CERTIFICATE OF
DESIGNATIONS, PREFERENCES, AND RIGHTS
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
INSYNQ, INC.
(Pursuant to Section 78.1955 of the
Nevada General Corporation Law)
INSYNQ, INC., a corporation organized and existing under the
Nevada General Corporation Law (the "CORPORATION"), hereby certifies that the
following resolutions were adopted by the Board of Directors of the Corporation
on February 25, 2005 pursuant to authority of the Board of Directors as required
by Section 78.1955 of the Nevada General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the
"BOARD") in accordance with the provisions of its Articles of Incorporation, the
Board of Directors hereby authorizes a series of the Corporation's previously
authorized Preferred Stock, par value $.001 per share (the "PREFERRED STOCK"),
and hereby states the designation and number of shares, and fixes the relative
rights, preferences, privileges, powers and restrictions thereof as follows:
Series B Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
The designation of this series, which consists of 300 shares
of Preferred Stock, is Series B Convertible Preferred Stock (the "SERIES B
PREFERRED STOCK") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "STATED VALUE").
II. RANK
The Series B Preferred Stock shall rank (i) prior to the
Corporation's common stock, par value $.001 per share (the "COMMON STOCK"); (ii)
prior to any class or series of capital stock of the Corporation hereafter
created (unless, with the consent of the holders of Series B Preferred Stock
obtained in accordance with Article IX hereof, such class or series of capital
stock specifically, by its terms, ranks senior to or pari passu with the Series
B Preferred Stock) (collectively, with the Common Stock, "JUNIOR SECURITIES");
(iii) pari passu with any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of Series B Preferred Stock
obtained in accordance with Article IX hereof) specifically ranking, by its
terms, on parity with the Series B Preferred Stock ("PARI PASSU SECURITIES");
and (iv) junior to any class or series of capital stock of the Corporation
hereafter created (with the consent of the holders of Series B Preferred Stock
obtained in accordance with Article IX hereof) specifically ranking, by its
terms, senior to the Series B Preferred Stock ("SENIOR SECURITIES"), in each
case as to distribution of assets upon liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary.
III. DIVIDENDS
A. DIVIDENDS. The holders of the Series B Preferred Stock shall be entitled to
receive, when, if and as declared by the Board of Directors, out of funds
legally available therefor, cumulative dividends in the amount of six percent
(6%) per annum as follows:
(I) Dividends on the Series B Preferred Stock shall accrue and shall be
cumulative from the date of issuance of the shares of Series B Preferred Stock
(the "DATE OF ORIGINAL ISSUE"), whether or not earned or declared by the Board
of Directors. Until paid, the right to receive dividends on the Series B
Preferred Stock shall accumulate, and shall be payable in cash, as set forth
below, in arrears, on March 31, June 30, September 30 and December 31 of each
year (each, a "DIVIDEND PAYMENT DATE"), commencing on March 31, 2005 (the
"INITIAL DIVIDEND PAYMENT DATE") except that if such Dividend Payment Date is
not a business day, then the Dividend Payment Date will be the immediately
preceding business day. Each such dividend declared by the Board of Directors on
the Series B Preferred Stock shall be paid to the holders of record of shares of
the Series B Preferred Stock as they appear on the stock register of the
Corporation on the record date which shall be the business day next preceding a
Dividend Payment Date. Dividends in arrears for any past dividend period may be
declared by the Board of Directors and paid on shares of the Series B Preferred
Stock on any date fixed by the Board of Directors, whether or not a regular
Dividend Payment Date, to holders of record of shares of the Series B Preferred
Stock as they appear on the Corporation's stock register on the record date. The
record date, which shall not be greater than 5 days before such Dividend Payment
Date, shall be fixed by the Board of Directors. Any dividend payment made on
shares of the Series B Preferred Stock shall first be credited against the
dividends accumulated with respect to the earliest dividend period for which
dividends have not been paid.
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(II) Except as hereinafter provided, no dividends shall be declared or paid or
set apart for payment on the shares of Common Stock or any other class or series
of capital stock of the Corporation for any dividend period unless full
cumulative dividends have been or contemporaneously are declared and paid on the
Series B Preferred Stock through the most recent Dividend Payment Date. If full
cumulative dividends have not been paid on shares of the Series B Preferred
Stock, all dividends declared on shares of the Series B Preferred Stock shall be
paid pro rata to the holders of outstanding shares of the Series B Preferred
Stock.
(III) Dividends on the Series B Preferred Stock may be paid even if, after
giving effect thereto, the Corporation's total assets would be less than the sum
of its total liabilities, plus the amount that would be needed, if the
Corporation were to be dissolved at the time of such distribution, to satisfy
the preferential rights upon dissolution of stockholders, if any, whose
preferential rights are superior to those receiving the distribution.
(IV) The holders of the Series B Preferred Stock shall each be entitled to
receive dividends on a pari passu basis with the holders of shares of Common
Stock, out of any assets legally available therefor, with the amount of such
dividends to be distributed to the holders of Series B Preferred Stock computed
on the basis of the number of shares of Common Stock which would be held by such
holder if, immediately prior to the declaration of the dividend, all of the
shares of Series B Preferred Stock had been converted into shares of Common
Stock at the then current Conversion Price (as hereinafter defined).
IV. LIQUIDATION PREFERENCE
A. LIQUIDATION EVENT. If the Corporation shall commence a voluntary case under
the Federal bankruptcy laws or any other applicable Federal or State bankruptcy,
insolvency or similar law, or consent to the entry of an order for relief in an
involuntary case under any law or to the appointment of a receiver, liquidator,
assignee, custodian, trustee, sequestrator (or other similar official) of the
Corporation or of any substantial part of its property, or make an assignment
for the benefit of its creditors, or admit in writing its inability to pay its
debts generally as they become due, or if a decree or order for relief in
respect of the Corporation shall be entered by a court having jurisdiction in
the premises in an involuntary case under the Federal bankruptcy laws or any
other applicable Federal or state bankruptcy, insolvency or similar law
resulting in the appointment of a receiver, liquidator, assignee, custodian,
trustee, sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"LIQUIDATION EVENT"), no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities) upon
liquidation, dissolution or winding up unless prior thereto, the holders of
shares of Series B Preferred Stock, subject to Article VI, shall have received
the Liquidation Preference (as defined in Article IV.C) with respect to each
share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series B Preferred Stock and
holders of Pari Passu Securities (including any dividends or distribution paid
on any Pari Passu Securities after the date of filing of this Certificate of
Designation) shall be insufficient to permit the payment to such holders of
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the preferential amounts payable thereon, then the entire assets and funds of
the Corporation legally available for distribution to the Series B Preferred
Stock and the Pari Passu Securities shall be distributed ratably among such
shares in proportion to the ratio that the Liquidation Preference payable on
each such share bears to the aggregate liquidation preference payable on all
such shares. Any prior dividends or distribution made after the date of filing
of this Certificate of Designation shall offset, dollar for dollar, the amount
payable to the class or series to which such distribution was made.
