the eighth month following the Original Issue Date a Holder converted
no shares of Preferred Stock, then during the eighth month up to 55% of the
shares of Preferred Stock issued to such Holder on the Original Issue Date may
be converted by such Holder at the Variable Conversion Price); (vii) during the
ninth month following the Original Issue Date a Holder can convert up to an
additional 20% of the shares of Preferred Stock issued to it on the Original
Issue Date, measured on a cumulative basis with prior months (accordingly, if
prior to the ninth month following the Original Issue Date a Holder converted no
shares of Preferred Stock, then during the ninth month up to 75% of the shares
of Preferred Stock issued to such Holder on the Original Issue Date may be
converted by such Holder at the Variable Conversion Price); (viii) during the
tenth month following the Original Issue Date a Holder can convert up to an
additional 20% of the shares of Preferred Stock issued to it on the Original
Issue Date, measured on a cumulative basis with prior months (accordingly, if
prior to the tenth month following the Original Issue Date a Holder converted no
shares of Preferred Stock, then during the tenth month up to 95% of the shares
of Preferred Stock issued to such Holder on the Original Issue Date may be
converted by such Holder at the Variable Conversion Price) and (ix) from and
after the eleventh month following the Original Issue Date, all conversion shall
be at the lower of the Fixed Conversion Price and the Variable Conversion Price.
(ii) If the Company, at any time while any shares of Preferred Stock
are outstanding, shall issue rights, warrants or options to all holders of
Common Stock entitling them
6
to subscribe for or purchase shares of Common Stock at a price per share less
than the Per Share Market Value at the record date mentioned below, then the
Conversion Price shall be multiplied by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to the
issuance of such rights, warrants or options, plus the number of shares of
Common Stock which the aggregate offering price of the total number of shares so
offered would purchase at such Per Share Market Value, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock
offered for subscription or purchase. 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 stockholders entitled to receive such
rights or warrants. However, upon the expiration of any right, warrant or option
to purchase shares of Common Stock the issuance of which resulted in an
adjustment in the Conversion Price pursuant to this Section 5(c)(ii), if any
such right, warrant or option shall expire and shall not have been exercised,
the Conversion Price shall immediately upon such expiration shall be recomputed
and effective immediately upon such expiration shall be increased to the price
which it would have been (but reflecting any other adjustments in the Conversion
Price made pursuant to the provisions of this Section 5 upon the issuance of
other rights or warrants) had the adjustment of the Conversion Price made upon
the issuance of such rights, warrants, or options been made on the basis of
offering for subscription or purchase only that number of shares of Common Stock
actually purchased upon the exercise of such rights, warrants or options
actually exercised.
(iii) If the Company or any subsidiary thereof, as applicable with
respect to Common Stock Equivalents (as defined below), at any time while any
shares of Preferred Stock are outstanding, shall issue shares of Common Stock
or rights, warrants, options or other securities or debt that is convertible
into or exchangeable for shares of Common Stock, except for the Series C
Preferred Stock, and Series D Preferred Stock (the next series of preferred
stock to be issued) if the Fixed Conversion Price for the Series D Preferred
Stock determined in a manner consistent with the Series C Preferred Stock is
less than $7.37, warrants issued in connection thereto and to Brighton Capital,
Ltd. ("COMMON STOCK EQUIVALENTS"), entitling any Person to acquire shares of
Common Stock at a price per share less than the Conversion Price on the Trading
Day before the Board of Directors approves such issuance and on the date of such
issuance (if the holder of the Common Stock or Common Stock Equivalent so issued
shall at any time, whether by operation of purchase price adjustments, reset
provisions, floating conversion, exercise or exchange prices or otherwise, or
due to warrants, options or rights issued in connection with such issuance at a
price less than the prevailing Conversion Price, such issuance shall be deemed
to have occurred for less than the Conversion Price), then the Conversion Price
shall be multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
Common Stock or such Common Stock Equivalents plus the number of shares of
Common Stock which the offering price for such shares of Common Stock or Common
Stock Equivalents would purchase at the Conversion Price, and the denominator of
