EXHIBIT 10.5
FORM OF
STATEMENT OF DESIGNATION,
PREFERENCES AND RIGHTS
OF
SERIES F CONVERTIBLE PREFERRED STOCK
OF
DATA RACE, INC.
Pursuant to Article 2.13 of the
Texas Business Corporation Act
Data Race, Inc., a corporation organized and existing under the Texas
Business Corporation Act (the "COMPANY"), does hereby certify that the following
resolutions were adopted by the Board of Directors of the Company on July 20,
1998 pursuant to authority of the Board of Directors as required by Article 2.13
of the Texas Business Corporation Act.
RESOLVED, that pursuant to the authority granted to and vested in the
Board of Directors of this Company (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
Company's previously authorized preferred Stock, no par value (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 F Convertible Preferred Stock:
1. Designation, Amount and Dividends. The designation of this
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series, which consists of 750 shares of Preferred Stock, is the Series F
Convertible Preferred Stock (the "PREFERRED SHARES") and the stated value
shall be One Thousand Dollars ($1,000.00) per share (the "STATED VALUE").
The Preferred Shares shall not bear any dividends.
2. Holder's Conversion of Preferred Shares. A holder of Preferred
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Shares shall have the right, at such holder's option, to convert the
Preferred Shares into shares of the Company's common stock, no par value
per share (the "COMMON STOCK"), on the following terms and conditions:
a. Conversion Right. Subject to the provisions of Section 11
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below, at any time or times on or after the earliest of the first
anniversary of the Issuance Date (as defined below), the Mandatory
Conversion Date (as defined below) or the occurrence of a Triggering Event
(as defined below), any holder of Preferred Shares shall be entitled to
convert any whole number of Preferred Shares into fully paid and
nonassessable shares (rounded to the nearest whole share in accordance with
Section 2(i) below) of Common Stock, at the Conversion Rate (as defined
below); provided, however, that in no event shall any holder be entitled to
convert Preferred Shares in excess of that number of Preferred Shares
which, upon giving effect to such conversion, would cause the aggregate
number of shares of Common Stock beneficially owned by the holder and its
affiliates to exceed 4.99% of the outstanding shares of the Common Stock
following such conversion. For purposes of the foregoing proviso, the
aggregate number of shares of Common Stock beneficially owned by the holder
and its affiliates shall include the number of shares of Common Stock
issuable upon conversion of the Preferred Shares with respect to which the
determination of such proviso is being made, but shall exclude the number
of shares of Common Stock which would be issuable upon (i) conversion of
the remaining, nonconverted Preferred Shares beneficially owned by the
holder and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
(including, without limitation, any warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein
beneficially owned by the holder and its affiliates. Except as set forth in
the preceding sentence, for purposes of this paragraph, beneficial
ownership shall be calculated in accordance with Section 13(d) of the
Securities Exchange Act of 1934, as amended. Each holder may waive the
foregoing limitation with respect to its conversions by written notice to
the Company upon not less than 61 days prior notice (with such waiver
taking effect only upon the expiration of such 61 day notice period), and
such limitation shall not apply to conversions as of the Mandatory
Conversion Date.
b. Conversion Rate. Subject to the other provisions hereof,
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each of the Preferred Shares shall be convertible, at the option of the
holder, into that number of shares of fully paid and nonassessable shares
of Common Stock which is to be derived from dividing the Stated Value by
the Conversion Price (the "Conversion Rate).
For purposes of this Statement of Designation, the following terms shall
have the following meanings:
The "CLOSING BID PRICE" shall mean, for any security as of any
date, the last closing bid price for such security on the Nasdaq National Market
as reported by Bloomberg Financial Markets ("BLOOMBERG"), or, if the Nasdaq
National Market is not the principal trading market for such security, the last
closing bid price of such security on the principal securities exchange or
trading market where such security is listed or traded as reported by Bloomberg,
or if the foregoing do not apply, the last closing bid price of such security in
the over-the-counter market
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on the electronic bulletin board for such security as reported by Bloomberg, or,
if no closing bid price is reported for such security by Bloomberg, the last
closing trade price of such security as reported by Bloomberg, or, if no last
closing trade price is reported for such security by Bloomberg, the average of
the bid prices of any market makers for such security as reported in the "pink
sheets" by the National Quotation Bureau, Inc. If the Closing Bid Price cannot
be calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as mutually determined by the Company and the holders of a majority of the
outstanding Preferred Shares. If the Company and the holders of Preferred Shares
are unable to agree upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 2(g)(iii) below with the term
"Closing Bid Price" being substituted for the term "Market Price". To the extent
required hereunder, all such determinations of the Closing Bid Price shall be
appropriately adjusted for any stock dividend, stock split or other similar
transaction.
"CONVERSION PRICE" means, as of any Conversion Date (as defined
below) or other date of determination, the Fixed Conversion Price.
"FIXED CONVERSION PRICE" means ____ ($___), subject to adjustment
as provided herein. [Prior to filing this Statement the Company shall fill in
the blank with the Market Price (as defined below) of the Common Stock on the
date of the Company's Call pursuant to the Purchase Agreement.]
"ISSUANCE DATE" shall mean, with respect to each Preferred Share,
the date of issuance of the applicable Preferred Share.
"MARKET PRICE" shall mean, with respect to any security for any
date, the arithmetic average of the Closing Bid Price for such security on each
of the five consecutive trading days immediately preceding such date.
c. Premium. The Preferred Shares shall bear a non-compounding
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premium at the rate of eight (8%) percent per annum. Accrual of such premium
shall commence on the Issuance Date. The premium on each Preferred Share shall
be payable by the Company upon conversion of the Preferred Share, at the
Company's option, in cash or, subject to the Exchange Cap as provided in Section
11, in shares of Common Stock (valued at the Market Price on the Conversion
Date) which have been previously registered by the Company for resale by the
holder of the Preferred Shares. The premium on each Preferred Share shall be
payable solely in cash by the Company upon redemption thereof or liquidation.
d. Adjustment to Conversion Price -- Dilution and Other Events.
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In order to prevent dilution of the rights granted under this Statement of
Designation, the Conversion Price will be subject to adjustment from time to
time as provided in this Section 2(d).
