CERTIFICATE OF DESIGNATIONS
OF
PREFERRED STOCK
OF
AVITAR, INC.
To Be Designated
6% Convertible Preferred Stock
Pursuant to Section 151(g) of the
General Corporation Law of the State of Delaware
The undersigned DO HEREBY CERTIFY that the following resolution was
duly adopted by the Board of Directors of Avitar, Inc., a Delaware corporation
(the "Corporation"), at a meeting duly convened and held, at which a quorum was
present and acting throughout:
"RESOLVED, that pursuant to the authority conferred on the Board of
Directors of the Corporation (the "Board of Directors") by the
Corporation's Certificate of Incorporation, the issuance of a series of
preferred stock, par value $0.001 per share, of the Corporation which shall
consist of 2,000 shares of preferred stock be, and the same hereby is,
authorized; and the Chief Executive Officer and Secretary or Assistant
Secretary of the Corporation be, and they hereby are, authorized and
directed to execute and file with the Secretary of State of the State of
Delaware a Certificate of Designations of Preferred Stock of the
Corporation fixing the designations, powers, preferences and rights of the
shares of such series, and the qualifications, limitations or restrictions
thereof (in addition to the designations, powers, preferences and rights,
and the qualifications, limitations or restrictions thereof, set forth in
the Certificate of Incorporation which may be applicable to the
Corporation's preferred stock), as follows:
1. Number of Shares; Designation. A total of 2,000 shares of preferred stock,
par value $0.001 per share, of the Corporation are hereby designated as 6%
Convertible Preferred Stock (the "Series").
2. Rank. The Series shall, with respect to payment of dividends, redemption
payments and rights upon liquidation, dissolution or winding-up of the
affairs of the Corporation, rank:
(i) senior and prior to the Series A Redeemable Convertible Preferred
Stock, par value $.001 per share, of the Corporation; the Series B
Redeemable Convertible Preferred Stock, par value $.001 per share, of
the Corporation; the Series C Redeemable Convertible Preferred Stock,
par value $.001 per share, of the Corporation; the Series D Redeemable
Convertible Preferred Stock, par value $.001 per share, of the
Corporation; the Common Stock, par value $.01 per share, of the
Corporation (the "Common Stock"); and any additional series of
preferred stock which may in the future be issued by the Corporation
and are designated in the amendment to the Certificate of
Incorporation or the certificate of designations establishing such
additional preferred stock as ranking junior to the shares of the
Series. Any shares of the Corporation's capital stock which are junior
to the shares of the Series with respect to the payment of dividends
are hereinafter referred to as "Junior Dividend Shares" and any shares
which are junior to the shares of the Series with respect to
redemption, payment and rights upon liquidation, dissolution or
winding-up of the affairs of the Corporation are hereinafter referred
to as "Junior Liquidation Shares".
(ii) Parri passu with the 8% Convertible Preferred Stock, par value $0.001
per share, of the Corporation; and any additional series of preferred
stock which may in the future be issued by the Corporation and are
designated in the amendment to the Certificate of Incorporation or the
certificate of designations establishing such additional preferred
stock as ranking equal to the shares of the Series or which do not
state they are Junior Dividend Shares or Senior Dividend Shares (as
defined below). Any shares of the Corporation's capital stock which
are equal to the shares of the Series with respect to the payment of
dividends are hereinafter referred to as "Parity Dividend Shares" and
any shares which are equal to the shares of the Series with respect to
redemption, payment and rights upon liquidation, dissolution or
winding-up of the affairs of the Corporation are hereinafter referred
to as "Parity Liquidation Shares".
(iii)Junior to any additional series of preferred stock which may in the
future be issued by the Corporation and are designated in the
amendment to the Certificate of Incorporation or the certificate of
designations establishing such additional preferred stock as ranking
senior to the shares of the Series. Any shares of the Corporation's
capital stock which are senior to the shares of the Series with
respect to the payment of dividends are hereinafter referred to as
"Senior Dividend Shares" and any shares which are senior to the shares
of the Series with respect to redemption, payment and rights upon
liquidation, dissolution or winding-up of the affairs of the
Corporation are hereinafter referred to as "Senior Liquidation
Shares".
The Corporation may not issue additional shares of preferred stock which
are not (a) Junior Stock (as defined in paragraph 3(c) below) or (b) both
Parity Liquidation Shares and Parity Dividend Shares without the consent of
the holders of a majority of the outstanding shares of the Series.