which shall be the sum of the number of shares of Common Stock outstanding
immediately prior to such issuance plus the number of shares of Common Stock so
issued or issuable, PROVIDED, that for purposes hereof, all shares of Common
Stock that are issuable upon conversion, exercise or exchange of Common Stock
Equivalents shall be deemed outstanding immediately after the issuance of such
Common Stock Equivalents. Such adjustment shall be made whenever such Common
Stock or Common Stock Equivalents
7
are issued. However, upon the expiration of any Common Stock Equivalents the
issuance of which resulted in an adjustment in the Conversion Price pursuant to
this Section, if any such Common Stock Equivalents shall expire and shall not
have been exercised, the Conversion Price shall immediately upon such expiration
be recomputed and effective immediately upon such expiration be increased to the
price which it would have been (but reflecting any other adjustments in the
Conversion Price made pursuant to the provisions of this Section after the
issuance of such Common Stock Equivalents) had the adjustment of the Conversion
Price made upon the issuance of such Common Stock Equivalents been made on the
basis of offering for subscription or purchase only that number of shares of the
Common Stock actually purchased upon the exercise of such Common Stock
Equivalents actually exercised.
(iv) If the Company, at any time while shares of Preferred Stock are
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
5(c)(ii)-(iv)), then in each such case the Conversion Price at which each share
of Preferred Stock shall thereafter be convertible shall be determined by
multiplying the Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Per Share Market Value
determined as of the record date mentioned above, and of which the numerator
shall be such Per Share Market Value 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 shares of Common Stock
as determined by the Board of Directors in good faith; PROVIDED, that in the
event of a distribution exceeding ten percent (10%) of the net assets of the
Company, if the Holders of a majority in interest of the Preferred Stock dispute
such valuation, such fair market value shall be determined by a nationally
recognized or major regional investment banking firm or firm of independent
certified public accountants of recognized standing (which may be the firm that
regularly examines the financial statements of the Company) (an "APPRAISER")
selected in good faith by the Holders of a majority in interest of the shares of
Preferred Stock then outstanding; and PROVIDED, FURTHER, that the Company, after
receipt of the determination by such Appraiser shall have the right to select an
additional Appraiser, in good faith, in which case the fair market value shall
be equal to the average of the determinations by each such Appraiser. In either
case the adjustments shall be described in a statement provided to the Holders
of the portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock. Such adjustment
shall be made whenever any such distribution is made and shall become effective
immediately after the record date mentioned above.
(v) All calculations under this Section 5 shall be made to the nearest
cent or the nearest 1/100th of a share, as the case may be.
(vi) Notwithstanding anything herein to the contrary, whenever the
Conversion Price is adjusted pursuant to Section 5(c),(iii),(iv), or (v), the
Fixed Conversion Price shall likewise also be adjusted in the same manner as the
Conversion Price. Whenever either the Conversion Price or the Fixed Conversion
Price is adjusted pursuant to Section 5(c)(ii),(iii),(iv), or (v), the Company
shall promptly mail to each Holder, a notice setting forth the Conversion Price
or the Fixed Conversion Price (as applicable) after such adjustment and setting
forth a brief statement of the facts requiring such adjustment.
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(vii) In case of any reclassification of the Common Stock, or any
compulsory share exchange pursuant to which the Common Stock is converted into
other securities, cash or property (other than compulsory share exchanges which
constitute Change of Control Transactions), the Holders of the Preferred Stock
then outstanding shall have the right thereafter to convert such shares only
into the shares of stock and other securities, cash and property receivable upon
or deemed to be held by holders of Common Stock following such reclassification
or share exchange, and the Holders of the Preferred Stock shall be entitled upon
such event to receive such amount of securities, cash or property as a holder of
the number of shares of Common Stock of the Company into which such shares of
Preferred Stock could have been converted immediately prior to such
reclassification or share exchange would have been entitled. This provision
shall similarly apply to successive reclassifications or share exchanges.