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(i) Adjustment of Fixed Conversion Price upon Issuance of
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Common Stock. If and whenever on or after the date of issuance of the Preferred
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Shares, the Company issues or sells, or is deemed to have issued or sold, any
shares of Common Stock (other than shares of Common Stock deemed to have been
issued by the Company in connection with
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Approved Issuances (as defined below)) for a consideration per share less than
the Market Price in effect immediately prior to such time (the "APPLICABLE
PRICE"), then immediately after such issue or sale, the Fixed Conversion Price
shall be reduced to an amount equal to the product of (x) the Fixed Conversion
Price in effect immediately prior to such issue or sale and (y) the quotient
determined by dividing (1) the sum of (I) the product of the Applicable Price
and the number of shares of Common Stock Deemed Outstanding (as defined below)
immediately prior to such issue or sale, and (II) the consideration, if any,
received by the Company upon such issue or sale, by (2) the product of (I) the
Applicable Price and (II) the number of shares of Common Stock Deemed
Outstanding immediately after such issue or sale. For purposes of determining
the adjusted Fixed Conversion Price under this Section 2(d)(i), the following
shall be applicable:
(A) Issuance of Options. If the Company in any manner grants any
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rights or options to subscribe for or to purchase Common Stock (other than
in connection with an Approved Issuance or upon conversion of the Preferred
Shares) or any stock or other securities convertible into or exchangeable
for Common Stock (such rights or options being herein called "OPTIONS" and
such convertible or exchangeable stock or securities being herein called
"CONVERTIBLE SECURITIES") and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or exchange
of such Convertible Securities is less than the Applicable Price, then the
total maximum number of shares of Common Stock issuable upon the exercise
of such Options or upon conversion or exchange of the total maximum amount
of such Convertible Securities issuable upon the exercise of such Options
shall be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For purposes of this Section 2(d)(i)(A),
the "price per share for which Common Stock is issuable upon exercise of
such Options or upon conversion or exchange of such Convertible Securities"
is determined by dividing (I) the total amount, if any, received or
receivable by the Company as consideration for the granting of such
Options, plus the minimum aggregate amount of additional consideration
payable to the Company upon the exercise of all such Options, plus in the
case of such Options which relate to Convertible Securities, the minimum
aggregate amount of additional consideration, if any, payable to the
Company upon the issuance or sale of such Convertible Securities and the
conversion or exchange thereof, by (II) the total maximum number of shares
of Common Stock issuable upon exercise of such Options or upon the
conversion or exchange of all such Convertible Securities issuable upon the
exercise of such Options. No adjustment of the Fixed Conversion Price shall
be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such
Convertible Securities.
(B) Issuance of Convertible Securities. If the Company in any
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manner issues or sells any Convertible Securities and the price per share
for which Common Stock is issuable upon such conversion or exchange is less
than the Applicable Price, then the maximum number of shares of Common
Stock issuable upon conversion or exchange of such Convertible Securities
shall be deemed to be outstanding and to have been issued and sold by the
Company for such price per share. For the purposes of this Section
2(d)(i)(B), the "price per share for which Common Stock is issuable upon
such conversion or exchange" is determined by dividing (I) the total amount
received or receivable by the
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Company as consideration for the issue or sale of such Convertible
Securities, plus the minimum aggregate amount of additional consideration,
if any, payable to the Company upon the conversion or exchange thereof, by
(II) the total maximum number of shares of Common Stock issuable upon the
conversion or exchange of all such Convertible Securities. No adjustment of
the Fixed Conversion Price shall be made upon the actual issue of such
Common Stock upon conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustment of the Fixed Conversion Price
had been or are to be made pursuant to other provisions of this Section
2(d)(i), no further adjustment of the Fixed Conversion Price shall be made
by reason of such issue or sale.
(C) Change in Option Price or Rate of Conversion. If the purchase
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price provided for in any Options, the additional consideration, if any,
payable upon the issue, conversion or exchange of any Convertible
Securities, or the rate at which any Convertible Securities are convertible
into or exchangeable for Common Stock change at any time, the Fixed
Conversion Price in effect at the time of such change shall be readjusted
to the Fixed Conversion Price which would have been in effect at such time
had such Options or Convertible Securities still outstanding provided for
such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold;
provided that no adjustment shall be made if such adjustment would result
in an increase of the Fixed Conversion Price then in effect.
(D) Certain Definitions. For purposes of determining the adjusted
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Fixed Conversion Price under this Section 2(d)(i), the following terms have
meanings set forth below:
(I) "APPROVED ISSUANCES" shall mean (i) a loan from a
commercial bank, (ii) any transaction involving the Company's issuances of
securities (A) as consideration in a merger or consolidation or (B) as
consideration for the acquisition of a business, product or license or
other assets by the Company, (iii) the issuance of Common Stock in a firm
commitment, underwritten public offering, (iv) the issuance of securities
upon exercise or conversion of the Company's options, warrants or other
convertible securities outstanding as of the date hereof, (v) the grant of
additional options or warrants, or the issuance of additional securities,
under any Company stock option plan, restricted stock plan, stock purchase
plan or other plan or written compensation contract for the benefit of the
Company's employees, consultants or directors, (vi) the issuance of
securities pursuant to the Rights Agreement, dated September 15, 1997,
between the Company and ChaseMellon Shareholder Services, L.L.C., as
amended from time to time in accordance with its terms (the "Rights
Agreement"), and (vii) the issuance of securities pursuant to the Purchase
Agreement, or in connection with any of the transactions related thereto.
(II) "COMMON STOCK DEEMED OUTSTANDING" means, at any given
time, the number of shares of Common Stock actually outstanding at such
time, plus the number of shares of Common Stock deemed to be outstanding
pursuant to Sections 2(d)(i)(A) and 2(d)(i)(B) hereof regardless of whether
the Options or Convertible
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Securities are actually exercisable at such time, but excluding any shares
of Common Stock issuable upon conversion of the Preferred Shares.
(E) Treatment of Expired Options and Unexercised Convertible
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Securities. If, in any case, the total number of shares of Common Stock
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issuable upon the exercise of any Option or upon exercise, conversion or
exchange of any Convertible Security is not, in fact, issued and the rights
to exercise such Option or to exercise, convert or exchange such
Convertible Securities shall have expired or terminated, the Fixed
Conversion Price then in effect will be readjusted to the Fixed Conversion
Price which would have been effect at the time of such expiration or
termination had such Option or Convertible Securities, to the extent
outstanding immediately prior to such expiration or termination (other than
in respect of the actual number of shares of Common Stock issued upon
exercise or conversion thereof), never been issued.
(F) Effect on Fixed Conversion Price of Certain Events. For
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purposes of determining the adjusted Fixed Conversion Price under this
Section 2(d)(i), the following shall be applicable:
(I) Calculation of Consideration Received. If any Common
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Stock, Options or Convertible Securities are issued or sold or deemed to
have been issued or sold for cash, the consideration received therefor will
be deemed to be the amount received by the Company therefor, before
deduction of reasonable commissions, underwriting discounts or allowances
or other reasonable expenses paid or incurred by the Company in connection
with such issuance or sale. In case any Common Stock, Options or
Convertible Securities are issued or sold for a consideration other than
cash, the amount of the consideration other than cash received by the
Company will be the fair value of such consideration, except where such
consideration consists of securities, in which case the amount of
consideration received by the Company will be the Market Price of such
security on the date of receipt. In case any Common Stock, Options or
Convertible Securities are issued to the owners of the non-surviving entity
in connection with any merger in which the Company is the surviving entity
the amount of consideration therefor will be deemed to be the fair value of
such portion of the net assets and business of the non-surviving entity as
is attributable to such Common Stock, Options or Convertible Securities, as
the case may be. The fair value of any consideration other than cash or
securities will be determined jointly by the Company and the holders of a
majority of the Preferred Shares then outstanding. If such parties are
unable to reach agreement within ten (10) days after the occurrence of an
event requiring valuation (the "VALUATION EVENT"), the fair value of such
consideration will be determined within forty-eight (48) hours of the tenth
(10th) day following the Valuation Event by an independent, reputable
appraiser selected by the Company. The determination of such appraiser
shall be deemed binding upon all parties absent manifest error.