3. Dividends. (a) The dividend rate on shares of the Series shall be $60.00
per share per annum. Dividends on shares of the Series shall be fully
cumulative, accruing, without interest, from the date of original issuance
of the Series through the date of redemption or conversion thereof, and
shall be payable in arrears, when, as and if declared by the Board of
Directors out of funds legally available for the payment of dividends, on
September 30 and March 31 of each year, commencing March 31, 2004, except
that if such date is not a business day then the dividend shall be payable
on the first immediately succeeding business day (as used herein, the term
"business day" shall mean any day except a Saturday, Sunday or day on which
banking institutions are legally authorized to close in Canton,
Massachusetts) (each such period being hereinafter referred to as a
"Dividend Period"). Dividends shall be payable in cash. Each dividend shall
be paid to the holders of record of shares of the Series as they appear on
the stock register of the Corporation on the record date, not less than 10
nor more than 60 days preceding the payment date thereof, as shall be fixed
by the Board of Directors. Dividends payable for each Dividend Period shall
be computed on the basis of a 360-day year of twelve 30-day months and
rounded to the nearest cent. Dividends on account of arrearages for any
past Dividend Period may be declared and paid at any time, without
reference to any regular dividend payment date, to holders of record on
such date, not exceeding 45 days preceding the payment date thereof, as may
be fixed by the Board of Directors of the Corporation. Dividends shall
accrue regardless of whether the Corporation has earnings, whether there
are funds legally available therefor and/or whether declared. No interest
shall be payable with respect to any dividend payment that may be in
arrears. Holders of shares of the Series called for redemption between the
close of business on a dividend payment record date and the close of
business on the corresponding dividend payment date shall, in lieu of
receiving such dividend on the dividend payment date fixed therefor,
receive such dividend payment on the date fixed for redemption together
with all other accrued and unpaid dividends to the date fixed for
redemption. The holders of shares of the Series shall not be entitled to
any dividends other than the cash dividends provided for in this paragraph
3.
(b) No dividends, except as described in the next succeeding sentence,
shall be declared or paid or set apart for payment on any Parity
Dividend Shares for any period unless full cumulative dividends have
been or contemporaneously are declared and paid or declared and set
aside for payment for all accrued dividends with respect to the Series
through the most recent Dividend Period ending on or prior to the date
of payment. Unless dividends accrued and payable but unpaid on shares
of the Series and any Parity Dividend Shares at the time outstanding
have been paid in full, all dividends declared by the Corporation upon
shares of the Series or Parity Dividend Shares shall be declared pro
rata with respect to all such shares, so that the amounts of any
dividends declared on shares of the Series and the Parity Dividend
Shares shall in all cases bear to each other the same ratio that, at
the time of the declaration, all accrued but unpaid dividends on
shares of the Series and the other Parity Dividend Shares,
respectively, bear to each other.
(c) If at any time the Corporation has failed to (x) pay or set apart for
payment all accrued dividends on any shares of the Series through the
then most recent Dividend Period and (y) set apart for payment an
amount in cash equal to the scheduled dividend payments for each of
the next two Dividend Periods, the Corporation shall not, and shall
not permit any corporation or other entity directly or indirectly
controlled by the Corporation to:
(i) declare or pay or set aside for payment any dividend or other
distribution on or with respect to the Junior Dividend Shares,
whether in cash, securities, obligations or otherwise (other than
dividends or distributions paid in shares of capital stock of the
Corporation ranking junior to shares of the Series both as to the
payment of dividends and as to rights in liquidation, dissolution
or winding-up of the affairs of the Corporation ("Junior Stock"),
or options, warrants or rights to subscribe for or purchase
shares of Junior Stock); or
(ii) redeem, purchase or otherwise acquire, or pay into, set apart
money or make available for a sinking or other analogous fund for
the redemption, purchase or other acquisition of, any shares of
the Series (unless all of the shares of the Series are
concurrently redeemed), Parity Dividend Shares, Parity
Liquidation Shares or shares of Junior Stock for any
consideration (except by conversion into or exchange for Junior
Stock),
unless, in each such case, all dividends accrued on shares of the Series
through the most recent Dividend Period and on any Parity Dividend Shares
have been or contemporaneously are declared and paid in full.
(d) Any reference to "distribution" contained in this paragraph 3 shall
not be deemed to include any distribution made in connection with any
liquidation, dissolution or winding-up of the Corporation, whether
voluntary or involuntary.
4. Liquidation. (a) The liquidation value per share of shares of the Series,
in case of the voluntary or involuntary liquidation, dissolution or
winding-up of the affairs of the Corporation, shall be $1,000 per share,
plus an amount equal to the cash value of dividends accrued and unpaid
thereon, whether or not declared, to the payment date.
(b) In the event of any voluntary or involuntary liquidation, dissolution
or winding-up of the Corporation, the holders of shares of the Series
(i) shall not be entitled to receive the liquidation value of the
shares held by them until the liquidation value of all Senior
Liquidation Shares shall have been paid in full, and (ii) shall be
entitled to receive the liquidation value of such shares held by them
in preference to and in priority over any distributions upon the
Junior Liquidation Shares. Upon payment in full of the liquidation
value to which the holders of shares of the Series are entitled, the
holders of shares of the Series will not be entitled to any further
participation in any distribution of assets by the Corporation. If the
assets of the Corporation are not sufficient to pay in full the
liquidation value payable to the holders of shares of the Series and
the liquidation value payable to the holders of any Parity Liquidation
Shares, the holders of all such shares shall share ratably in such
distribution of assets in accordance with the amounts that would be
payable on the distribution if the amounts to which the holders of
shares of the Series and the holders of Parity Liquidation Shares are
entitled were paid in full.
(c) For purposes of this paragraph 4, (i) any acquisition of the
Corporation by means of merger or other form of corporate
reorganization in which outstanding capital stock of the Corporation
are exchanged for securities or other consideration issued, or caused
to be issued, by the acquiring entity or its subsidiary (other than a
mere reincorporation transaction), or (ii) a sale of all or
substantially all of the assets of the Corporation, shall be treated
as a liquidation, dissolution or winding-up of the Corporation and
shall entitle the holders of the Series to receive at the closing in
cash, securities or other property (valued as provided in paragraph
4(e) below) amounts as specified in paragraph 4(a) and (b) above.