B. CERTAIN ACTS DEEMED LIQUIDATION EVENT. At the option of any holder of Series
B Preferred Stock, the sale, conveyance or disposition of all or substantially
all of the assets of the Corporation, the effectuation by the Corporation of a
transaction or series of related transactions in which more than 50% of the
voting power of the Corporation is disposed of, or the consolidation, merger or
other business combination of the Corporation with or into any other Person (as
defined below) or Persons when the Corporation is not the survivor shall either:
(i) be deemed to be a liquidation, dissolution or winding up of the Corporation
pursuant to which the Corporation shall be required to distribute upon
consummation of and as a condition to such transaction an amount equal to 130%
of the Liquidation Preference with respect to each outstanding share of Series B
Preferred Stock or (ii) be treated pursuant to Article VI.C(b) hereof. "PERSON"
shall mean any individual, corporation, limited liability company, partnership,
association, trust or other entity or organization.
C. LIQUIDATION PREFERENCE. For purposes hereof, the "LIQUIDATION PREFERENCE"
with respect to a share of the Series B Preferred Stock shall mean an amount
equal to the sum of (i) the Stated Value thereof plus (ii) an amount equal to
all accrued and unpaid dividends for the period beginning on the date of
issuance of the Series B Preferred Stock (the "ISSUE DATE") and ending on the
date of final distribution to the holder thereof (prorated for any portion of
such period) plus (iii) all Conversion Default Payments (as defined in Article
VI.E below), Delivery Default Payments (as defined in Article VI.D below) and
any other amounts owed to such holder pursuant to Section 2(c) of the
Registration Rights Agreement. The liquidation preference with respect to any
Pari Passu Securities shall be as set forth in the Certificate of Designation
filed in respect thereof.
V. REDEMPTION
A. MANDATORY REDEMPTION. If any of the following events (each, a "MANDATORY
REDEMPTION EVENT") shall occur:
(I) The Corporation (a) fails to issue shares of Common Stock to the holders of
Series B Preferred Stock upon exercise by the holders of their conversion rights
in accordance with the terms of this Certificate of Designation (for a period of
at least sixty (60) days if such failure is solely as a result of the
circumstances governed by the second paragraph of Article VI.E below and the
Corporation is using its best efforts to authorize a sufficient number of shares
of Common Stock as soon as practicable), (b) fails to transfer or to cause its
transfer agent to transfer (electronically or in certificated form) any
certificate for shares of Common Stock issued to the holders upon conversion of
the Series B Preferred Stock as and when required by this Certificate of
Designation or the Registration Rights Agreement, dated as of February 28, 2005,
by and among the Corporation and the other signatories thereto (the
"REGISTRATION RIGHTS AGREEMENT"), (c) fails to remove any restrictive legend (or
to withdraw any stop transfer instructions in respect thereof) on any
certificate or any shares of Common Stock issued to the holders of Series B
Preferred Stock upon conversion of the Series B Preferred Stock as and when
required by this Certificate of Designation, the Securities Purchase Agreement
dated as of February 28, 2005, by and between the Corporation and the other
signatories thereto (the
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"PURCHASE AGREEMENT") or the Registration Rights Agreement, or (d) fails to
fulfill its obligations pursuant to the Purchase Agreement (or makes any
announcement or statement that it does not intend to honor the obligations
described in this paragraph) and any such failure shall continue uncured (or any
announcement or statement not to honor its obligations shall not be rescinded in
writing) for ten (10) days after the Corporation shall have been notified
thereof in writing by any holder of Series B Preferred Stock;
(II) The Corporation fails to file the Registration Statement within sixty (60)
days following the Closing Date (as defined in the Purchase Agreement) or obtain
effectiveness with the Securities and Exchange Commission of the Registration
Statement within one hundred thirty-five (135) days following the Closing Date
(as defined in the Purchase Agreement) or such Registration Statement lapses in
effect (or sales cannot otherwise be made thereunder effective, whether by
reason of the Corporation's failure to amend or supplement the prospectus
included therein in accordance with the Registration Rights Agreement or
otherwise) for more than ten (10) consecutive days or twenty (20) days in any
twelve month period after the Registration Statement becomes effective;
(III) The Corporation or any subsidiary of the Corporation shall make an
assignment for the benefit of creditors, or apply for or consent to the
appointment of a receiver or trustee for it or for all or substantially all of
its property or business; or such a receiver or trustee shall otherwise be
appointed;
(IV) Bankruptcy, insolvency, reorganization or liquidation proceedings or other
proceedings for relief under any bankruptcy law or any law for the relief of
debtors shall be instituted by or against the Corporation or any subsidiary of
the Corporation;
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(V) The Corporation shall fail to maintain the listing of the Common Stock on
the Over-the-Counter Bulletin Board (the "OTCBB"), Nasdaq National Market,
Nasdaq SmallCap Market, New York Stock Exchange or American Stock Exchange,
then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs (i), (ii) or (v), at the option of
the holders of at least 50% of the then outstanding shares of Series B Preferred
Stock exercisable by delivery of written notice (the "MANDATORY REDEMPTION
NOTICE") to the Corporation of such Mandatory Redemption Event, or upon the
occurrence of any Mandatory Redemption Event specified in subparagraphs (iii) or
(iv), the then outstanding shares of Series B Preferred Stock shall become
immediately redeemable and the Corporation shall purchase each holder's
outstanding shares of Series B Preferred Stock for an amount per share equal to
the greater of (1) 130% multiplied by the sum of (a) the Stated Value of the
shares to be redeemed plus (b) any accrued, but unpaid dividends under Article
III equal to six percent (6%) per annum of such Stated Value for the period
beginning on the Issue Date and ending on the date of payment of the Mandatory
Redemption Amount (the "MANDATORY REDEMPTION DATE") plus (c) all Conversion
Default Payments (as defined in Article VI.E below), Delivery Default Payments
(as defined in Article VI.D below) and any other amounts owed to such holder
pursuant to Section 2(c) of the Registration Rights Agreement, and (2) the
"PARITY VALUE" of the shares to be redeemed, where parity value means the
product of (a) the highest number of shares of Common Stock issuable upon
conversion of such shares of Series B Preferred Stock in accordance with Article
VI below, treating the Trading Day (as defined in Article VI.B) immediately
preceding the Mandatory Redemption Date as the "CONVERSION DATE" (as defined in
Article VI.B(a)) for purposes of determining the lowest applicable Conversion
Price, unless the Mandatory Redemption Event arises as a result of a breach in
respect of a specific Conversion Date in which case such Conversion Date shall
be the Conversion Date), multiplied by (b) the highest Closing Price (as defined
below) for the Common Stock during the period beginning on the date of first
occurrence of the Mandatory Redemption Event and ending one day prior to the
Mandatory Redemption Date (the greater of such amounts being referred to as the
"MANDATORY REDEMPTION AMOUNT"). "CLOSING PRICE," as of any date, means the last
sale price of the Common Stock on the OTCBB as reported by Bloomberg Financial
Markets or an equivalent reliable reporting service mutually acceptable to and
hereafter designated by the holders of a majority in interest of the shares of
Series B Preferred Stock and the Corporation ("BLOOMBERG") or, if the OTCBB is
not the principal trading market for such security, the last sale price of such
security on the principal securities exchange or trading market where such
security is listed or traded as reported by Bloomberg, or if the foregoing do
not apply, the last sale price of such security in the over-the-counter market
on the electronic bulletin board for such security as reported by Bloomberg, or,
if no last sale price of such security is available in the over-the-counter
market on the electronic bulletin board for such security or in any of the
foregoing manners, the average of the bid prices of any market makers for such
security that are listed in the "pink sheets" by the National Quotation Bureau,
Inc. If the Closing Price cannot be calculated for such security on such date in
the manner provided above, the Closing Price shall be the fair market value as
mutually determined by the Corporation and the holders of a majority in interest
of shares of Series B Preferred Stock for which the calculation of the Closing
Price is required.