(II) Integrated Transactions. In case any Option is issued in
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connection with the issue or sale of other securities of the Company,
together comprising one integrated transaction in which no specific
consideration is allocated to such Options by the parties thereto, the
Options will be deemed to have been issued for a consideration of $.01 for
purposes of Section 2(d)(i)(A).
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(III) Treasury Shares. The number of shares of Common Stock
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outstanding at any given time does not include shares owned or held by or
for the account of the Company, and the disposition of any shares so owned
or held will be considered an issue or sale of Common Stock.
(IV) Record Date. If the Company takes a record of the holders
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of Common Stock for the purpose of entitling them (1) to receive a dividend
or other distribution payable in Common Stock, Options or in Convertible
Securities or (2) to subscribe for or purchase Common Stock, Options or
Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been
issued or sold upon the declaration of such dividend or the making of such
other distribution or the date of the granting of such right of
subscription or purchase, as the case may be (assuming such issuance
ultimately occurs).
(ii) Adjustment of Fixed Conversion Price upon Subdivision or
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Combination of Common Stock. If the Company at any time subdivides (by any
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stock split, stock dividend, recapitalization or otherwise) one or more
classes of its outstanding shares of Common Stock into a greater number of
shares, the Fixed Conversion Price in effect immediately prior to such
subdivision will be proportionately reduced. If the Company at any
time combines (by combination, reverse stock split or otherwise) one or
more classes of its outstanding shares of Common Stock into a smaller
number of shares, the Fixed Conversion Price in effect immediately
prior to such combination will be proportionately increased.
(iii) Intentionally omitted.
(iv) Reorganization, Reclassification, Consolidation, Merger or Sale.
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Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Company's assets to another
Person (as defined below) or other transaction which is effected in such a
way that holders of Common Stock are entitled to receive (either directly
or upon subsequent liquidation) stock, securities or assets with respect to
or in exchange for Common Stock, other than a Major Transaction, is
referred to herein as "ORGANIC CHANGE." Prior to the consummation of any
Organic Change, the Company will appropriate provision (in form and
substance reasonably satisfactory to the holders of a majority of the
Preferred Shares then outstanding) to insure that each of the holders of
the Preferred Shares will thereafter have the right to acquire and receive
in lieu of or addition to (as the case may be) the shares of Common Stock
otherwise acquirable and receivable upon the conversion of such holder's
Preferred Shares, such shares of stock, securities or assets that would
have been issued or payable in such Organic Change with respect to or in
exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the conversion of such holder's Preferred
Shares had such Organic Change not taken place (without taking into account
any limitations or restrictions on the timing or amount of conversions). In
any such case, the Company will make appropriate provision (in form and
substance reasonably satisfactory to the holders of a majority of the
Preferred Shares then outstanding) with respect to such holders' rights and
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interests to insure that the provisions of this Section 2(d) and Section
2(e) below will thereafter be applicable to the Preferred Shares
(including, in the case of any such consolidation, merger or sale in which
the successor entity or purchasing entity is other than the Company, an
immediate adjustment of the Fixed Conversion Price to the value for the
Common Stock reflected by the terms of such consolidation, merger or sale,
if the value so reflected is less than the Fixed Conversion Price in effect
immediately prior to such consolidation, merger or sale). The Company will
not effect any such consolidation, merger or sale, other than a Major
Transaction, unless prior to the consummation thereof, the successor entity
(if other than the Company) resulting from consolidation or merger or the
entity purchasing such assets assumes, by written instrument, the
obligation to deliver to each holder of Preferred Shares such shares of
stock, securities or assets as, in accordance with the foregoing
provisions, such holder may be entitled to acquire. "PERSON" shall mean an
individual, a limited liability company, a partnership, a joint venture, a
corporation, a trust, an unincorporated organization and a government or
any department or agency thereof.
(v) Certain Events. If any event occurs of the type contemplated by
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the provisions of this Section 2(d) but not expressly provided for by such
provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity
features), then the Company's Board of Directors will make an appropriate
adjustment in the Conversion Price so as to protect the rights of the
holders of the Preferred Shares; provided that no such adjustment will
increase the Conversion Price as otherwise determined pursuant to this
Section 2(d).
(vi) Notices.
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(A) Immediately upon any adjustment of the Conversion Price, the
Company will give written notice thereof to each holder of Preferred
Shares, setting forth in reasonable detail and certifying the calculation
of such adjustment.
(B) The Company will give written notice to each holder of
Preferred Shares at least twenty (20) days prior to the date on which the
Company closes its books or takes a record (I) with respect to any dividend
or distribution upon the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock or (III) for determining
rights to vote with respect to any Organic Change, dissolution or
liquidation and in no event shall such notice be provided to such holder
prior to such information being made known to the public.
(C) The Company will also give written notice to each holder of
Preferred Shares at least twenty (20) days prior to the date on which any
Organic Change, dissolution or liquidation will take place and in no event
shall such notice be provided to such holder prior to such information
being made known to the public.
e. Purchase Rights. In addition to any adjustments of the
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Conversion Price pursuant to Section 2(d) above, if at any time after the
Issuance Date the Company grants, issues or sells any Options, Convertible
Securities or rights to purchase stock, warrants, securities or
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other property pro rata to the record holders of any class of Common Stock (the
"PURCHASE RIGHTS"), then the holders of Preferred Shares 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
Preferred Shares (without taking into account any limitations or restrictions on
the timing or amount of conversions) 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.
f. [Intentionally omitted.]
g. Mechanics of Conversion. Subject to the Company's inability
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to fully satisfy its obligations under a Conversion Notice (as defined below) as
provided for in Section 4 below:
(i) Holder's Delivery Requirements. To convert Preferred Shares
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into full shares of Common Stock on any date (the "CONVERSION DATE"), the
holder thereof shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m., Eastern Time on such date, a copy of a
fully executed notice of conversion in the form attached hereto as Exhibit
I (the "CONVERSION NOTICE"), to the Company, and (B) surrender to a common
carrier for delivery to the Company as soon as practicable following such
date, the original certificates representing the Preferred Shares being
converted (or an indemnification undertaking with respect to such shares in
the case of their loss, theft or destruction) (the "PREFERRED STOCK
CERTIFICATES") and the originally executed Conversion Notice.
