CERTIFICATE OF DESIGNATIONS
OF THE RIGHTS, PREFERENCES, PRIVILEGES
AND RESTRICTIONS, WHICH HAVE NOT BEEN SET
FORTH IN THE CERTIFICATE OF INCORPORATION
OR IN ANY AMENDMENT THERETO,
OF THE
SERIES A CONVERTIBLE PREFERRED STOCK
OF
AVITAR, INC.
(Pursuant to Section 151(g) of the Delaware General Corporation Law)
The undersigned, Peter P. Phildius , does hereby certify that:
A. He is the duly elected and acting President of Avitar, Inc., a Delaware
Corporation (the "Corporation" or "Company").
B. Pursuant to the Unanimous Written Consent of the Board of Directors of
the Corporation dated May 12, 2004, the Board of Directors duly adopted the
following resolutions:
WHEREAS, the Certificate of Incorporation of the Corporation authorizes a
class of stock designated as Preferred Stock, with a par value of $0.001 per
share (the "Preferred Class"), comprising Five Million (5,000,000) shares and
provides that the Board of Directors of the Corporation may fix the terms,
including any dividend rights, dividend rates, conversion rights, voting rights,
rights and terms of any redemption, redemption price or prices, and liquidation
preferences, if any, of the Preferred Class;
WHEREAS, the Board of Directors believes it in the best interests of the
Corporation to create a series of preferred stock consisting of 15,000shares and
designated as the "Series A Convertible Preferred Stock" having certain rights,
preferences, privileges, restrictions and other matters relating to the Series A
Convertible Preferred Stock.
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby fix
and determine the rights, preferences, privileges, restrictions and other
matters relating to the Series A Convertible Preferred Stock as follows:
1. Definitions. For purposes of this Certificate of Designation, the
following definitions shall apply:
1. "Board" shall mean the Board of Directors of the Corporation.
2. "Change in Control" shall mean a Change in Control as defined in
the Securities Purchase Agreement and the Exchange Agreement.
3. "Corporation" or "Company" shall mean Avitar, Inc., a Delaware
Corporation.
4. "Common Stock" shall mean the Common Stock, $0.01 par value per
share, of the Corporation.
5. "Common Stock Dividend" shall mean a stock dividend declared and
paid on the Common Stock that is payable in shares of Common Stock.
6. "Distribution" shall mean the transfer of cash or property by the
Corporation to one or more of its stockholders without consideration,
whether by dividend or otherwise (except a dividend in shares of
Corporation's stock).
7. "Exchange Agreement" shall mean that certain Exchange Agreement by
and between the Corporation and Global Capital Funding Group, L.P. as of
May 14, 2004.
8. "Event of Default" shall mean an Event of Default as defined in the
Securities Purchase Agreement.
9. "Preferred Conversion Price" shall mean the amount equal to the
lesser of (i) the closing bid price of the common stock, as reported by
Bloomberg, L.P. ("Bloomberg"), on the trading day immediately prior to the
closing and (ii) 85% of the average of the three lowest closing bid prices,
as reported by Bloomberg, for the ten (10) trading days immediately prior
to the related notice of conversion, provided however, that the Preferred
Conversion Price will have a floor price equal to 50% of the closing price
reported on Bloomberg on the day of the closing. If the price of the Common
Stock is below said floor for any five (5) out of ten (10) consecutive
trading days, then the floor shall be reduced to 50% of the floor then in
effect, on a continuing basis.
10. "Original Issue Date" shall mean the date on which the first share
of Series A Convertible Preferred Stock is issued by the Corporation.
11. "Original Issue Price" shall mean $1,000.00 per share for the
Series A Convertible Preferred Stock.
12. "Qualified Future Financing" shall mean any transaction or series
of transactions that the Corporation enters into whereby the Corporation
raises capital through the issuance of additional preferred stock or a
convertible debt instrument (each a "Financing Transaction"), until such
time as the proceeds from all Financing Transactions entered into from the
time of the filing of this Certificate of Designation, including proceeds
from all issuances of the Series A Convertible Preferred Stock, but
excluding the 2,316 shares of Series A Convertible Preferred Stock to be
issued pursuant to the Exchange Agreement and the Securities Purchase
Agreement, equals or exceeds, in the aggregate, Seven Million Seven Hundred
Thousand Dollars ($7,700,000) in the following tranches: (1) an amount not
to exceed One Million Two Hundred Thousand Dollars ($1,200,000) no sooner
than June 1, 2004; (2) an amount not to exceed Three Million Five Hundred
Thousand Dollars ($3,500,000.) no sooner than August 1, 2004; and (3) an
amount not to exceed Three Million Dollars ($3,000,000) no sooner than
October 31, 2004.