B. TRADING MARKET REDEMPTION. If the Series B Preferred Stock ceases to be
convertible by any holder as a result of the limitations described in Article
VI.A(ii) below (a "TRADING MARKET REDEMPTION EVENT"), and the Corporation has
not, prior to, or within thirty
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(30) days of, the date that such Trading Market Redemption Event arises, (i)
obtained the Stockholder Approval (as defined in Article VI.A(ii)) eliminated
any prohibitions under applicable law or the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or any of its securities on the
Corporation's ability to issue shares of Common Stock in excess of the Maximum
Share Amount (as defined in Article VI.A(ii)), then the Corporation shall be
obligated to redeem immediately all of the then outstanding Series B Preferred
Stock, in accordance with this Article V.B. An irrevocable redemption notice
(the "TRADING MARKET REDEMPTION NOTICE") shall be delivered promptly to the
holders of Series B Preferred Stock at their registered address appearing on the
records of the Corporation and shall state (i) that the Maximum Share Amount (as
defined in Article VI.A) has been issued upon exercise of the Series B Preferred
Stock, (ii) that the Corporation is obligated to redeem all of the outstanding
Series B Preferred Stock and (iii) the Mandatory Redemption Date, which shall be
a date within five (5) business days of the earlier of (a) the date of the
Trading Market Redemption Notice or (b) the date on which the holders of the
Series B Preferred Stock notify the Corporation of the occurrence of a Trading
Market Redemption Event. On the Mandatory Redemption Date, the Corporation shall
make payment of the Mandatory Redemption Amount (as defined in Article V.A
above) in cash.
C. OPTIONAL REDEMPTION. Notwithstanding anything to the contrary contained in
this Article V, so long as (i) no Mandatory Redemption Event or Trading Market
Redemption Event shall have occurred and be continuing, (ii) any Registration
Statement required to be filed and be effective pursuant to the Registration
Rights Agreement is then in effect and has been in effect and sales of all of
the Registrable Securities can be made thereunder for at least twenty (20) days
prior to the Optional Redemption Date (as defined below), (iii) the Corporation
has a sufficient number of authorized shares of Common Stock reserved for
issuance upon full conversion of the Series B Preferred Stock, and (iv) the
Common Stock is trading at or below $.0075 per share, then at any time after the
Issue Date, the Corporation shall have the right to deliver written notice to
the holders of Series B Preferred Stock (which notice may not be sent to the
holders of the Series B Preferred Stock until the Corporation is permitted to
redeem the Series B Preferred Stock pursuant to this Article V.C) of its
intention to redeem all of the outstanding shares of Series B Preferred Stock in
accordance with this Article V.C. Any notice (the "OPTIONAL REDEMPTION NOTICE")
of redemption hereunder (an "OPTIONAL REDEMPTION") shall be delivered to the
holders of Series B Preferred Stock at their registered addresses appearing on
the books and records of the Corporation and shall state (1) that the
Corporation is exercising its right to redeem all of the outstanding shares of
Series B Preferred Stock issued and (2) the date of redemption (the "OPTIONAL
REDEMPTION DATE"), which date shall be twenty (20) Trading Days after the date
of delivery of the Optional Redemption Notice. On the Optional Redemption Date,
the Corporation shall make payment of the Optional Redemption Amount (as defined
below) to or upon the order of the holders as specified by the holders in
writing to the Corporation at least one (1) business day prior to the Optional
Redemption Date. If the Corporation exercises its right to redeem the Series B
Preferred Stock, the Corporation shall make payment to the holders of an amount
in cash (the "OPTIONAL REDEMPTION AMOUNT") equal to 130% multiplied by the sum
of (i) the Stated Value of the shares of Series B Preferred Stock to be redeemed
plus (ii) an amount equal to all accrued and unpaid dividends for the period
beginning on the Issue Date and ending on the Optional Redemption Date plus
(iii) all Conversion Default Payments (as defined in Article VI.E below),
Delivery Default Payments (as defined in Article VI.D below) and any other
amounts owed to
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such holder pursuant to Section 2(c) of the Registration Rights Agreement, for
each share of Series B Preferred Stock then held. Notwithstanding notice of an
Optional Redemption, the holders shall at all times prior to the Optional
Redemption Date maintain the right to convert all or any shares of Series B
Preferred Stock in accordance with Article VI and any shares of Series B
Preferred Stock so converted after receipt of an Optional Redemption Notice and
prior to the Optional Redemption Date set forth in such notice and payment of
the aggregate Optional Redemption Amount shall be deducted from the shares of
Series B Preferred Stock which are otherwise subject to redemption pursuant to
such notice. If the Corporation delivers an Optional Redemption Notice and fails
to pay the Optional Redemption Amount due to the holders of the Series B
Preferred Stock within two (2) business days following the Optional Redemption
Date, the Corporation shall forever forfeit its right to redeem the Series B
Preferred Stock pursuant to this Article V.C.
D. FAILURE TO PAY REDEMPTION AMOUNTS. In the case of a Mandatory Redemption
Event or the delivery of an Optional Redemption Notice, if the Corporation fails
to pay the Mandatory Redemption Amount or Optional Redemption Amount as
applicable, within five (5) business days of written notice that such amount is
due and payable, then (assuming there are sufficient authorized shares) in
addition to all other available remedies, each holder of Series B Preferred
Stock shall have the right at any time, so long as the Mandatory Redemption
Event continues, or at any time after delivery of an Optional Redemption Notice
to require the Corporation, upon written notice, to immediately issue (in
accordance with and subject to the terms of Article VI below), in lieu of the
Mandatory Redemption Amount or Optional Redemption Amount as applicable, the
number of shares of Common Stock of the Corporation equal to such applicable
redemption amount divided by any Conversion Price (as defined below), as chosen
in the sole discretion of the holder of Series B Preferred Stock, in effect from
the date of the Mandatory Redemption Event (or the date of delivery of an
Optional Redemption Notice) until the date such holder elects to exercise its
rights pursuant to this Article V.E.