(d) Written notice of any liquidation, dissolution or winding-up of the
Corporation, stating the payment date or dates when and the place or
places where the amounts distributable in such circumstances shall be
payable, shall be given by first class mail, postage prepaid, not less
than 30 days prior to any payment date stated therein, to the holders
of record of shares of the Series at their respective addresses as the
same shall appear on the books of the transfer agent with respect to
the Series.
(e) Whenever the distribution provided for in this paragraph 4 shall be
payable in securities or property other than cash, the value of such
distribution shall be the fair market value of such securities or
other property as determined in good faith by the Board of Directors.
5. Optional Redemption. (a) Shares of the Series will be redeemable at the
option of the Corporation, in whole or in part, from and after the time
that (x) the first anniversary of the issuance of shares of the Series
occurs, and (y) the Current Market Price for the Common Stock for a period
of any 20 out of 30 consecutive trading days equals or exceeds 200% of the
Conversion Price (as defined below) then in effect, and (z) the Common
Stock underlying the Shares can be sold by the holder thereof without
restriction on resale; provided, however, that prior to the last date (the
"Final Registration Date") on which a registration statement is required to
remain effective and available for use pursuant to that certain
Registration Rights Agreement, dated September 30, 2003 (the "Registration
Rights Agreement"), such registration statement is effective and available
for use at all times during the period beginning thirty (30) days prior to
the date of the redemption notice and ending on the earlier of the
redemption date or the Final Registration Date, and is expected to remain
effective and available for use until the earlier of thirty (30) days
following the redemption date or the Final Registration Date. The
redemption price will be payable in cash and equal to $1,000 per share,
together with an amount equal to the dividends accrued and unpaid thereon,
whether or not declared, to the redemption date. The aggregate payment to
each holder of shares of the Series to be redeemed will be rounded to the
nearest cent. Notwithstanding the foregoing, if the date fixed for
redemption occurs after a record date for a dividend and prior to the
corresponding payment date, such dividend shall be paid on the payment date
and the amount payable with respect to each share of the Series redeemed
shall not include the amount of the dividend to be so paid.
(b) Not less than 60 nor more than 90 days prior to the date fixed for any
redemption of shares of the Series pursuant to this paragraph 5, a
notice of redemption shall be mailed by first class mail, postage
prepaid, to each holder of shares of the Series to be redeemed at such
holder's last address as it appears on the books of the transfer agent
for the Series. Such notice shall state (i) that the Corporation has
elected to redeem all or a portion of the shares of the Series, as
specified in such notice, (ii) the redemption price, (iii) the
redemption date, (iv) that, unless the Corporation defaults in the
payment of the redemption price, all shares of the Series called for
redemption shall cease to accrue dividends after the redemption date
and shall cease to be outstanding after such date, and (v) any other
information required by applicable law to be included therein and any
other procedures that a holder of shares of the Series must follow to
receive payment for its redeemed shares. Neither failure to mail such
notice, nor any defect therein or in the mailing thereof, to any
particular holder shall affect the sufficiency of the notice or the
validity of the proceedings for redemption with respect to any other
holder. Any notice mailed in the manner herein provided shall be
conclusively presumed to have been duly given whether or not the
holder receives the notice. On or after the redemption date, each
holder of shares of the Series to be redeemed shall present and
surrender such holder's certificate or certificates for such shares to
the Corporation at the place designated in the redemption notice and
thereupon the redemption price of the shares shall be promptly paid to
or on the order of the person whose name appears on such certificate
or certificates as the owner thereof, and each surrendered certificate
shall be canceled. In case less than all the shares represented by any
such certificate are redeemed, a new certificate shall be issued to
the holder representing the unredeemed shares of the Series.
(c) If a notice of redemption has been given pursuant to this paragraph 5
and if, on or before the date fixed for redemption, the funds
necessary for such redemption shall have been set aside by the
Corporation, separate and apart from its other funds, in trust for the
pro rata benefit of the holders of the shares of the Series so called
for redemption, then, notwithstanding that any certificates for such
shares have not been surrendered for cancellation, on the redemption
date dividends shall cease to accrue on the shares of the Series to be
redeemed, and at the close of business on the redemption date the
holders of such shares shall cease to be stockholders with respect to
those shares, shall have no interest in or claims against the
Corporation by virtue thereof and shall have no voting or other rights
with respect thereto, except the right to receive the moneys payable
upon such redemption, without interest thereon, upon surrender (and
endorsement, if required by the Corporation) of their certificates,
and the shares evidenced thereby shall no longer be outstanding.
Subject to applicable escheat laws, any moneys so set aside by the
Corporation and unclaimed at the end of two years from the redemption
date shall revert to the Corporation, after which reversion the
holders of such shares so called for redemption shall look only to the
Corporation for the payment of the redemption price. Any interest
accrued on funds so deposited shall be paid to the Corporation from
time to time.
(d) If a notice of redemption has been given pursuant to this paragraph 5,
and any holder of shares of the Series shall, prior to the close of
business on the date fixed for redemption, give written notice to the
Corporation pursuant to paragraph 7 below of the conversion of any or
all of the shares to be redeemed held by the holder, then such
redemption shall not become effective as to such shares to be
converted and such conversion shall become effective as provided in
paragraph 7 below, whereupon any funds deposited by the Corporation,
or on its behalf, with a payment agent or segregated and held in trust
by the Corporation for the redemption of such shares shall (subject to
any right of the holder of such shares to receive the dividend payable
thereon as provided in paragraph 7 below) immediately upon such
conversion be returned to the Corporation or, if then held in trust by
the Corporation, shall be discharged from the trust.