(viii) In case of any (1) merger or consolidation of the Company with
or into another Person that would constitute a Change of Control Transaction, or
(2) sale by the Company of more than one-half of the assets of the Company (on
an as valued basis) in one or a series of related transactions, or (3) tender or
other offer or exchange (whether by the Company or another Person) pursuant to
which holders of Common Stock are permitted to tender or exchange their shares
for other securities, stock, cash or property of the Company or another Person,
a Holder shall have the right thereafter to (A) convert its shares of Preferred
Stock into the shares of stock and other securities, cash and property
receivable upon or deemed to be held by holders of Common Stock following such
merger, consolidation or sale, and such Holder shall be entitled upon such event
or series of related events to receive such amount of securities, cash and
property as the shares of Common Stock into which such shares of Preferred Stock
could have been converted immediately prior to such merger, consolidation or
sales would have been entitled or (B) in the event of an exchange or tender
offer or other transaction contemplated by clause (3) of this Section, tender or
exchange its shares of Preferred Stock for such securities, stock, cash and
other property receivable upon or deemed to be held by holders of Common Stock
that have tendered or exchanged their shares of Common Stock following such
tender or exchange, and such Holder shall be entitled upon such exchange or
tender to receive such amount of securities, cash and property as the shares of
Common Stock into which such shares of Preferred Stock could have been converted
(taking into account all then accrued and unpaid dividends) immediately prior to
such tender or exchange would have been entitled as would have been issued. The
terms of any such merger, sale, consolidation, tender or exchange shall include
such terms so as continue to give the Holders of Preferred Stock the right to
receive the securities, cash and property set forth in this Section upon any
conversion or redemption following such event. This provision shall similarly
apply to successive such events. The rights set forth in this Section 5(c)(viii)
shall not alter the rights of a Holder set forth in Section 7, provided, that, a
Holder may only exercise the rights set forth in this Section 5(c)(viii) or the
rights set forth in Section 7 with respect to a single event giving rise to such
rights.
(ix) If (a) the Company shall declare a dividend (or any other
distribution) on the Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of the Common Stock, (c) the
Company shall authorize the granting to all holders of Common Stock rights or
warrants to subscribe for or purchase any shares of capital stock of any class
or of any rights, (d) the approval of any stockholders of the Company shall be
required in connection with any reclassification of the Common Stock, any
consolidation or merger to which
9
the Company is a party, any sale or transfer of all or substantially all of the
assets of the Company, of any compulsory share of exchange whereby the Common
Stock is converted into other securities, cash or property, or (e) the Company
shall authorize the voluntary or involuntary dissolution, liquidation or winding
up of the affairs of the Company; then the Company shall cause to be filed at
each office or agency maintained for the purpose of conversion of Preferred
Stock, and shall cause to be mailed to the Holders at their last addresses as
they shall appear upon the stock books of the Company, at least 20 calendar days
prior to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not to
be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are to
be determined or (y) the date on which such reclassification, consolidation,
merger, sale, transfer or share exchange is expected to become effective or
close, and the date as of which it is expected that holders of Common Stock of
record shall be entitled to exchange their Common Stock for securities, cash or
other property deliverable upon such reclassification, consolidation, merger,
sale, transfer or share exchange. Holders are entitled to convert shares of
Preferred Stock during the 20-day period commencing the date of such notice to
the effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued shares of Common Stock solely for
the purpose of issuance upon conversion of Preferred Stock and payment of
dividends on Preferred Stock, each as herein provided, free from preemptive
rights or any other actual contingent purchase rights of persons other than the
Holders, not less than such number of shares of Common Stock as shall be
issuable (taking into account the provisions of Section 5(a) and Section 5(c))
upon the conversion of all outstanding shares of Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid, nonassessable.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of 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 of a share of
Preferred Stock shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
(f) The issuance of certificates for Common Stock on conversion of
Preferred Stock shall be made without charge to the Holders thereof for any
documentary stamp or similar taxes that may be payable in respect of the issue
or delivery of such certificate, provided that the Company shall not be required
to pay any tax that may be payable in respect of any transfer involved in the
issuance and delivery of any such certificate upon conversion in a name other
than that of the Holder of such shares of Preferred Stock so converted.