VI. CONVERSION AT THE OPTION OF THE HOLDER
A. OPTIONAL CONVERSION
(I) CONVERSION AMOUNT. Each holder of shares of Series B Preferred Stock may, at
its option at any time and from time to time, upon surrender of the certificates
therefor, convert any or all of its shares of Series B Preferred Stock into
Common Stock as set forth below (an "OPTIONAL CONVERSION"). Each share of Series
B Preferred Stock shall be convertible into such number of fully paid and
nonassessable shares of Common Stock as such Common Stock exists on the Issue
Date, or any other shares of capital stock or other securities of the
Corporation into which such Common Stock is thereafter changed or reclassified,
as is determined by dividing (1) the Stated Value thereof by (2) the then
effective Conversion Price (as defined below); provided, however, that in no
event (other than pursuant to the Automatic Conversion (as defined in Article
VII)) shall a holder of shares of Series B Preferred Stock be entitled to
convert any such shares in excess of that number of shares upon conversion of
which the sum of (x) the number of shares of Common Stock beneficially owned by
the holder and its affiliates (other than shares of Common Stock which may be
deemed beneficially owned through the ownership of the unconverted portion of
the shares of Series B Preferred Stock or the unexercised or unconverted portion
of any other securities of the Corporation subject to a
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limitation on conversion or exercise analogous to the limitations contained
herein) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series B Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by a holder and such holder's affiliates of more than 4.99% of the
outstanding shares of Common Stock. For purposes of the proviso to the
immediately preceding sentence, beneficial ownership shall be determined in
accordance with Section 13(d) of the Securities Exchange Act of 1934, as
amended, and Regulation 13D-G thereunder, except as otherwise provided in clause
(x) of such proviso.
(II) TRADING MARKET LIMITATION. Unless the Corporation either (i) is permitted
or not prohibited by the applicable rules and regulations of the principal
securities market on which the Common Stock is listed or traded or (ii) has
obtained approval of the issuance of the Common Stock upon conversion of or
otherwise pursuant to the Series B Preferred Stock in accordance with applicable
law and the rules and regulations of any stock exchange, interdealer quotation
system or other self-regulatory organization with jurisdiction over the
Corporation or any of its securities (the "STOCKHOLDER APPROVAL"), in no event
shall the total number of shares of Common Stock issued upon conversion of or
otherwise pursuant to the Series B Preferred Stock (including any shares of
capital stock or rights to acquire shares of capital stock issued by the
Corporation which are aggregated or integrated with the Common Stock issued or
issuable upon conversion of or otherwise pursuant to the Series B Preferred
Stock for purposes of any such rule or regulation) exceed the maximum number of
shares of Common Stock that the Corporation can so issue pursuant to any rule of
the principal United States securities market on which the Common Stock trades
(the "MAXIMUM SHARE AMOUNT") which, as of the Issue Date, shall be 19.99% of the
total shares of Common Stock outstanding on the Issue Date), subject to
equitable adjustments from time to time for stock splits, stock dividends,
combinations, capital reorganizations and similar events relating to the Common
Stock occurring after the Issue Date. With respect to each holder of Series B
Preferred Stock, the Maximum Share Amount shall refer to such holder's pro rata
share thereof determined in accordance with Article X below. In the event that
the sum of (x) the aggregate number of shares of Common Stock actually issued
upon conversion of or otherwise pursuant to the outstanding Series B Preferred
Stock plus (y) the aggregate number of shares of Common Stock that remain
issuable upon conversion of or otherwise pursuant to the Series B Preferred
Stock at the then effective Conversion Price, represents at least one hundred
percent (100%) of the Maximum Share Amount (the "TRIGGERING EVENT"), the
Corporation will use its best efforts to seek and obtain Stockholder Approval
(or obtain such other relief as will allow conversions hereunder in excess of
the Maximum Share Amount) as soon as practicable following the Triggering Event.
B. CONVERSION PRICE.
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(I) CALCULATION OF CONVERSION PRICE. Subject to subparagraph C below, the
"CONVERSION PRICE" shall be the Applicable Percentage (as defined herein)
multiplied by the Market Price (as defined herein). "MARKET PRICE" means the
average of the lowest three (3) Trading Prices (as defined below) for the Common
Stock during the twenty (20) Trading Day period ending one Trading Day prior to
the date the Conversion Notice is sent by the Holder to the Borrower via
facsimile (the "CONVERSION DATE"). "TRADING PRICE" means, for any security as of
any date, the intraday trading price on the OTCBB as reported by a reliable
reporting service mutually acceptable to and hereafter designated by Holders of
a majority in interest of the Series B Preferred Stock and the Corporation or,
if the OTCBB is not the principal trading market for such security, the intraday
trading price of such security on the principal securities exchange or trading
market where such security is listed or traded or, if no intraday trading price
of such security is available in any of the foregoing manners, the average of
the intraday trading prices of any market makers for such security that are
listed in the "pink sheets" by the National Quotation Bureau, Inc. If the
Trading Price cannot be calculated for such security on such date in the manner
provided above, the Trading Price shall be the fair market value as mutually
determined by the Borrower and the holders of a majority in interest of the
Series B Preferred Stock being converted for which the calculation of the
Trading Price is required in order to determine the Conversion Price of such
Series B Preferred Stock. "TRADING DAY" shall mean any day on which the Common
Stock is traded for any period on the OTCBB, or on the principal securities
exchange or other securities market on which the Common Stock is then being
traded. "APPLICABLE PERCENTAGE" shall mean 86%.
(II) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS. Notwithstanding anything
contained in subparagraph (i) of this Paragraph B to the contrary, in the event
the Corporation (a) makes a public announcement that it intends to consolidate
or merge with any other corporation (other than a merger in which the
Corporation is the surviving or continuing corporation and its capital stock is
unchanged) or sell or transfer all or substantially all of the assets of the
Corporation or (b) any person, group or entity (including the Corporation)
publicly announces a tender offer to purchase 50% or more of the Corporation's
Common Stock (or any other takeover scheme) (the date of the announcement
referred to in clause (a) or (b) is hereinafter referred to as the "ANNOUNCEMENT
DATE"), then the Conversion Price shall, effective upon the Announcement Date
and continuing through the Adjusted Conversion Price Termination Date (as
defined below), be equal, for each such date, to the lower of (x) the Conversion
Price which would have been applicable for an Optional Conversion occurring on
the Announcement Date and (y) the Conversion Price that would otherwise be in
effect. From and after the Adjusted Conversion Price Termination Date, the
Conversion Price shall be determined as set forth in subparagraph (i) of this
Article VI.B. For purposes hereof, "ADJUSTED CONVERSION PRICE TERMINATION DATE"
shall mean, with respect to any proposed transaction or tender offer (or
takeover scheme) for which a public announcement as contemplated by this
subparagraph (b) has been made, the date upon which the Corporation (in the case
of clause (a) above) or the person, group or entity (in the case of clause (ii)
above) consummates or publicly announces the termination or abandonment of the
proposed transaction or tender offer (or takeover scheme) which caused this
subparagraph (ii) to become operative.