(e) In every case of redemption of less than all of the outstanding shares
of the Series pursuant to this paragraph 5, the shares to be redeemed
shall be selected pro rata or by lot or in such other manner as the
Board of Directors may determine, as may be prescribed by resolution
of the Board of Directors of the Corporation, provided that only whole
shares shall be selected for redemption. Notwithstanding the
foregoing, the Corporation shall not redeem any of the shares of the
Series at any time outstanding until all dividends accrued and in
arrears upon all shares of the Series then outstanding shall have been
paid for all past dividend periods.
6. [Intentionally omitted.]
7. Conversion. (a) Holders of shares of the Series will have the right,
exercisable at any time after the issuance by the Corporation of shares of
the Series, to convert, in whole or in part, shares of the Series into
shares of Common Stock (calculated as to each conversion to the nearest
1/100th of a share) at the Conversion Price (as defined in paragraph 11
below); provided, however, that until the earlier of (i) the six (6) month
anniversary of the First Closing Date (as defined in the Purchase
Agreement), and (ii) the date on which the stockholders of the Corporation
approve the issuance of the shares of the Series, no more than 580 shares
of the Series may be converted into shares of Common Stock. The number of
shares of Common Stock into which each share of the Series shall be
convertible shall be determined by dividing $1,000, subject to proportional
adjustment to reflect any split or consolidation of the Common Stock or any
dividend payable on the Common Stock in additional shares of Common Stock
(the "Conversion Amount"), by the Conversion Price then in effect. In the
case of shares of the Series called for redemption, conversion rights will
expire at the close of business on the business day next preceding the
redemption date. Upon conversion of shares of the Series, the Corporation
will pay to the holder of the converted shares an amount equal to the
dividends accrued but unpaid thereon through the date the notice of
conversion is delivered to the Corporation. Such payment shall be made in
cash. Notwithstanding the foregoing, holders of record of shares of the
Series on a record date fixed for the payment of a dividend on such shares
shall be entitled to receive the dividend notwithstanding the conversion of
the shares prior to the dividend payment date. A share of the Series may
not be converted in part.
(b) In order to exercise the conversion right, the holder of each share of
the Series to be converted shall surrender the certificate
representing such share, duly endorsed or assigned to the Corporation
or in blank, at the office of the Corporation in Canton, Massachusetts
(or such other address as the Corporation may designate) and shall
give written notice to the Corporation in the form set forth on the
reverse of the stock certificates for the shares of the Series that
such holder elects to convert the shares represented by such
certificate or a portion thereof. Such notice shall also state the
name or names (with address) in which the certificate or certificates
for the shares of Common Stock which shall be issuable upon such
conversion shall be issued, and shall be accompanied by funds in an
amount sufficient to pay any transfer or similar tax required by the
provisions of paragraph 7(e) below. Each share surrendered for
conversion shall, unless the shares issuable on conversion are to be
issued in the same name as the name in which such share of the Series
is registered, be duly endorsed by, or be accompanied by instruments
of transfer (in each case, in form reasonably satisfactory to the
Corporation), duly executed by the holder or such holder's duly
authorized attorney-in-fact.
(c) As promptly as practicable after the surrender of certificates for
shares of the Series for conversion and the receipt of such notice and
funds, if any, as aforesaid, the Corporation shall issue and shall
deliver to such holder, or on such holder's written order, a
certificate or certificates for the number of shares of Common Stock
issuable upon the conversion of such shares of the Series in
accordance with the provisions of this paragraph 7, and a check or
cash in respect of any fractional interest in respect of a share of
Common Stock arising upon such conversion, as provided in paragraph
7(d) below. Each conversion with respect to any shares of the Series
shall be deemed to have been effected immediately prior to the close
of business on the date on which the certificates for shares of the
Series shall have been surrendered (accompanied by the funds, if any,
required by paragraph 7(e) below) and such notice and assignment, if
any, shall have been received by the Corporation as aforesaid, and the
person or persons entitled to receive the Common Stock issuable upon
such conversion shall be deemed for all purposes to be the record
holder or holders of such Common Stock upon that date.
(d) No fractional shares of Common Stock or scrip representing fractional
shares shall be issued upon conversion of shares of the Series. If
more than one share of the Series shall be surrendered for conversion
at one time by the same holder, the number of full shares of Common
Stock issuable upon conversion thereof shall be computed on the basis
of the aggregate number of shares of the Series so surrendered.
Instead of any fractional share of Common Stock otherwise issuable
upon conversion of any shares of the Series, the Corporation shall pay
a cash adjustment in respect to such fraction in an amount equal to
the same fraction of the Current Market Price of the Common Stock at
the close of business on the day of conversion.
(e) If a holder converts shares of the Series, the Corporation shall pay
any and all documentary, stamp or similar issue or transfer tax
payable in respect of the issue or delivery of the shares of the
Series (or any other securities issued on account thereof pursuant
hereto) or Common Stock upon the conversion; provided, however, the
Corporation shall not be required to pay any such tax that may be
payable because any such shares are issued in a name other than the
name of the holder.