(ii) Company's Response. Upon receipt by the Company of a
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facsimile copy of a Conversion Notice, the Company shall immediately send,
via facsimile, a confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Company of the Preferred Stock Certificates to
be converted pursuant to a Conversion Notice, together with the originally
executed Conversion Notice, the Company or its designated transfer agent
(the "TRANSFER AGENT") (as applicable) shall, on the next business day
following the date of receipt of both (or the second business day following
the date of receipt of both if received after 11:00 a.m. local time of the
Company), (I) issue and surrender to a common carrier for overnight
delivery to the address as specified in the Conversion Notice, a
certificate, registered in the name of the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled, or
(II) credit such aggregate number of shares of Common Stock to which the
holder shall be entitled to the holder's or its designee's balance account
with The Depository Trust Company. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) submitted for conversion
is greater than the number of Preferred Shares being converted, then the
Company shall, as soon as practicable and in no event later than two
business days after receipt of the Preferred Stock Certificate(s) and at
its own expense, issue and deliver to the holder a new Preferred Stock
Certificate representing the number of Preferred Shares not converted.
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(iii) Dispute Resolution. In the case of a dispute as
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to the determination of the Market Price or the arithmetic calculation of
the Conversion Rate, the Company shall promptly issue to the holder the
number of shares of Common Stock that is not disputed and shall submit the
disputed determinations or arithmetic calculations to the holder via
facsimile as soon as possible, but in no event later than two (2) business
days after receipt of such holder's Conversion Notice. If such holder and
the Company are unable to agree upon the determination of the Market Price
or arithmetic calculation of the Conversion Rate within one (1) business
day of such disputed determination or arithmetic calculation being
submitted to the holder, then the Company shall within one (1) business day
submit via facsimile (A) the disputed determination of the Market Price to
an independent, reputable investment bank or (B) the disputed arithmetic
calculation of the Conversion Rate to its independent, outside accountant.
The Company shall cause the investment bank or the accountant, as the case
may be, to perform the determinations or calculations and notify the
Company and the holder of the results no later than forty-eight (48) hours
from the time it receives the disputed determinations or calculations. Such
investment bank's or accountant's determination or calculation, as the case
may be, shall be binding upon all parties absent manifest error. The period
of time in which the Company is required to effect conversions or
redemptions under this Statement of Designations shall be tolled with
respect to the subject conversion or redemption pending resolution of any
dispute by the Company made in good faith and in accordance with this
Section 2(g)(iii).
(iv) Record Holder. The person or persons entitled to receive
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the shares of Common Stock issuable upon a conversion of Preferred Shares
shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within three (3)
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business days of the Company's receipt of the Conversion Notice (the "SHARE
DELIVERY PERIOD") the Company shall fail to issue a certificate to a holder
for the number of shares of Common Stock to which such holder is entitled
upon such holder's conversion of Preferred Shares or to issue a new
Preferred Stock Certificate representing the number of Preferred Shares to
which such holder is entitled pursuant to Section 2(g)(ii) (a "CONVERSION
FAILURE"), in addition to all other available remedies which such holder
may pursue hereunder and under the Purchase Agreement between the Company
and the initial holders of the Preferred Shares (the " PURCHASE AGREEMENT")
(including indemnification), the Company shall pay additional damages to
such holder for each business day after such third (3rd) business day that
such conversion is not timely effected in an amount equal to two (2%)
percent per month of the product of (A) the number of shares of Common
Stock not issued to the holder on a timely basis pursuant to Section
2(g)(ii) and to which such holder is entitled, and (B) the Closing Bid
Price of the Common Stock on the last possible date which the Company could
have issued such Common Stock to such holder without violating Section
2(g)(ii). If the Company fails to pay the additional damages set forth in
this Section 2(g)(v) within five business days of the date incurred, then
the holder entitled to such payments shall have the right at any time, so
long as the Company continues to fail to make such payments, to require the
Company, upon written notice, to immediately issue, in lieu of
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the cash additional damages set forth in this Section 2(g)(v), the number
of shares of Common Stock equal to the quotient of (X) the aggregate amount
of the additional damages payments described above divided by (Y) the
Market Price in effect on such Conversion Date as is specified by the
holder in writing to the Company. Payment of the additional damages shall
not relieve the Company of its obligation to send the shares of Common
Stock to the holder upon conversion.
h. Mandatory Conversion. Subject to Section 11, if any
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Preferred Shares remain outstanding on the Mandatory Conversion Date (as
defined below), then all such Preferred Shares shall be converted as of
such date in accordance with this Section 2 as if the holders of such
Preferred Shares had given the Conversion Notice on the Mandatory
Conversion Date; provided, however, that if a Triggering Event has occurred
and is continuing on the Mandatory Conversion Date, then the Company shall,
within five business days following the Mandatory Conversion Date (unless
otherwise notified in writing by the holder of its request to have the
Preferred Shares converted into Common Stock), pay to each holder of
Preferred Shares then outstanding, in immediately available funds, an
amount equal to the Triggering Event Redemption Price as of the Mandatory
Conversion Date. All holders of Preferred Shares shall thereupon surrender
all Preferred Stock Certificates, duly endorsed for cancellation, to the
Company or the Transfer Agent, provided that the Company has complied with
its obligations under this Section 2(h). Notwithstanding the foregoing,
except in the case of a Major Transaction, if the Common Stock is not
designated for quotation on the Nasdaq National Market or listed on The New
York Stock Exchange, Inc. or The American Stock Exchange, Inc. but such
events do not constitute a Triggering Event, then the Mandatory Conversion
Date shall be extended until the Common Stock is so designated or listed.
"MANDATORY CONVERSION DATE" means the date which is the earlier of five
years after the applicable Issuance Date, subject to extension as described
in the immediately preceding sentence, or immediately prior to a Major
Transaction.
i. Fractional Shares. The Company shall not issue any fraction
-----------------
of a share of Common Stock upon any conversion. All shares of Common Stock
(including fractions thereof) issuable upon conversion of more than one
Preferred Share by a holder thereof shall be aggregated for purposes of
determining whether the conversion would result in the issuance of a
fraction of a share of Common Stock. If, after the aforementioned
aggregation, the issuance would result in the issuance of a fraction of a
share of Common Stock, the Company shall round such fraction of a share of
Common Stock up or down to the nearest whole share.
j. Taxes. The Company shall pay any and all taxes which may be
-----
imposed upon it with respect to the issuance and delivery of Common Stock
upon the conversion of the Preferred Shares.