C. ADJUSTMENTS TO CONVERSION PRICE. The Conversion Price shall be subject to
adjustment from time to time as follows:
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(I) ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK DIVIDEND, ETC. If
at any time when Series B Preferred Stock is issued and outstanding, the number
of outstanding shares of Common Stock is increased or decreased by a stock
split, stock dividend, combination, reclassification, rights offering below the
Trading Price (as defined below) to all holders of Common Stock or other similar
event, which event shall have taken place during the reference period for
determination of the Conversion Price for any Optional Conversion or Automatic
Conversion of the Series B Preferred Stock, then the Conversion Price shall be
calculated giving appropriate effect to the stock split, stock dividend,
combination, reclassification or other similar event. In such event, the
Corporation shall notify the Transfer Agent of such change on or before the
effective date thereof. "TRADING PRICE," which shall be measured as of the
record date in respect of the rights offering, means (a) the average of the last
reported sale prices for the shares of Common Stock on the OTCBB as reported by
Bloomberg, as applicable, for the five (5) Trading Days immediately preceding
such date, or (b) if the OTCBB is not the principal trading market for the
shares of Common Stock, the average of the last reported sale prices on the
principal trading market for the Common Stock during the same period as reported
by Bloomberg, or (c) if market value cannot be calculated as of such date on any
of the foregoing bases, the Trading Price shall be the fair market value as
reasonably determined in good faith by (x) the Board of Directors of the
Corporation or, (y) at the option of a majority-in-interest of the holders of
the outstanding Series B Preferred Stock by an independent investment bank of
nationally recognized standing in the valuation of businesses similar to the
business of the Corporation.
11
(II) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC. If, at any time when Series B
Preferred Stock is issued and outstanding and prior to the conversion of all
Series B Preferred Stock, there shall be any merger, consolidation, exchange of
shares, recapitalization, reorganization, or other similar event, as a result of
which shares of Common Stock of the Corporation shall be changed into the same
or a different number of shares of another class or classes of stock or
securities of the Corporation or another entity, or in case of any sale or
conveyance of all or substantially all of the assets of the Corporation other
than in connection with a plan of complete liquidation of the Corporation (each,
a "CHANGE OF CONTROL TRANSACTION"), then the holders of Series B Preferred Stock
shall thereafter have the right to receive upon conversion of the Series B
Preferred Stock, upon the basis and upon the terms and conditions specified
herein and in lieu of the shares of Common Stock immediately theretofore
issuable upon conversion, such stock, securities or assets which the holders of
Series B Preferred Stock would have been entitled to receive in such transaction
had the Series B Preferred Stock been converted in full immediately prior to
such transaction (without regard to any limitations on conversion contained
herein), and in any such case appropriate provisions shall be made with respect
to the rights and interests of the holders of Series B Preferred Stock to the
end that the provisions hereof (including, without limitation, provisions for
adjustment of the Conversion Price and of the number of shares of Common Stock
issuable upon conversion of the Series B Preferred Stock) shall thereafter be
applicable, as nearly as may be practicable in relation to any securities or
assets thereafter deliverable upon the conversion of Series B Preferred Stock.
The Corporation shall not effect any transaction described in this subsection
(i) unless (a) it first gives, to the extent practical, thirty (30) days' prior
written notice (but in any event at least fifteen (15) business days prior
written notice) of the record date of the special meeting of stockholders to
approve, or if there is no such record date, the consummation of, such Change of
Control Transaction (during which time the holders of Series B Preferred Stock
shall be entitled to convert the Series B Preferred Stock) and (b) the resulting
successor or acquiring entity (if not the Corporation) and, if an entity
different from the successor or acquiring entity, the entity whose capital stock
or assets the holders of the Common Stock are entitled to receive as a result of
such Change of Control Transaction, assumes by written instrument the
obligations of this Certificate of Designation (including this subsection (b)).
The above provisions shall similarly apply to successive consolidations,
mergers, sales, transfers or share exchanges.
(III) ADJUSTMENT DUE TO DISTRIBUTION. Subject to Article III, if the Corporation
shall declare or make any distribution of its assets (or rights to acquire its
assets) to holders of Common Stock as a dividend, stock repurchase, by way of
return of capital or otherwise (including any dividend or distribution to the
Corporation's shareholders in cash or shares (or rights to acquire shares) of
capital stock of a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then the
holders of Series B Preferred Stock shall be entitled, upon any conversion of
shares of Series B Preferred Stock after the date of record for determining
shareholders entitled to such Distribution, to receive the amount of such assets
which would have been payable to the holder with respect to the shares of Common
Stock issuable upon such conversion had such holder been the holder of such
shares of Common Stock on the record date for the determination of shareholders
entitled to such Distribution.
12
(IV) PURCHASE RIGHTS. Subject to Article III, if at any time when any Series B
Preferred Stock is issued and outstanding, the Corporation issues any
convertible securities or rights to purchase stock, warrants, securities or
other property (the "PURCHASE RIGHTS") pro rata to the record holders of any
class of Common Stock, then the holders of Series B Preferred Stock will be
entitled to acquire, upon the terms applicable to such Purchase Rights, the
aggregate Purchase Rights which such holder could have acquired if such holder
had held the number of shares of Common Stock acquirable upon complete
conversion of the Series B Preferred Stock (without regard to any limitations on
conversion contained herein) immediately before the date on which a record is
taken for the grant, issuance or sale of such Purchase Rights, or, if no such
record is taken, the date as of which the record holders of Common Stock are to
be determined for the grant, issue or sale of such Purchase Rights.