(f) The Corporation shall reserve out of its authorized but unissued
Common Stock or its Common Stock held in treasury sufficient shares of
Common Stock to permit the conversion of all of the outstanding shares
of the Series. The Corporation shall from time to time, in accordance
with the General Corporation Law of the State of Delaware, increase
the authorized amount of its Common Stock if at any time the
authorized amount of its Common Stock remaining unissued shall not be
sufficient to permit the conversion of all shares of the Series at the
time outstanding. If any shares of Common Stock required to be
reserved for issuance upon conversion of shares of the Series
hereunder require registration with or approval of any governmental
authority under any federal or state law before the shares may be
issued upon conversion, the Corporation shall in good faith and as
expeditiously as possible endeavor to cause the shares to be so
registered or approved. All shares of Common Stock delivered upon
conversion of the shares of the Series will, upon delivery, be duly
authorized and validly issued, fully paid and nonassessable, free from
all taxes, liens and charges with respect to the issue thereof.
(g) The Conversion Price shall be subject to adjustment from time to time
as follows:
(i) In the event that the Corporation shall (A) pay a dividend or
make a distribution, in shares of Common Stock, on any class of
Capital Stock of the Corporation or any subsidiary which is not
directly or indirectly wholly owned by the Corporation, (B) split
or subdivide its outstanding Common Stock into a greater number
of shares, or (C) combine its outstanding Common Stock into a
smaller number of shares, then in each such case the Conversion
Price in effect immediately prior thereto shall be adjusted so
that the holder of each share of the Series thereafter
surrendered for conversion shall be entitled to receive the
number of shares of Common Stock that such holder would have
owned or have been entitled to receive after the occurrence of
any of the events described above had such share of the Series
been converted immediately prior to the occurrence of such event.
An adjustment made pursuant to this paragraph 7(g)(i) shall
become effective immediately after the close of business on the
record date in the case of a dividend or distribution (except as
provided in paragraph 7(k) below) and shall become effective
immediately after the close of business on the effective date in
the case of such subdivision, split or combination, as the case
may be. Any shares of Common Stock issuable in payment of a
dividend shall be deemed to have been issued immediately prior to
the close of business on the record date for such dividend for
purposes of calculating the number of outstanding shares of
Common Stock under clauses (ii) and (iii) below.
(ii) In the event that the Corporation shall commit to issue or
distribute Common Stock or issue rights, warrants, options or
convertible or exchangeable securities entitling the holder
thereof to subscribe for or purchase, convert into or exchange
for Common Stock, in any such case at a price per share less than
the Current Market Price per share on the earliest of (i) the
date the Corporation shall enter into a firm contract for such
issuance or distribution, (ii) the record date for the
determination of stockholders entitled to receive any such
rights, warrants, options or convertible or exchangeable
securities, if applicable, or (iii) the date of actual issuance
or distribution of any such Common Stock or rights, warrants,
options or convertible or exchangeable securities (provided that
the issuance of Common Stock upon the exercise of rights,
warrants, options or convertible or exchangeable securities will
not cause an adjustment in the Conversion Price if no such
adjustment would have been required at the time such right,
warrant, option or convertible or exchangeable security was
issued), then the Conversion Price in effect immediately prior to
such earliest date shall be adjusted so that the Conversion Price
shall equal the price determined by multiplying the Conversion
Price in effect immediately prior to such earliest date by the
fraction:
(x) whose numerator shall be the number of shares of Common
Stock outstanding on such date plus the number of shares
which the aggregate offering price of the total number of
shares so offered would purchase at such Current Market
Price (such amount, with respect to any such rights,
warrants, options or convertible or exchangeable securities,
determined by multiplying the total number of shares subject
thereto by the exercise price of such rights, warrants,
options or convertible or exchangeable securities and
dividing the product so obtained by the Current Market
Price), and
(y) whose denominator shall be the number of shares of Common
Stock outstanding on such date plus the number of additional
shares of Common Stock to be issued or distributed or
receivable upon exercise of any such right, warrant, option
or convertible or exchangeable security.
Such adjustment shall be made successively whenever any such
Common Stock, rights, warrants, options or convertible or
exchangeable securities are issued or distributed. In
determining whether any rights, warrants or options entitle
the holders to subscribe for or purchase shares of Common
Stock at less than such Current Market Price, and in
determining the aggregate offering price of shares of Common
Stock so issued or distributed, there shall be taken into
account any consideration received by the Corporation for such
Common Stock, rights, warrants, options, or convertible or
exchangeable securities, the value of such consideration, if
other than cash, to be determined by the Board of Directors,
whose determination shall be conclusive and described in a
certificate filed with the records of corporate proceedings of
the Corporation. If any right, warrant, option or convertible
or exchangeable security to purchase or acquire Common Stock,
the issuance of which resulted in an adjustment in the
Conversion Price pursuant to this subsection (g) shall expire
and shall not have been exercised, the Conversion Price shall
immediately upon such expiration be recomputed to the
Conversion Price which would have been in effect had the
adjustment of the Conversion Price made upon the issuance of
such right, warrant, option or convertible or exchangeable
security been made on the basis of offering for subscription,
purchase or issuance, as the case may be, only of that number
of shares of Common Stock actually purchased or issued upon
the actual exercise of such right, warrant, option or
convertible or exchangeable securities.
(iii)No adjustment in the Conversion Price shall be required unless
the adjustment would require an increase or decrease of at least
1% in the Conversion Price then in effect; provided, however,
that any adjustments that by reason of this paragraph 7(g)(iii)
are not required to be made shall be carried forward and taken
into account in any subsequent adjustment. All calculations under
this paragraph 7(g) shall be made to the nearest cent or nearest
1/100th of a share.