-11-
3. Redemption at Option of Holders.
-------------------------------
a. Redemption Option Upon Major Transaction. In addition to
----------------------------------------
all other rights of the holders of Preferred Shares contained herein,
simultaneous with the occurrence of a Major Transaction (as defined below),
each holder of Preferred Shares shall have the right, at such holder's
option, to require the Company to redeem all or a portion of such holder's
Preferred Shares at a price per Preferred Share equal to 120% of the
Liquidation Preference (as defined in Section 8 below) ("MAJOR TRANSACTION
REDEMPTION PRICE").
b. Redemption Option Upon Triggering Event. In addition to all
---------------------------------------
other rights of the holders of Preferred Shares contained herein, after a
Triggering Event (as defined below), each holder of Preferred Shares shall
have the right, at such holder's option, to require the Company to redeem
all or a portion of such holder's Preferred Shares at a price per Preferred
Share equal to 120% of the Liquidation Preference ("TRIGGERING EVENT
REDEMPTION PRICE" and, collectively with "MAJOR TRANSACTION REDEMPTION
PRICE," the "REDEMPTION PRICE").
c. "Major Transaction". A "MAJOR TRANSACTION" shall be deemed
-------------------
to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business
combination of the Company with or into another Person which requires or
receives the consent or recommendation of the Company's Board of Directors
(excluding a consolidation, merger or other business combination in which
holders of the Company's voting power immediately prior to the transaction
continue after the transaction to hold, directly or indirectly, the voting
power of the surviving entity or entities necessary to elect a majority of
the members of the board of directors (or their equivalent if other than a
corporation) of such entity or entities and excluding a short-form merger
effected without the consent or recommendation of the Company's Board of
Directors) (an "EXEMPT MAJOR TRANSACTION").
(ii) the sale or transfer of all or substantially all of
the Company's assets or rights to the "Be There!" business or product line
other than in connection with a disposition to a subsidiary of the Company;
or
(iii) consummation of a purchase, tender or exchange offer
made to the holders of more than 50% of the outstanding shares of Common
Stock which requires or receives the consent or recommendation of the
Company's Board of Directors.
d. "Triggering Event". A "TRIGGERING EVENT" shall be deemed to
------------------
have occurred at such time as any of the following events (other than in
connection with a Major Transaction):
(i) the failure of the Registration Statement to be
declared effective by the SEC on or prior to the date that is 150 days
after the Demand;
-12-
(ii) while the Registration Statement is required to be
maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Preferred Shares for sale of all of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such
lapse or unavailability continues for a period of thirty (30) consecutive
trading days, provided that the cause of such lapse or unavailability is
not due to factors solely within the control of such holder of Preferred
Shares;
(iii) the Company undertakes any voluntary action to
terminate the quotation or listing of the Common Stock on the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc., unless such action is taken in connection with the
continued quotation or listing of the Common Stock on another of the Nasdaq
National Market, The New York Stock Exchange, Inc. or The American Stock
Exchange, Inc.;
(iv) the Company's failure to deliver shares of Common
Stock within 15 days of its receipt of a Conversion Notice (together with
the Preferred Stock Certificate) or the Company's notice to any holder of
Preferred Shares, including by way of public announcement, at any time, of
its intention not to comply with proper requests for conversion of any
Preferred Shares into shares of Common Stock, other than due to any of the
reasons set forth in Section 4(a) below; or
(v) if the Company pursuant to or within the meaning of
Title 11, U.S. Code, or any similar federal or state law for the relief of
debtors ("BANKRUPTCY LAW"), (I) commences a voluntary case, (II) consents
to the entry of an order for relief against it in any involuntary case,
(III) consents to the appointment of a receiver, trustee, assignee,
liquidator or similar official under any Bankruptcy Law (a "CUSTODIAN") of
it or for all or substantially all of its property, (IV) makes a general
assignment for the benefit of its creditors, or (V) admits in writing that
it is generally unable to pay its debts as the same become due.
e. Mechanics of Redemption at Option of Buyer Upon Major
-----------------------------------------------------
Transaction. No sooner than 15 days nor later than 10 days prior to the
-----------
consummation of a Major Transaction, but not prior to the public
announcement of such Major Transaction, the Company shall deliver written
notice thereof via facsimile and overnight courier ("NOTICE OF MAJOR
TRANSACTION") to each holder of Preferred Shares. At any time after receipt
of a Notice of Major Transaction (or, in the event a Notice of Major
Transaction is not delivered at least 10 days prior to a Major Transaction,
at any time within 10 days prior to a Major Transaction), any holder of
Preferred Shares then outstanding may require the Company to redeem,
effective immediately prior to the consummation of such Major Transaction,
all of the holder's Preferred Shares then outstanding by delivering written
notice thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION
AT OPTION OF BUYER UPON MAJOR TRANSACTION") to the Company, which Notice of
Redemption at Option of Buyer Upon Major Transaction shall indicate (i) the
number of Preferred Shares that such holder is
-13-
electing to redeem and (ii) the applicable Major Transaction Redemption
Price, as calculated pursuant to Section 3(a) above. Preferred Shares which
are not required to be redeemed pursuant to this paragraph are subject to
mandatory conversion as provided herein.
f. Mechanics of Redemption at Option of Buyer Upon Triggering
----------------------------------------------------------
Event. Within one (1) day after the occurrence of a Triggering Event, the
-----
Company shall deliver written notice thereof via facsimile and overnight
courier ("NOTICE OF TRIGGERING EVENT") to each holder of Preferred Shares.
At any time after the earlier of a holder's receipt of a Notice of
Triggering Event and such holder becoming aware of a Triggering Event, any
holder of Preferred Shares then outstanding may require the Company to
redeem all of the Preferred Shares by delivering written notice thereof via
facsimile and overnight courier ("NOTICE OF REDEMPTION AT OPTION OF BUYER
UPON TRIGGERING EVENT") to the Company, which Notice of Redemption at
Option of Buyer Upon Triggering Event shall indicate (i) the number of
Preferred Shares that such holder is electing to redeem and (ii) the
applicable Triggering Event Redemption Price, as calculated pursuant to
Section 3(b) above.
g. Payment of Redemption Price. Upon the Company's receipt of
---------------------------
a Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction from any
holder of Preferred Shares or Pari Passu Shares (as defined in Section 8),
the Company shall immediately notify each holder of Preferred Shares and
Pari Passu Shares by facsimile of the Company's receipt of such Notice(s)
of Redemption at Option of Buyer Upon Triggering Event or Notice(s) of
Redemption at Option of Buyer Upon Major Transaction and each holder which
has sent such a notice shall promptly submit to the Company or its Transfer
Agent such holder's Preferred Stock Certificates which such holder has
elected to have redeemed. The Company shall deliver the applicable
Triggering Event Redemption Price, in the case of a redemption pursuant to
Section 3(f), to such holder within five business days after the Company's
receipt of a Notice of Redemption at Option of Buyer Upon Triggering Event
and, in the case of a redemption pursuant to Section 3(e), the Company
shall deliver the applicable Major Transaction Redemption Price immediately
prior to the consummation of the Major Transaction; provided that a
holder's Preferred Stock Certificates shall have been so delivered to the
Company; provided further that if the Company is unable to redeem all of
the Preferred Shares and Pari Passu Shares to be redeemed (because of
insufficient funds to lawfully effect such redemption), the Company shall
redeem an amount from each holder of Preferred Shares and Pari Passu Shares
being redeemed equal to such holder's pro-rata amount (based on the
relative redemption amounts of all holders of Preferred Shares and Pari
Passu Shares) of all Preferred Shares and Pari Passu Shares being redeemed.