D. MECHANICS OF CONVERSION. In order to convert Series B Preferred Stock into
full shares of Common Stock, a holder of Series B Preferred Stock shall: (i)
submit a copy of the fully executed notice of conversion in the form attached
hereto as Exhibit A ("NOTICE OF CONVERSION") to the Corporation by facsimile
dispatched prior to Midnight, New York City time (the "CONVERSION NOTICE
DEADLINE") on the date specified therein as the Conversion Date (as defined in
Article VI.D(d)) (or by other means resulting in, or reasonably expected to
result in, notice to the Corporation on the Conversion Date) to the office of
the Corporation or its designated Transfer Agent for the Series B Preferred
Stock, which notice shall specify the number of shares of Series B Preferred
Stock to be converted, the applicable Conversion Price and a calculation of the
number of shares of Common Stock issuable upon such conversion (together with a
copy of the first page of each certificate to be converted); and (ii) surrender
the original certificates representing the Series B Preferred Stock being
converted (the "PREFERRED STOCK CERTIFICATES"), duly endorsed, along with a copy
of the Notice of Conversion to the office of the Corporation or the Transfer
Agent for the Series B Preferred Stock as soon as practicable thereafter. The
Corporation shall not be obligated to issue certificates evidencing the shares
of Common Stock issuable upon such conversion, unless either the Preferred Stock
Certificates are delivered to the Corporation or its Transfer Agent as provided
above, or the holder notifies the Corporation or its Transfer Agent that such
certificates have been lost, stolen or destroyed and provides to the Corporation
an indemnity reasonably satisfactory to the Corporation (subject to the
requirements of subparagraph (a) below). In the case of a dispute as to the
calculation of the Conversion Price, the Corporation shall promptly issue such
number of shares of Common Stock that are not disputed in accordance with
subparagraph (b) below. The Corporation shall submit the disputed calculations
to its outside accountant via facsimile within two (2) business days of receipt
of the Notice of Conversion. The accountant shall audit the calculations and
notify the Corporation and the holder of the results no later than 48 hours from
the time it receives the disputed calculations. The accountant's calculation
shall be deemed conclusive absent manifest error.
(I) LOST OR STOLEN CERTIFICATES. Upon receipt by the Corporation of evidence of
the loss, theft, destruction or mutilation of any Preferred Stock Certificates
representing shares of Series B Preferred Stock, and (in the case of loss, theft
or destruction) of indemnity reasonably satisfactory to the Corporation, and
upon surrender and cancellation of the Preferred Stock Certificate(s), if
mutilated, the Corporation shall execute and deliver new Preferred Stock
Certificate(s) of like tenor and date.
13
(II) DELIVERY OF COMMON STOCK UPON CONVERSION. Upon the surrender of
certificates as described above together with a Notice of Conversion, the
Corporation shall issue and, within two (2) business days after such surrender
(or, in the case of lost, stolen or destroyed certificates, after provision of
agreement and indemnification pursuant to subparagraph (a) above) (the "DELIVERY
PERIOD"), deliver (or cause its Transfer Agent to so issue and deliver) in
accordance with the terms hereof and the Purchase Agreement (including, without
limitation, in accordance with the requirements of Section 2(g) of the Purchase
Agreement) to or upon the order of the holder (i) that number of shares of
Common Stock for the portion of the shares of Series B Preferred Stock converted
as shall be determined in accordance herewith and (ii) a certificate
representing the balance of the shares of Series B Preferred Stock not
converted, if any. In addition to any other remedies available to the holder,
including actual damages and/or equitable relief, the Corporation shall pay to a
holder $2,000 per day in cash for each day beyond a two (2) day grace period
following the Delivery Period that the Corporation fails to deliver Common Stock
(a "DELIVERY DEFAULT") issuable upon surrender of shares of Series B Preferred
Stock with a Notice of Conversion until such time as the Corporation has
delivered all such Common Stock (the "DELIVERY DEFAULT PAYMENTS"). Such Delivery
Default Payments shall be paid to such holder by the fifth day of the month
following the month in which it has accrued or, at the option of the holder (by
written notice to the Corporation by the first day of the month following the
month in which it has accrued), shall be convertible into Common Stock in
accordance with the terms of this Article VI.
In lieu of delivering physical certificates representing the
Common Stock issuable upon conversion, provided the Corporation's Transfer Agent
is participating in the Depository Trust Company ("DTC") Fast Automated
Securities Transfer ("FAST") program, upon request of the holder and its
compliance with the provisions contained in Article VI.A and in this Article
VI.D, the Corporation shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of holder's Prime Broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and
penalties described in the immediately preceding paragraph shall apply to the
electronic transmittals described herein.
(III) NO FRACTIONAL SHARES. If any conversion of Series B Preferred Stock would
result in a fractional share of Common Stock or the right to acquire a
fractional share of Common Stock, such fractional share shall be disregarded and
the number of shares of Common Stock issuable upon Conversion of the Series B
Preferred Stock shall be the next higher number of shares.
(IV) CONVERSION DATE. The "CONVERSION DATE" shall be the date specified in the
Notice of Conversion, provided that the Notice of Conversion is submitted by
facsimile (or by other means resulting in, or reasonably expected to result in,
notice) to the Corporation or its Transfer Agent before Midnight, New York City
time, on the date so specified, otherwise the Conversion Date shall be the first
business day after the date so specified on which the Notice of Conversion is
actually received by the Corporation or its Transfer Agent. The person or
persons entitled to receive the shares of Common Stock issuable upon conversion
shall be treated for all purposes as the record holder or holders of such
securities as of the Conversion Date and all rights with respect to the shares
of Series B Preferred Stock surrendered shall forthwith terminate except the
right to receive the shares of Common Stock or other
14
securities or property issuable on such conversion and except that the holders
preferential rights as a holder of Series B Preferred Stock shall survive to the
extent the Corporation fails to deliver such securities.
E. RESERVATION OF SHARES. A number of shares of the authorized but unissued
Common Stock sufficient to provide for the conversion of the Series B Preferred
Stock outstanding (based on the then current Conversion Price in effect from
time to time) shall at all times be reserved by the Corporation, free from
preemptive rights, for such conversion or exercise. As of the date of issuance
of the Series B Preferred Stock, 139,534,884 authorized and unissued shares of
Common Stock have been duly reserved for issuance upon conversion of the Series
B Preferred Stock (the "RESERVED AMOUNT"). The Reserved Amount shall be
increased from time to time in accordance with the Corporation's obligations
pursuant to Section 4(h) of the Purchase Agreement. In addition, if the
Corporation shall issue any securities or make any change in its capital
structure which would change the number of shares of Common Stock into which
each share of the Series B Preferred Stock shall be convertible, the Corporation
shall at the same time also make proper provision so that thereafter there shall
be a sufficient number of shares of Common Stock authorized and reserved, free
from preemptive rights, for conversion of the outstanding Series B Preferred
Stock.