(iv) Notwithstanding anything to the contrary set forth in this
paragraph 7(g), no adjustment shall be made to the Conversion
Price upon (A) the issuance of shares of Common Stock pursuant to
any compensation or incentive plan for officers, directors,
employees or consultants of the Corporation which plan has been
approved by the Compensation Committee of the Board of Directors
(or if there is no such committee then serving, by the majority
vote of the Directors then serving who are not employees or
officers of the Corporation, a 5% or greater stockholder of the
Corporation or an officer, employee or Affiliate or Associate (as
defined in paragraph 11 below) of any such 5% or greater
stockholder) (unless the exercise price thereof is changed after
the date hereof other than solely by operation of the
anti-dilution provisions thereof or by the Compensation Committee
of the Board of Directors or, if applicable, the Board of
Directors and, if required by law, the stockholders of the
Corporation as provided in this clause (A)), or (B) the issuance
of Common Stock upon the conversion or exercise of the options,
warrants or rights of the Corporation outstanding on September
30, 2003, unless the conversion or exercise price thereof is
changed after September 30, 2003 (other than solely by operation
of the anti-dilution provisions thereof).
(v) The Corporation from time to time may reduce the Conversion Price
by any amount for any period of time in the discretion of the
Board of Directors. A voluntary reduction of the Conversion Price
does not change or adjust the Conversion Price otherwise in
effect for purposes of this paragraph 7(g).
(vi) In the event that, at any time as a result of an adjustment made
pursuant to paragraph 7(g)(i) through 7(g)(iii) above, the holder
of any share of the Series thereafter surrendered for conversion
shall become entitled to receive any shares of the Corporation
other than shares of the Common Stock, thereafter the number of
such other shares so receivable upon conversion of any share of
the Series shall be subject to adjustment from time to time in a
manner and on terms as nearly equivalent as practicable to the
provisions with respect to the Common Stock contained in
paragraphs 7(g)(i) through 7(g)(v) above, and the other
provisions of this paragraph 7(g)(vi) with respect to the Common
Stock shall apply on like terms to any such other shares.
(vii)Notwithstanding any other provision of this Certificate of
Designations, no shares of Common Stock shall be issued or
issuable in the aggregate upon conversion or redemption of the
Series, or otherwise related to the Series, in excess of 19.9% of
the Common Stock outstanding immediately prior to August 13,
2003, without the approval of the shareholders of the Corporation
in accordance with the rules of the American Stock Exchange.
(h) In case of any reclassification of the Common Stock (other than in a
transaction to which paragraph 7(g)(i) applies), any consolidation of
the Corporation with, or merger of the Corporation into, any other
entity, any merger of another entity into the Corporation (other than
a merger that does not result in any reclassification, conversion,
exchange or cancellation of outstanding shares of Common Stock of the
Corporation), any sale or transfer of all or substantially all of the
assets of the Corporation or any compulsory share exchange, pursuant
to which share exchange the Common Stock is converted into other
securities, cash or other property, then lawful provision shall be
made as part of the terms of such transaction whereby the holder of
each share of the Series then outstanding shall have the right
thereafter, during the period such share shall be convertible, to
convert such share only into the kind and amount of securities, cash
and other property receivable upon the reclassification,
consolidation, merger, sale, transfer or share exchange by a holder of
the number of shares of Common Stock of the Corporation into which a
share of the Series might have been converted immediately prior to the
reclassification, consolidation, merger, sale, transfer or share
exchange assuming that such holder of Common Stock failed to exercise
rights of election, if any, as to the kind or amount of securities,
cash or other property receivable upon consummation of such
transaction, subject to adjustment as provided in paragraph 7(g) above
following the date of consummation of such transaction. As a condition
to any such transaction, the Corporation or the person formed by the
consolidation or resulting from the merger or which acquires such
assets or which acquires the Corporation's shares, as the case may be,
shall make provisions in its certificate or articles of incorporation
or other constituent document to establish such right. The certificate
or articles of incorporation or other constituent document shall
provide for adjustments which, for events subsequent to the effective
date of the certificate or articles of incorporation or other
constituent document, shall be as nearly equivalent as may be
practicable to the adjustments provided for in this paragraph 7. The
provisions of this paragraph 7(h) shall similarly apply to successive
reclassifications, consolidations, mergers, sales, transfers or share
exchanges.
(i) If:
(i) the Corporation shall take any action which would require an
adjustment in the Conversion Price pursuant to Section 7(g); or
(ii) the Corporation shall authorize the granting to the holders of
its Common Stock generally of rights, warrants or options to
subscribe for or purchase any shares of any class or any other
rights, warrants or options; or
(iii)there shall be any reclassification or change of the Common
Stock (other than a subdivision or combination of its outstanding
Common Stock or a change in par value) or any consolidation,
merger or statutory share exchange to which the Corporation is a
party and for which approval of any stockholders of the
Corporation is required, or the sale or transfer of all or
substantially all of the assets of the Corporation; or
(iv) there shall be a voluntary or involuntary dissolution,
liquidation or winding-up of the Corporation;
then, the Corporation shall cause to be filed with the transfer agent for
the Series and shall cause to be mailed to the holders of shares of the
Series at their addresses as shown on the books of the transfer agent for
the Series, as promptly as possible, but at least 30 days prior to the
applicable date hereinafter specified, a notice stating (A) the date on
which a record is to be taken for the purpose of such dividend,
distribution or granting of rights, warrants or options or, if a record is
not to be taken, the date as of which the holders of Common Stock of record
to be entitled to such dividend, distribution or rights, warrants or
options are to be determined, or (B) the date on which such
reclassification, change, consolidation, merger, statutory share exchange,
sale, transfer, dissolution, liquidation or winding-up is expected to
become effective or occur, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their
shares of Common Stock for securities or other property deliverable upon
such reclassification, change, consolidation, merger, statutory share
exchange, sale, transfer, dissolution, liquidation or winding-up. Failure
to give such notice or any defect therein shall not affect the legality or
validity of the proceedings described in this paragraph 7(i).