If the Company shall fail to redeem all of the Preferred Shares submitted
for redemption (other than pursuant to a dispute as to the arithmetic
calculation of the Redemption Price), in addition to any remedy such holder
of Preferred Shares may have under this Statement of Designations and the
Purchase Agreement, the applicable Redemption Price payable in respect of
such unredeemed Preferred Shares shall bear interest at the rate of 2.0%
per month (prorated for partial months) until paid in full. Until the
Company pays such unpaid applicable Redemption Price in full to a holder of
Preferred Shares submitted for redemption, such holder shall have the
option (the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of redemption,
require the Company to promptly return to such holder(s) all of the
-14-
Preferred Shares that were submitted for redemption by such holder(s) under
this Section 3 and for which the applicable Redemption Price has not been
paid, by sending written notice thereof to the Company via facsimile (the
"VOID OPTIONAL REDEMPTION NOTICE"). Upon the Company's receipt of such Void
Optional Redemption Notice(s) and prior to payment of the full applicable
Redemption Price to such holder, (i) the Notice(s) of Redemption at Option
of Buyer Upon Triggering Event or the Notice(s) of Redemption at Option of
Buyer Upon Major Transaction, as the case may be, shall be null and void
with respect to those Preferred Shares submitted for redemption and for
which the applicable Redemption Price has not been paid, and (ii) the
Company shall immediately return any Preferred Shares submitted to the
Company by each holder for redemption under this Section 3(g) and for which
the applicable Redemption Price has not been paid. Notwithstanding the
foregoing, in the event of a dispute as to the determination of the Closing
Bid Price or the arithmetic calculation of the Redemption Price, such
dispute shall be resolved pursuant to Section 2(g)(iii) above with the term
"Closing Bid Price" being substituted for the term "Average Market Price"
and the term "Redemption Price" being substituted for the term "Conversion
Rate". A holder's delivery of a Void Optional Redemption Notice and
exercise of its rights follo wing such notice shall not affect the
Company's obligations to make any payments which have accrued prior to the
date of such notice. Payments provided for in this Section 3 shall have
priority to payments to other stockholders, other than any required
payments with respect to shares of the Company's Series A Convertible
Preferred Stock which were outstanding on the Issuance Date, in connection
with a Major Transaction.
4. Inability to Fully Convert.
--------------------------
a. Holder's Option if Company Cannot Fully Convert. If, upon
-----------------------------------------------
the Company's receipt of a Conversion Notice or on the Mandatory Conversion
Date, the Company can not issue shares of Common Stock registered for
resale under the Registration Statement for any reason, including, without
limitation, because the Company (x) does not have a sufficient number of
shares of Common Stock authorized and available, (y) is otherwise
prohibited by applicable law or by the rules or regulations of any stock
exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Company or its Securities,
including without limitation the Exchange Cap, from issuing all of the
Common Stock which is to be issued to a holder of Preferred Shares pursuant
to a Conversion Notice or (z) fails to have a sufficient number of shares
of Common Stock registered for resale under the Registration Statement,
then the Company shall issue as many shares of Common Stock as it is able
to issue in accordance with such holder's Conversion Notice and pursuant to
Section 2(g) above and, with respect to the unconverted Preferred Shares,
the holder, solely at such holder's option, can elect to:
(i) require the Company to redeem from such holder those
Preferred Shares for which the Company is unable to issue Common Stock in
accordance with such holder's Conversion Notice ("MANDATORY REDEMPTION") at
a price per Preferred Share (the "MANDATORY REDEMPTION PRICE") equal to the
Triggering Event Redemption Price as of such Conversion Date;
-15-
(ii) if the Company's inability to fully convert Preferred
Shares is pursuant to Section 4(a)(z) above, require the Company to issue
restricted shares of Common Stock in accordance with such holder's
Conversion Notice and pursuant to Section 2(g) above;
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the nonconverted Preferred Shares that were
to be converted pursuant to such holder's Conversion Notice (provided that
a holder's voiding its Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of
such notice); or
(iv) if the Company's inability to fully convert Preferred
Shares is pursuant to the Exchange Cap described in Section 4(a)(y) above,
and the issuance of additional Conversion Shares at a Conversion Price
equal to the Market Price would not violate the rules or regulations of The
Nasdaq Stock Market, Inc., then, subject to Section 11, require the Company
to issue shares of Common Stock in accordance with such holder's Conversion
Notice and pursuant to Section 2(g) above at a Conversion Price equal to
the Market Price of the Common Stock on the date of such holder's Notice in
Response to Inability to Convert (as defined below).
b. Mechanics of Fulfilling Holder's Election. The Company
-----------------------------------------
shall immediately send via facsimile to a holder of Preferred Shares, upon
receipt of a facsimile copy of a Conversion Notice from such holder which
cannot be fully satisfied as described in Section 4(a) above, a notice of
the Company's inability to fully satisfy such holder's Conversion Notice
(the "INABILITY TO FULLY CONVERT NOTICE"). Such Inability to Fully Convert
Notice shall indicate (i) the reason why the Company is unable to fully
satisfy such holder's Conversion Notice, (ii) the number of Preferred
Shares which cannot be converted and (iii) the applicable Mandatory
Redemption Price. Such holder shall notify the Company of its election
pursuant to Section 4(a) above by delivering written notice via facsimile
to the Company ("NOTICE IN RESPONSE TO INABILITY TO CONVERT").
c. Payment of Redemption Price. If such holder shall elect to
---------------------------
have its shares redeemed pursuant to Section 4(a)(i) above, the Company
shall pay the Mandatory Redemption Price in cash to such holder within
thirty (30) days of the Company's receipt of the holder's Notice in
Response to Inability to Convert, provided that prior to the Company's
receipt of the holder's Notice in Response to Inability to Convert the
Company has not delivered a notice to such holder stating, to the
satisfaction of the holder, that the event or condition resulting in the
Mandatory Redemption has been cured and all Conversion Shares issuable to
such holder can and will be delivered to the holder in accordance with the
terms of Section 2(g). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in
this Section 4(c) (other than pursuant to a dispute as to the determination
of the arithmetic calculation of the Redemption Price), in addition to any
remedy such holder of Preferred Shares may have under this Statement of
Designations and the Securities Purchase Agreement, such unpaid amount
shall bear interest at the rate of 2.0% per month (prorated for partial
months) until paid in full. Until the full Mandatory Redemption Price is
paid in full to such holder, such holder may void the
-16-
Mandatory Redemption with respect to those Preferred Shares for which the
full Mandatory Redemption Price has not been paid and receive back such
Preferred Shares. Notwithstanding the foregoing, if the Company fails to
pay the applicable Mandatory Redemption Price within such thirty (30) days
time period due to a dispute as to the determination of the arithmetic
calculation of the Redemption Rate, such dispute shall be resolved pursuant
to Section 2(g)(iii) above with the term "Redemption Price" being
substituted for the term "Conversion Rate".