If at any time a holder of shares of Series B Preferred Stock
submits a Notice of Conversion, and the Corporation does not have sufficient
authorized but unissued shares of Common Stock available to effect such
conversion in accordance with the provisions of this Article VI (a "CONVERSION
DEFAULT"), subject to Article X, the Corporation shall issue to the holder all
of the shares of Common Stock which are available to effect such conversion. The
number of shares of Series B Preferred Stock included in the Notice of
Conversion which exceeds the amount which is then convertible into available
shares of Common Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to
the contrary contained herein, not be convertible into Common Stock in
accordance with the terms hereof until (and at the holder's option at any time
after) the date additional shares of Common Stock are authorized by the
Corporation to permit such conversion, at which time the Conversion Price in
respect thereof shall be the lesser of (i) the Conversion Price on the
Conversion Default Date (as defined below) and (ii) the Conversion Price on the
Conversion Date elected by the holder in respect thereof. The Corporation shall
use its best efforts to effect an increase in the authorized number of shares of
Common Stock as soon as possible following the earlier of (i) such time that a
holder of Series B Preferred Stock notifies the Corporation or that the
Corporation otherwise becomes aware that there are or likely will be
insufficient authorized and unissued shares to allow full conversion thereof and
(ii) a Conversion Default. In addition, the Corporation shall pay to the holder
payments ("CONVERSION DEFAULT PAYMENTS") for a Conversion Default in the amount
of (a) .24, multiplied by (b) the sum of the Stated Value plus any unpaid
accrued dividends per share of Series B Preferred Stock held by such holder
through the Authorization Date (as defined below), multiplied by (c) (N/365),
where N = the number of days from the day the holder submits a Notice of
Conversion giving rise to a Conversion Default (the "CONVERSION DEFAULT DATE")
to the date (the "AUTHORIZATION DATE") that the Corporation authorizes a
sufficient number of shares of Common Stock to effect conversion of the full
number of shares of Series B Preferred Stock. The Corporation 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 Payment for each calendar month shall
be
15
paid in cash or shall be convertible into Common Stock at the applicable
Conversion Price, at the holder's option, as follows:
(I) In the event the holder elects to take such payment in cash, cash payment
shall be made to holder by the fifth day of the month following the month in
which it has accrued; and
(II) In the event the holder elects to take such payment in Common Stock, the
holder may convert such payment amount into Common Stock at the Conversion Price
(as in effect at the time of Conversion) at any time after the fifth day of the
month following the month in which it has accrued in accordance with the terms
of this Article VI (so long as there is then a sufficient number of authorized
shares of Common Stock).
The holder's election shall be made in writing to the
Corporation at any time prior to 9:00 p.m., New York City Time, on the third
(3rd) day of the month following the month in which Conversion Default payments
have accrued. If no election is made, the holder shall be deemed to have elected
to receive cash. Nothing herein shall limit the holder's right to pursue actual
damages (to the extent in excess of the Conversion Default Payments) for the
Corporation's failure to maintain a sufficient number of authorized shares of
Common Stock, and each holder shall have the right to pursue all remedies
available at law or in equity (including a decree of specific performance and/or
injunctive relief).
F. NOTICE OF CONVERSION PRICE ADJUSTMENTS. Upon the occurrence of each
adjustment or readjustment of the Conversion Price pursuant to this Article VI,
the Corporation, at its expense, shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of Series B Preferred Stock a certificate setting forth such adjustment
or readjustment and showing in detail the facts upon which such adjustment or
readjustment is based. The Corporation shall, upon the written request at any
time of any holder of Series B Preferred Stock, furnish or cause to be furnished
to such holder a like certificate setting forth (i) such adjustment or
readjustment, (ii) the Conversion Price at the time in effect and (iii) the
number of shares of Common Stock and the amount, if any, of other securities or
property which at the time would be received upon conversion of a share of
Series B Preferred Stock.
G. STATUS AS STOCKHOLDERS. Upon submission of a Notice of Conversion by a holder
of Series B Preferred Stock, (i) the shares covered thereby (other than the
shares, if any, which cannot be issued because their issuance would exceed such
holder's allocated portion of the Reserved Amount or Maximum Share Amount) shall
be deemed converted into shares of Common Stock and (ii) the holder's rights as
a holder of such converted shares of Series B Preferred Stock shall cease and
terminate, excepting only the right to receive certificates for such shares of
Common Stock and to any remedies provided herein or otherwise available at law
or in equity to such holder because of a failure by the Corporation to comply
with the terms of this Certificate of Designation. Notwithstanding the
foregoing, if a holder has not received certificates for all shares of Common
Stock prior to the tenth (10th) business day after the expiration of the
Delivery Period with respect to a conversion of shares of Series B Preferred
Stock for any reason, then (unless the holder otherwise elects to retain its
status as a holder of Common Stock by so notifying the Corporation) the holder
shall regain the rights of a holder of
16
such shares of Series B Preferred Stock with respect to such unconverted shares
of Series B Preferred Stock and the Corporation shall, as soon as practicable,
return such unconverted shares of Series B Preferred Stock to the holder or, if
such shares of Series B Preferred Stock have not been surrendered, adjust its
records to reflect that such shares of Series B Preferred Stock have not been
converted. In all cases, the holder shall retain all of its rights and remedies
(including, without limitation, (i) the right to receive Delivery Default
Payments pursuant to Article VI.E to the extent required thereby for such
Delivery Default and any subsequent Delivery Default and (ii) the right to have
the Conversion Price with respect to subsequent conversions determined in
accordance with Article VI.E.) for the Corporation's failure to convert the
Series B Preferred Stock.
VII. AUTOMATIC CONVERSION
Subject to the limitations on conversion set forth in Article
VI.A(c) and so long as (i) all of the shares of Common Stock issuable upon
conversion of all outstanding shares of Series B Preferred Stock are then (x)
authorized and reserved for issuance, (y) registered for re-sale under the 1933
Act by the holders of the Series B Preferred Stock (or may otherwise be resold
publicly without restriction) and (z) eligible to be traded on the OTCBB, Nasdaq
National Market, Nasdaq SmallCap Market, New York Stock Exchange or American
Stock Exchange and (ii) there is not then a continuing Mandatory Redemption
Event or Trading Market Redemption Event, each share of Series B Preferred Stock
issued and outstanding on February 28, 2008 (the "AUTOMATIC CONVERSION Date"),
automatically shall be converted into shares of Common Stock on such date at the
then effective Conversion Price in accordance with, and subject to, the
provisions of Article VI hereof (the "AUTOMATIC CONVERSION"). The Automatic
Conversion Date shall be delayed by one (1) Trading Day for each Trading Day
occurring prior thereto and prior to the full conversion of the Series B
Preferred Stock that (i) any Registration Statement required to be filed and to
be effective pursuant to the Registration Rights Agreement is not effective or
sales of all of the Registrable Securities otherwise cannot be made thereunder
during the Registration Period (as defined in the Registration Rights Agreement)
(whether by reason of the Corporation's failure to properly supplement or amend
the prospectus included therein in accordance with the terms of the Registration
Rights Agreement or otherwise, including during any Allowed Delays (as defined
in Section 3(f) of the Registration Rights Agreement), (ii) any Mandatory
Redemption Event or Trading Market Redemption Event exists, without regard to
whether any cure periods shall have run or (iii) that the Corporation is in
breach of any of its obligations pursuant to Section 4(h) of the Purchase
Agreement. The Automatic Conversion Date shall be the Conversion Date for
purposes of determining the Conversion Price and the time within which
certificates representing the Common Stock must be delivered to the holder.
VIII. VOTING RIGHTS
The holders of the Series B Preferred Stock have no voting
power whatsoever, except as otherwise provided by the Nevada General Corporation
Law (the "NGCL"), in this Article VIII, and in Article IX below.