(g) Shares of Preferred Stock converted into Common Stock or redeemed
in accordance with the terms hereof shall be canceled and may not be reissued.
(h) Any and all notices or other communications or deliveries to be
provided by the Holder hereunder, including, without limitation, any Conversion
Notice, shall be in writing and
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delivered personally, by facsimile or sent by a nationally recognized overnight
courier service, addressed to the attention of the Chief Financial Officer of
the Company addressed to 11240 Sherman Way, Sun Valley, California 91352 or to
facsimile number (818) 765-8078 and (818) 765-2416, or to such other address or
facsimile number as shall be specified in writing by the Company for such
purpose. Any and all notices or other communications or deliveries to be
provided by the Company hereunder shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to each Holder at the facsimile telephone number or address of such
Holder appearing on the books of the Company, or if no such facsimile telephone
number or address appears, at the principal place of business of the Holder. Any
notice or other communication or deliveries hereunder shall be deemed given and
effective on the earliest of (i) the date of transmission, if such notice or
communication is delivered via facsimile at the facsimile telephone number
specified in this Section prior to 8:00 p.m. (New York City time), (ii) the date
after the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section later than
8:00 p.m. (New York City time) on any date and earlier than 11:59 p.m. (New York
City time) on such date, (iii) upon receipt, if sent by a nationally recognized
overnight courier service, or (iv) upon actual receipt by the party to whom such
notice is required to be given.
Sections 6 and 7 [Intentionally left blank]
Section 8. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
"CHANGE OF CONTROL AMOUNT" for each share of Preferred Stock means the
sum of (i) the product of (1) the Redemption Rate and (2) the Stated Value and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such share of Preferred Stock due hereunder or under the Purchase Agreement.
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of
effective control (whether through legal or beneficial ownership of capital
stock of the Company, by contract or otherwise) of in excess of 33% of the
voting securities of the Company, (ii) a replacement at one time or over time of
more than one-half of the members of the Company's board of directors which is
not approved by a majority of those individuals who are members of the board of
directors on the date hereof (or by those individuals who are serving as members
of the board of directors on any date whose nomination to the board of directors
was approved by a majority of the members of the board of directors who are
members on the date hereof), (iii) the merger of the Company with or into
another entity that is not wholly-owned by the Company, consolidation or sale of
all or substantially all of the assets of the Company in one or a series of
related transactions, or (iv) the execution by the Company of an agreement to
which the Company is a party or by which it is bound, providing for any of the
events set forth above in (i), (ii) or (iii).
"COMMISSION" means the Securities and Exchange Commission.
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"COMMON STOCK" means the Company's common stock, no par value, and
stock of any other class into which such shares may hereafter have been
reclassified or changed.
"CONVERSION RATIO" means, at any time, a fraction, the numerator of
which is Stated Value and the denominator of which is the Conversion Price at
such time.
"DISCOUNT RATE" means (i) during the period commencing on the 4th
month following the Original Issue Date and ending on the expiration of the 7th
month following the Original Issue Date, 88%, (ii) during the period commencing
on the 8th month following the Original Issue Date and ending on the expiration
of the 10th month following the Original Issue Date, 84%, and (iii) then and
after the commencement of the 11th month following the Original Issue Date, 80%.
"DIVIDEND EFFECTIVENESS DATE" means the earlier to occur of (x) the
Effectiveness Date (as defined in the Registration Rights Agreement) and (y) the
Effective Date.
"EFFECTIVE DATE" means the date that the Underlying Shares
Registration Statement is first declared effective by the Commission.
"JUNIOR SECURITIES" means the Common Stock and all other equity and
equity equivalent securities of the Company.