d. Pro-rata Conversion and Redemption. In the event the
----------------------------------
Company receives a Conversion Notice from more than one holder of Preferred
Shares or Pari Passu Shares on the same day and the Company can convert and
redeem some, but not all, of the Preferred Shares or Pari Passu Shares
pursuant to this Section 4, the Company shall convert and redeem from each
holder of Preferred Shares or Pari Passu Shares electing to have Preferred
Shares or Pari Passu Shares converted and redeemed at such time an amount
equal to such holder's pro-rata amount (based on the relative redemption
amounts of all holders of Preferred Shares and Pari Passu shares) of all
Preferred Shares and Pari Passu Shares being converted and redeemed at such
time.
e. Involuntary Delisting. In the event the Common Stock at any
---------------------
time is not designated for quotation on the Nasdaq National Market or
listed on The New York Stock Exchange, Inc. or The American Stock Exchange,
Inc. but such events do not constitute a Triggering Event and are not in
connection with a Major Transaction, then in addition to any other remedies
the holders of Preferred Shares may have at law or in equity, the Company
shall pay to each holder of Preferred Shares an amount in cash per
Preferred Share on each day that the Common Stock is not so designated or
listed equal to the product of the Liquidation Preference multiplied by
1.0%, provided that the Company shall not be required to make such payments
for more than 24 consecutive days. The Company's failure to pay such
amounts on each day they are due shall constitute a Triggering Event for
purposes of Section 3.
5. Reissuance of Certificates. In the event of a conversion or
--------------------------
redemption pursuant to this Statement of Designations of less than all of
the Preferred Shares represented by a particular Preferred Stock
Certificate, the Company shall promptly cause to be issued and delivered to
the holder of such Preferred Shares a preferred stock certificate
representing the remaining Preferred Shares which have not been so
converted or redeemed.
6. Reservation of Shares. Subject to the Exchange Cap in Section
---------------------
11, the Company shall, so long as any of the Preferred Shares are
outstanding, reserve and keep available out of its authorized and unissued
Common Stock, solely for the purpose of effecting the conversion of the
Preferred Shares, such number of shares of Common Stock as shall from time
to time be sufficient to effect the conversion of all of the Preferred
Shares then outstanding; provided that the number of shares of Common Stock
so reserved shall at no time be less than 200% of the number of shares of
Common Stock for which the Preferred Shares are at any time convertible
(subject to the Exchange Cap if lower). The initial number of shares of
Common Stock reserved for conversions of the Preferred Shares and each
increase in the number of shares so reserved shall be allocated pro rata
among the
-17-
holders of the Preferred Shares based on the number of Preferred Shares
held by each holder at the time of issuance of the Preferred Shares or
increase in the number of reserved shares, as the case may be. In the event
a holder shall sell or otherwise transfer any of such holder's Preferred
Shares, each transferee shall be allocated a pro rata portion of the number
of reserved shares of Common Stock reserved for such transferor. Any shares
of Common Stock reserved and which remain allocated to any person or entity
which does not hold any Preferred Shares shall be allocated to the
remaining holders of Preferred Shares, pro rata based on the number of
Preferred Shares then held by such holder.
7. Voting Rights. Holders of Preferred Shares shall have no voting
-------------
rights (including with respect to a Major Transaction), except as expressly
required by law, including but not limited to the Texas Business
Corporation Act, and as expressly provided in this Statement of
Designations.
8. Liquidation, Dissolution, Winding-Up. In the event of any
------------------------------------
voluntary or involuntary liquidation, dissolution or winding up of the
Company, the holders of the Preferred Shares shall be entitled to receive
in cash out of the assets of the Company, whether from capital or from
earnings available for distribution to its stockholders (the "PREFERRED
FUNDS"), after all required payments with respect to shares of the
Company's Series A Convertible Preferred Stock which were outstanding on
the Issuance Date, but before any amount shall be paid to the holders of
any of the capital stock of the Company of any class junior in rank to the
Preferred Shares in respect of the preferences as to the distributions and
payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the Stated Value plus all accrued and
unpaid premium thereon (such sum being referred to as the "LIQUIDATION
PREFERENCE"); provided that, if the Preferred Funds are insufficient to pay
the full amount due to the holders of Preferred Shares and holders of the
Company's Series D Convertible Preferred Stock and Series E Convertible
Preferred Stock (the "Pari Passu Shares"), which are of equal rank with the
Preferred Shares as to payments of Preferred Funds (and redemption
amounts), then each holder of Preferred Shares and Pari Passu Shares shall
receive a percentage of the Preferred Funds equal to the full amount of
Preferred Funds payable to such holder as a liquidation preference, in
accordance with their respective Statement of Designations, Preferences and
Rights, as a percentage of the full amount of Preferred Funds payable to
all holders of Preferred Shares and Pari Passu Shares. The purchase or
redemption by the Company of stock of any class, in any manner permitted by
law, shall not, for the purposes hereof, be regarded as a liquidation,
dissolution or winding up of the Company. Neither the consolidation or
merger of the Company with or into any other Person, nor the sale or
transfer by the Company of less than substantially all of its assets,
shall, for the purposes hereof, be deemed to be a liquidation, dissolution
or winding up of the Company. No holder of Preferred Shares shall be
entitled to receive any amounts with respect thereto upon any liquidation,
dissolution or winding up of the Company other than the amounts provided
for herein; provided that a holder of Preferred Shares shall be entitled to
all amounts previously accrued with respect to amounts owed hereunder.
9. Preferred Rank; Participation. (i) All shares of Common Stock
-----------------------------
shall be of junior rank to all Preferred Shares and Pari Passu Shares in
respect to the preferences as to
-18-
distributions and payments upon the liquidation, dissolution and winding up
of the Company. The rights of the shares of Common Stock shall be subject
to the preferences and relative rights of the Preferred Shares and Pari
Passu Shares. Without the prior express written consent of the holders of
not less than three-fourths (3/4) of the then outstanding Preferred Shares
and Pari Passu Shares, the Company shall not hereafter authorize or issue
additional or other capital stock that is of senior or equal rank to the
Preferred Shares and Pari Passu Shares in respect of the preferences as to
distributions and payments upon the liquidation, dissolution and winding up
of the Company. Without the prior express written consent of the holders of
not less than three-fourths (3/4) of the then outstanding Preferred Shares
and Pari Passu Shares, the Company shall not hereafter authorize or make
any amendment to the Company's Articles of Incorporation or bylaws, or file
any resolution of the board of directors of the Company with the Texas
Secretary of State containing any provisions, which would adversely affect
or otherwise impair the rights or relative priority of the holders of the
Preferred Shares and Pari Passu Shares relative to the holders of the
Common Stock or the holders of any other class of capital stock; provided
that the foregoing shall not affect the Company's ability to effect a Major
Transaction. In the event of the merger or consolidation of the Company
with or into another corporation (other than a Major Transaction), the
Preferred Shares and Pari Passu Shares shall maintain their relative
powers, designations and preferences provided for herein and no merger
shall result inconsistent therewith.