(j) Whenever the Conversion Price is adjusted as herein provided, the
Corporation shall promptly file with the transfer agent for the Series
a certificate of an officer of the Corporation setting forth the
Conversion Price after the adjustment and setting forth a brief
statement of the facts requiring such adjustment and a computation
thereof. The Corporation shall promptly cause a notice of the adjusted
Conversion Price to be mailed to each registered holder of shares of
the Series.
(k) In any case in which paragraph 7(g) provides that an adjustment shall
become effective immediately after a record date for an event and the
date fixed for such adjustment pursuant to paragraph 7(g) occurs after
such record date but before the occurrence of such event, the
Corporation may defer until the actual occurrence of such event (i)
issuing to the holder of any shares of the Series converted after such
record date and before the occurrence of such event the additional
shares of Common Stock issuable upon such conversion by reason of the
adjustment required by such event over and above the Common Stock
issuable upon such conversion before giving effect to such adjustment,
and (ii) paying to such holder any amount in cash in lieu of any
fraction pursuant to paragraph 7(d).
(l) In case the Corporation shall take any action affecting the Common
Stock, other than actions described in this paragraph 7, which in the
opinion of the Board of Directors would materially adversely affect
the conversion right of the holders of the shares of the Series, the
Conversion Price may be adjusted, to the extent permitted by law, in
such manner, if any, and at such time, as the Board of Directors may
determine to be equitable in the circumstances; provided, however,
that in no event shall the Board of Directors be required to take any
such action.
(m) The Corporation shall list the shares of Common Stock required to be
delivered upon conversion of shares of the Series, prior to delivery,
upon each national securities exchange, the American Stock Exchange or
any similar system of automated dissemination of securities prices, if
any, upon which the Common Stock is listed at the time of delivery.
8. Status of Shares. All shares of the Series that are at any time redeemed or
converted pursuant to paragraph 5 or 7 above, and all shares of the Series
that are otherwise reacquired by the Corporation and subsequently canceled
by the Board of Directors, shall have the status of authorized but unissued
shares of preferred stock, without designation as to series, subject to
reissuance by the Board of Directors as shares of any one or more other
series.
9. Voting Rights. Each holder of shares of the Series shall be entitled to the
number of votes equal to the number of shares of Common Stock into which
such shares of the Series could be converted and shall have voting rights
and powers equal to the voting rights and powers of the Common Stock
(except as otherwise expressly provided herein or as required by law),
voting together with the Common Stock as a single class and shall be
entitled to notice of any stockholders' meeting in accordance with the
Bylaws of the Corporation. Fractional votes shall not, however, be
permitted and any fractional voting rights resulting from the above formula
(after aggregating all shares into which shares of the Series held by each
holder could be converted) shall be rounded to the nearest whole number
(with one-half being rounded upward).
10. Restrictions and Limitations. So long as any shares of the Series remain
outstanding, the Corporation, shall not, without the vote or written
consent by the holders of at least 51% of the then outstanding shares of
the Series, voting together as a single class:
(i) Redeem, purchase or otherwise acquire for value (or pay into or set
aside for a sinking fund for such purpose) any share or shares of
preferred stock otherwise than by redemption in accordance with
paragraph 5 hereof or by conversion in accordance with paragraph 7
hereof or by conversion rights heretofore granted to the holders of
the preferred stock outstanding prior to the date hereof;
(ii) Redeem, purchase or otherwise acquire (or pay into or set aside for a
sinking fund for such purpose), any of the Common Stock; provided,
however, that this restriction shall not apply to the repurchase of
shares of Common Stock from employees, officers, directors,
consultants or other persons performing services for the Corporation
or any subsidiary pursuant to agreements under which the Corporation
has the option to repurchase such shares at cost or at cost plus
interest at a rate not to exceed nine percent (9%) per annum upon the
occurrence of certain events, such as the termination of employment;
and provided further, that the total amount applied to the repurchase
of shares of Common Stock shall not exceed $100,000 during any twelve
month period; or
(iii)Authorize or issue, or obligate itself to issue, any debt security,
or otherwise incur indebtedness for borrowed money, in an aggregate
amount greater than $3,000,000.
11. Certain Definitions. As used in this Certificate, the following terms shall
have the following respective meanings:
"Affiliate" of any specified person means any other person directly or
indirectly controlling or controlled by or under common control with such
specified person. For purposes of this definition, "control" when used with
respect to any person means the power to direct the management and policies
of such person, directly or indirectly, whether through the ownership of
voting securities or otherwise; and the term "controlling" and "controlled"
having meanings correlative to the foregoing.