"MANDATORY REDEMPTION AMOUNT" for each share of Preferred Stock means
the sum of (i) the greater of (A) 125% of the Stated Value and (B) the product
of (a) the Per Share Market Value on the Trading Day immediately preceding (x)
the date of the Triggering Event or the Conversion Date, as the case may be, or
(y) the date of payment in full by the Company of the applicable redemption
price, whichever is greater, and (b) the Conversion Ratio calculated on the date
of the Triggering Event, or the Conversion Date, as the case may be, and (ii)
all other amounts, costs, expenses and liquidated damages due in respect of such
share of Preferred Stock.
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"PER SHARE MARKET VALUE" means on any particular date (a) the closing
bid price per share of Common Stock on such date on the NASDAQ or on the
Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on the date nearest preceding such date, or (b) if the
Common Stock is not then listed or quoted on the NASDAQ or on a Subsequent
Market, the closing bid price for a shares 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 (c) if the Common
Stock is not then reported by the National Quotation Bureau Incorporated (or
similar organization or agency succeeding to its functions of reporting prices),
then the average of the "Pink Sheet" quotes for the relevant conversion period,
as determined in
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good faith by the Holder, or (d) if the Common Stock are not then publicly
traded the fair market value of a share of Common Stock as determined by an
Appraiser selected in good faith by the Holders of a majority of the shares of
the Preferred Stock.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Convertible Preferred Stock Purchase
Agreement, dated as of the Original Issue Date, to which the Company and the
original Holders are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"REDEMPTION RATE" means (i) from the Original Issue Date to the
expiration of the of the 3rd month following the Original Issue Date, 105%, (ii)
from the commencement of the 4th month following the Original Issue Date to the
expiration of the 6th month following the Original Issue Date, 112.5%, and (iii)
from and after the commencement of the 7th month following the Original Issue
Date, 120%.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of the Original Issue Date, to which the Company and the
original Holder are parties, as amended, modified or supplemented from time to
time in accordance with its terms.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"TRADING DAY" means (a) a day on which the Common Stock is traded on
the NASDAQ or on the Subsequent Market on which the Common Stock is then listed
or quoted, as the case may be, or (b) if the Common Stock is not listed on the
NASDAQ or on 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 Common 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 reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices); PROVIDED, HOWEVER, that in the
event that the Common Stock is not listed or quoted as set forth in (a), (b) and
(c) hereof, then Trading Day shall mean any day except Saturday, Sunday and any
day which shall be a legal holiday or a day on which banking institutions in the
State of New York are authorized or required by law or other government action
to close.
"UNDERLYING SHARES" means, collectively, the shares of Common Stock
into which the shares of Preferred Stock are convertible and the shares of
Common Stock issuable upon payment of dividends thereon in accordance with the
terms hereof.
"UNDERLYING SHARES REGISTRATION STATEMENT" means a registration
statement that meets the requirements of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the Holder, who shall be named
as a "selling stockholder" thereunder.
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"VARIABLE CONVERSION PRICE" means the product obtained by multiplying
the Discount Rate (as defined in Section 8) and the average of the five (5)
lowest Per Share Market Values during the thirty (30) Trading Days immediately
preceding the applicable Conversion Date (which, at the Holder's option may
include Trading Days prior to the Initial Floating Conversion Date), PROVIDED,
that such thirty (30) Trading Day period shall be extended for the number of
Trading Days during such period in which (A) trading in the Common Stock is
suspended by the NASDAQ or a Subsequent Market on which the Common Stock is then
listed, or (B) after the Effective Date, the Underlying Shares Registration
Statement is either not effective or the Prospectus included in the Underlying
Shares Registration Statement may not be used by the Holder for the resale of
Underlying Shares.
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C) The number of shares of 8% Series C Convertible Preferred Stock is 300,
none of which have been issued.
The undersigned declare under penalty under the laws of the State of
California that he has read the foregoing certificate and knows the contents
thereof and that the same is true of his own knowledge.
Dated: /s/ 12-9-99 /s/ David L. Lokken
---------------------------- --------------------------------
David L. Lokken, President
/s/ Daniel J. Lubeck
--------------------------------
Daniel J. Lubeck, Secretary
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