17
Notwithstanding the above, the Corporation shall provide each
holder of Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least ten (10) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under the NGCL the vote of the holders of
the Series B Preferred Stock, voting separately as a class or series as
applicable, is required to authorize a given action of the Corporation, the
affirmative vote or consent of the holders of at least a majority of the shares
of the Series B Preferred Stock represented at a duly held meeting at which a
quorum is present or by written consent of a majority of the shares of Series B
Preferred Stock (except as otherwise may be required under the NGCL) shall
constitute the approval of such action by the class. To the extent that under
the NGCL holders of the Series B Preferred Stock are entitled to vote on a
matter with holders of Common Stock, voting together as one class, each share of
Series B Preferred Stock shall be entitled to a number of votes equal to the
number of shares of Common Stock into which it is then convertible using the
record date for the taking of such vote of shareholders as the date as of which
the Conversion Price is calculated. Holders of the Series B Preferred Stock
shall be entitled to notice of all shareholder meetings or written consents (and
copies of proxy materials and other information sent to shareholders) with
respect to which they would be entitled to vote, which notice would be provided
pursuant to the Corporation's bylaws and the NGCL.
IX. PROTECTIVE PROVISIONS
So long as shares of Series B Preferred Stock are outstanding,
the Corporation shall not, without first obtaining the approval (by vote or
written consent, as provided by the NGCL) of the holders of at least a majority
of the then outstanding shares of Series B Preferred Stock:
(A) alter, amend or repeal (whether by merger, consolidation or otherwise) the
rights, preferences or privileges of the Series B Preferred Stock or any capital
stock of the Corporation so as to affect adversely the Series B Preferred Stock;
(B) create any new class or series of capital stock having a preference over the
Series B Preferred Stock as to distribution of assets upon liquidation,
dissolution or
18
winding up of the Corporation (as previously defined in Article II hereof,
"SENIOR SECURITIES");
(C) create any new class or series of capital stock ranking pari passu with the
Series B Preferred Stock as to distribution of assets upon liquidation,
dissolution or winding up of the Corporation (as previously defined in Article
II hereof, "PARI PASSU SECURITIES");
(D) increase the authorized number of shares of Series B Preferred Stock;
(E) issue any Senior Securities or Pari Passu Securities;
(F) increase the par value of the Common Stock, or
(G) do any act or thing not authorized or contemplated by this Certificate of
Designation which would result in taxation of the holders of shares of the
Series B Preferred Stock under Section 305 of the Internal Revenue Code of 1986,
as amended (or any comparable provision of the Internal Revenue Code as
hereafter from time to time amended).
In the event holders of at least a majority of the then
outstanding shares of Series B Preferred Stock agree to allow the Corporation to
alter or change the rights, preferences or privileges of the shares of Series B
Preferred Stock, pursuant to subsection (a) above, so as to affect the Series B
Preferred Stock, then the Corporation will deliver notice of such approved
change to the holders of the Series B Preferred Stock that did not agree to such
alteration or change (the "DISSENTING HOLDERS") and Dissenting Holders shall
have the right for a period of thirty (30) days to convert pursuant to the terms
of this Certificate of Designation as they exist prior to such alteration or
change or continue to hold their shares of Series B Preferred Stock.
X. PRO RATA ALLOCATIONS
The Maximum Share Amount and the Reserved Amount (including
any increases thereto) shall be allocated by the Corporation pro rata among the
holders of Series B Preferred Stock based on the number of shares of Series B
Preferred Stock issued to each holder. Each increase to the Maximum Share Amount
and the Reserved Amount shall be allocated pro rata among the holders of Series
B Preferred Stock based on the number of shares of Series B Preferred Stock held
by each holder at the time of the increase in the Maximum Share Amount or
Reserved Amount. In the event a holder shall sell or otherwise transfer any of
such holder's shares of Series B Preferred Stock, each transferee shall be
allocated a pro rata portion of such transferor's Maximum Share Amount and
Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount
which remains allocated to any person or entity which does not hold any Series B
Preferred Stock shall be allocated to the remaining holders of shares of Series
B Preferred Stock, pro rata based on the number of shares of Series B Preferred
Stock then held by such holders.
[Signature Page Follows]
19
IN WITNESS WHEREOF, this Certificate of Designation is
executed on behalf of the Corporation this 25th day of February, 2005.
INSYNQ, INC.
By:_________________________________
John Gorst
Chief Executive Officer
20
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series B Preferred Stock)
The undersigned hereby irrevocably elects to convert ______ shares of
Series B Preferred Stock, represented by stock certificate No(s). __________
(the "PREFERRED STOCK CERTIFICATES") into shares of common stock ("COMMON
STOCK") of Insynq, Inc., a Nevada corporation (the "CORPORATION") according to
the conditions of the Certificate of Designation of Series B Preferred Stock, as
of the date written below. If securities are to be issued in the name of a
person other than the undersigned, the undersigned will pay all transfer taxes
payable with respect thereto and is delivering herewith such certificates. No
fee will be charged to the Holder for any conversion, except for transfer taxes,
if any. A copy of each Preferred Stock Certificate is attached hereto (or
evidence of loss, theft or destruction thereof).
The undersigned hereby irrevocably elects to convert $___________ in
Conversion Default Payments, $__________ in Delivery Default Payments and/or
$___________ in payments pursuant to Section 2(c) of the Registration Rights
Agreement at the Applicable Conversion Price set forth below.
The Corporation shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC
TRANSFER").
Name of DTC Prime Broker: _______________________________
-
Account Number: ________________________________________
In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Corporation issue a certificate or certificates for
the number of shares of Common Stock set for the above (which numbers
are based on the Holder's calculation attached hereto) in the name(s)
specified immediately below or if additional space is necessary, on an
attachment hereto:
Name:_________________________________
Address: _____________________________
_____________________________
1
The undersigned represents and warrants that all offers and sales by
the undersigned of the securities issuable to the undersigned upon conversion of
the Series B Preferred Stock shall be made pursuant to registration of the
securities under the Securities Act of 1933, as amended (the "ACT"), or pursuant
to an exemption from registration under the Act.
Date of Conversion: __________________________
Applicable Conversion Price: ____________________
Number of Shares of
Common Stock to Be Issued pursuant to:
(i) Conversion of Series B Preferred Stock:
________________________________________________________
(ii) Conversion of Conversion Default Payments, Delivery
Default Payments and/or payments pursuant to Section 2(c) of
the Registration Rights Agreement:
--------------------------------------------
Signature: ____________________________________
Name:_______________________________________
Address: _____________________________________
_____________________________________
* The Corporation is not required to issued shares of Common Stock until the
original Series B Preferred Stock Certificate(s) (or evidence of loss, theft or
destruction thereof) to be converted are received by the Corporation or its
Transfer Agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than two (2) business days following receipt
of the original Preferred Stock Certificate(s) to be converted, and shall make
payments pursuant to the Certificate of Designation for the number of business
days such issuance and delivery is late.
2