"Associate" of a person means (A) any corporation or organization, other
than the Corporation or any subsidiary of the Corporation, of which the
person is an officer or partner or is, directly or indirectly, the
beneficial owner of 10% or more of any class of its equity securities; (B)
any trust or estate in which the person has a substantial beneficial
interest or as to which the person serves as trustee or in a similar
fiduciary capacity; and (C) any relative or spouse of the person, or any
relative of the spouse, who has the same home as the person or who is a
director or officer of the person or any of its parents or subsidiaries.
"Capital Stock" of any person or entity means any and all shares,
interests, rights to purchase, warrants, options, participations or other
equivalents of or interests in the common stock or preferred stock of such
person or entity, including, without limitation, partnership and membership
interests.
"Conversion Price" means, (i) with respect to shares of the Series issued
at the First Closing (as defined in the Purchase Agreement), $0.15 per
share of Common Stock, subject to adjustment as described in paragraph 7,
and (ii) with respect to shares of the Series issued at the Second Closing
(as defined in the Purchase Agreement), the greater of (A) $0.15 per share
of Common Stock, and (B) 80% of the 30-day moving average closing price of
the Common Stock ending on the trading day immediately prior to (but not
including) the Second Closing Date (as defined in the Purchase Agreement),
in either case of (A) or (B) above, subject to adjustment as described in
paragraph 7.
"Current Market Price" means, when used with respect to any security as of
any date, the volume weighted average price of such security as reported on
the American Stock Exchange for the ten (10) consecutive trading days
immediately preceding such date, or, in case such security is listed on a
national securities exchange other than American Stock Exchange, the volume
weighted average price of such security on the ten (10) consecutive trading
days immediately preceding such date as reported for consolidated
transactions with respect to securities listed on the principal national
securities exchange on which such security is listed or admitted to trading
or, if such security is not listed or admitted to trading on the American
Stock Exchange or any national securities exchange, the volume weighted
average price of such security on the ten (10) consecutive trading days
immediately preceding such date in the over-the-counter market, as reported
by the National Association of Securities Dealers, Inc. Automated
Quotations System or such other system then in use or, if such security is
not quoted by any such organization, the volume weighted average price of
such security as of the ten (10) consecutive trading days immediately
preceding such date furnished by a New York Stock Exchange member firm
selected by the Corporation, or if such security is not quoted by any such
organization and no such New York Stock Exchange member firm is able to
provide such prices, such price as is determined by the Independent
Directors in good faith.
"Independent Directors" means directors that (i) are not 5% or greater
stockholders of the Corporation or the designee of any such stockholder;
(ii) are not officers or employees of the Corporation, any of its
subsidiaries or of a stockholder referred to above in clause (i); (iii) are
not Related Persons; and (iv) do not have relationships that, in the
opinion of the Board of Directors, would interfere with their exercise of
independent judgment in carrying out the responsibilities of the directors.
"Purchase Agreement" means that certain Securities Purchase Agreement dated
as of September 30, 2003, by and between the Corporation and Gryphon Master
Fund, L.P.
"Related Person" means an individual related to an officer, director or
employee of the Corporation or any of its Affiliates which relation is by
blood, marriage or adoption and not more remote than first cousin.
12. Beneficial Ownership. The Corporation shall not effect any conversion of
the Series, and no person who is a holder of shares of the Series shall
have the right to convert its shares into Common Stock, to the extent that
after giving effect to such conversion, such person (together with such
person's affiliates) would beneficially own in excess of 9.99% of the
shares of the Common Stock outstanding immediately after giving effect to
such conversion. For purposes of the foregoing sentence, the aggregate
number of shares of Common Stock beneficially owned by such person and its
affiliates shall include, without limitation, the number of shares of
Common Stock issuable upon conversion of the Series with respect to which
the determination of such sentence is being made, but shall exclude shares
of Common Stock which would be issuable upon (i) conversion of the
remaining, unconverted shares of the Series beneficially owned by such
person and its affiliates, and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the
Corporation beneficially owned by such person and its affiliates
(including, without limitation, any debentures, convertible notes or
convertible preferred stock or warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein. 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. For purposes of this
paragraph 12, in determining the number of outstanding shares of Common
Stock, a holder may rely on the number of outstanding shares of Common
Stock as reflected in (1) the Corporation's most recent Form 10-Q, Form
10-K or other public filing with the Securities and Exchange Commission, as
the case may be, (2) a more recent public announcement by the Corporation,
or (3) any other notice by the Corporation or its transfer agent setting
forth the number of shares of Common Stock outstanding. For any reason at
any time, upon the written or oral request of any holder of shares of the
Series, the Corporation shall within two business days confirm orally and
in writing to such holder the number of shares of Common Stock then
outstanding. In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to the conversion or exercise of
securities of the Corporation by such holder and its affiliates since the
date as of which such number of outstanding shares of Common Stock was
reported. In effecting the conversion of shares of the Series, the
Corporation shall be entitled to rely on a representation by the holder of
such shares of the Series as to the number of shares that it beneficially
owns for purposes of the above 9.99% limitation calculation.
IN WITNESS WHEREOF, the Corporation has caused this Certificate to be duly
executed on its behalf by its undersigned Chief Executive Officer and
attested to by its Secretary this 30th day of September, 2003.
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Peter P. Phildius
Chief Executive Officer
ATTEST:
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Jay C. Leatherman, Jr.
Secretary