(ii) Subject to the rights of the holders, if any, of the Parri Passu
Shares, the holders of the Preferred Shares shall, as holders of Preferred
Stock, be entitled to such dividends paid and distributions made to the
holders of Common Stock to the same extent as if such holders of Preferred
Shares had converted the Preferred Shares into Common Stock (without regard
to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and
distributions. Payments under the preceding sentence shall be made
concurrently with the dividend or distribution to the holders of Common
Stock; provided that the holders of the Preferred Shares shall be entitled
to such dividends and distributions only to the extent that they exceed an
amount per Preferred Share equal to $1,000, plus the accrued premium
thereon.
10. Restriction on Redemption and Cash Dividends with respect to
------------------------------------------------------------
Other Capital Stock. Until all of the Preferred Shares have been converted
-------------------
or redeemed as provided herein, except as permitted in the Rights
Agreement, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or cash distribution on, its Common Stock
without the prior express written consent of the holders of not less than
two-thirds (2/3) of the then outstanding Preferred Shares.
11. Limitation on Number of Conversion Shares. Notwithstanding any
-----------------------------------------
other provision herein, the Company shall not be obligated to issue any
shares of Common Stock upon conversion of the Preferred Shares and Pari
Passu Shares if the issuance of such shares of Common Stock would exceed
that number of shares of Common Stock which the Company may issue upon
Conversion of the Preferred Shares and Pari Passu Shares (the "EXCHANGE
CAP") without breaching the Company's obligations under the rules or
regulations of The Nasdaq Stock Market, Inc., except that such limitation
shall not apply in
-19-
the event that the Company (a) obtains the approval of its stockholders as
required by NASD Rule 4460 (or any successor rule or regulation) for
issuances of Common Stock in excess of such amount or (ii) obtains a
written opinion from outside counsel to the Company that such approval is
not required, which opinion shall be reasonably satisfactory to the holders
of a majority of the Preferred Shares then outstanding. Until such approval
or written opinion is obtained, no purchaser of Preferred Shares and Pari
Passu Shares pursuant to the Purchase Agreement (the "PURCHASERS") shall be
issued, upon conversion of Preferred Shares and Pari Passu Shares, shares
of Common Stock in an amount greater than the product of (i) the Exchange
Cap amount multiplied by (ii) a fraction, the numerator of which is the
number of Preferred Shares and Pari Passu Shares issued to such Purchaser
pursuant to the Purchase Agreement and the denominator of which is the
aggregate amount of all the Preferred Shares and Pari Passu Shares issued
to the Purchasers pursuant to the Purchase Agreement (the "CAP ALLOCATION
AMOUNT"). In the event that any Purchaser shall sell or otherwise transfer
any of such Purchaser's Preferred Shares and Pari Passu Shares, the
transferee shall be allocated a pro rata portion of such Purchaser's Cap
Allocation Amount. In the event that any holder of Preferred Shares and
Pari Passu Shares shall convert all of such holder's Preferred Shares and
Pari Passu Shares into a number of shares of Common Stock which, in the
aggregate, is less than such holder's Cap Allocation Amount, then the
difference between such holder's Cap Allocation Amount and the number of
shares of Common Stock actually issued to such holder shall be allocated to
the respective Cap Allocation Amounts of the remaining holders of Preferred
Shares and Pari Passu Shares on a pro rata basis in proportion to the
number of Preferred Shares then held by each such holder.
12. Vote to Change the Terms of Preferred Shares. The affirmative
--------------------------------------------
vote at a meeting duly called for such purpose or the written consent
without a meeting, of the holders of not less than two-thirds (2/3) of the
then outstanding Preferred Shares and Pari Passu Shares, shall be required
for any change to this Statement of Designations or the Company's
Certificate of Incorporation which would amend, alter, change or repeal any
of the powers, designations, preferences and rights of the Preferred
Shares.
13. Lost or Stolen Certificates. Upon receipt by the Company of
---------------------------
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any
indemnification undertaking by the holder to the Company and, in the case
of mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall
not be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares
into Common Stock.
14. Remedies, Characterizations, Other Obligations, Breaches and
------------------------------------------------------------
Injunctive Relief. The remedies provided in this Statement of Designations
-----------------
shall be cumulative and in addition to all other remedies available under
this Statement of Designations, at law or in equity (including a decree of
specific performance and/or other injunctive relief), no remedy contained
herein shall be deemed a waiver of compliance with the provisions giving
rise to such remedy and nothing herein shall limit a holder's right to
pursue actual damages for any
-20-
failure by the Company to comply with the terms of this Statement of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as
expressly provided herein. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof)
shall be the amounts to be received by the holder thereof and shall not,
except as expressly provided herein, be subject to any other obligation of
the Company (or the performance thereof). The Company acknowledges that a
breach by it of its obligations hereunder will cause irreparable harm to
the holders of the Preferred Shares and that the remedy at law for any such
breach may be inadequate. The Company therefore agrees that, in the event
of any such breach or threatened breach, the holders of the Preferred
Shares shall be entitled, in addition to all other available remedies, to
an injunction restraining any breach, without the necessity of showing
economic loss and without any bond or other security being required.
15. Specific Shall Not Limit General; Construction. No specific
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provision contained in this Statement of Designations shall limit or modify
any more general provision contained herein. This Statement of Designations
shall be deemed to be jointly drafted by the Company and all holders of
Preferred Shares and shall not be construed against any person as the
drafter hereof.
16. Failure or Indulgence Not Waiver. No failure or delay on the
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part of a holder of Preferred Shares in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any such power, right or privilege preclude other or
further exercise thereof or of any other right, power or privilege.
[Remainder of Page Intentionally Left Blank]
[Signature Page Follows]
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IN WITNESS WHEREOF, the Company has caused this Statement of Designations
to be signed on behalf of the Company, as of the _____ day of ______________.
DATA RACE, INC.
By:
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Gregory T. Skalla
Vice President-Finance
Chief Financial Officer
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EXHIBIT I
DATA RACE, INC.
CONVERSION NOTICE
Reference is made to the Statement of Designations, Preferences and Rights of
Series F Convertible Preferred Stock (the "STATEMENT OF DESIGNATIONS"). In
accordance with and pursuant to the Statement of Designations, the undersigned
hereby elects to convert the number of shares of Series F Convertible Preferred
Stock, no par value per share (the "PREFERRED SHARES"), of Data Race, Inc., a
Texas corporation (the "COMPANY"), indicated below into shares of Common Stock,
no par value per share (the "COMMON STOCK"), of the Company, by tendering the
stock certificate(s) representing the share(s) of Preferred Shares specified
below as of the date specified below.
Date of Conversion:
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Number of Preferred Shares to be converted:
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Stock certificate no(s). of Preferred Shares to be converted:
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Please confirm the following information:
Conversion Price:
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Number of shares of Common Stock
to be issued:
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Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
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Facsimile Number:
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Authorization:
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By:
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Title:
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Dated:
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Account Number:
(if electronic book entry transfer):
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Transaction Code Number
(if electronic book entry transfer):
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