13. "Securities Purchase Agreement" shall mean that certain
Subscription and Securities Purchase Agreement dated as of May 14, 2004 by
and between the Corporation and GCA Strategic Investment Fund.
14. "Series A Convertible Preferred Stock" shall mean the Series A
Convertible Preferred Stock, $0.001 par value per share, of the
Corporation.
15. "Subsidiary" shall mean any corporation or limited liability
company of which at least fifty percent (50%) of the outstanding voting
stock or membership interests, as the case may be, is at the time owned
directly or indirectly by the Corporation or by one or more of such
subsidiary corporations.
2. Dividend Rights.
2.1 In-Kind Dividends. Each calendar quarter, beginning with the end of the
first full quarter following the Original Issue Date and continuing every
quarter thereafter, the holders of the then outstanding Series A Convertible
Preferred Stock shall be entitled to receive, not later than thirty (30) days
following the end of the applicable quarter, dividends in an amount equal to
four percent (4%) of the Original Issue Price per annum. Dividends on the Series
A Convertible Preferred Stock shall be paid, at the discretion of the Company,
in either (i) additional shares of Series A Convertible Preferred Stock based on
the Original Issue Price, or (ii) Common Stock based on the Preferred Conversion
Price. Dividends on the Series A Convertible Preferred Stock shall be
cumulative, so that if dividends required to be paid on said shares for any
quarterly period shall not have been paid, the amount of the deficiency shall be
paid in full, without interest, together with any dividends due for the current
quarterly period, before any distribution of any kind shall be paid to the
holders of the Common Stock. No dividends (other than a Common Stock Dividend)
shall be paid, and no Distribution shall be made, with respect to the Common
Stock unless dividends in such amount shall have been paid or declared and set
apart for payment to the holders of the Series A Convertible Preferred Stock
simultaneously.
2.2 Participation Rights. Other than as set forth in Section 2.1, dividends
shall be declared pro rata on the Common Stock and the Series A Convertible
Preferred Stock on a pari passu basis according to the number of shares of
Common Stock held by such holders, where each holder of shares of Series A
Convertible Preferred Stock is to be treated for this purpose as holding the
same number of common shares as such holder owns of Series A Convertible
Preferred Stock.
2.3 Other Non-Cash Dividends. Other than as set forth herein, whenever a
dividend or Distribution provided for in this Section 2 shall be payable in
property other than cash (other than a Common Stock Dividend), the value of such
dividend or Distribution shall be deemed to be the fair market value of such
property as determined in good faith by the Board.
3. Liquidation Rights. In the event of any liquidation, dissolution or
winding up of the Company, whether voluntary or involuntary, the funds and
assets of the Company that may be legally distributed to the Company's
shareholders (the "Available Funds and Assets") shall be distributed to
shareholders in the following manner:
3. Series A Convertible Preferred Stock. The holders of each share of
Series A Convertible Preferred Stock then outstanding shall be entitled to be
paid, out of the Available Funds and Assets, and prior and in preference to any
payment or distribution (or any setting apart of any payment or distribution) of
any Available Funds and Assets on any shares of Common Stock or subsequent
series of preferred stock, an amount per share equal to the Original Issue Price
of the Series A Convertible Preferred Stock plus all accrued but unpaid
dividends on the Series A Convertible Preferred Stock. If upon any liquidation,
dissolution or winding up of the Company, the Available Funds and Assets shall
be insufficient to permit the payment to holders of the Series A Convertible
Preferred Stock of their full preferential amount as described in this
subsection, then all of the remaining Available Funds and Assets shall be
distributed among the holders of the then outstanding Series A Convertible
Preferred Stock pro rata, according to the number of outstanding shares of
Series A Convertible Preferred Stock held by each holder thereof.
3. Merger or Sale of Assets. A reorganization or any other consolidation or
merger of the Company with or into any other corporation, or any other sale of
all or substantially all of the assets of the Company, shall not be deemed to be
a liquidation, dissolution or winding up of the Company within the meaning of
this Section 3, and the Series A Convertible Preferred Stock shall be entitled
only to (i) the right provided in any agreement or plan governing the
reorganization or other consolidation, merger or sale of assets transaction,
(ii) the rights contained in the Delaware Business Corporation Act and (iii) the
rights contained in other Sections hereof.
3. Non-Cash Consideration. If any assets of the Company distributed to
shareholders in connection with any liquidation, dissolution or winding up of
the Company are other than cash, then the value of such assets shall be their
fair market value as determined by the Board, except that any securities to be
distributed to shareholders in a liquidation, dissolution or winding up of the
Company shall be valued as follows:
(a) The method of valuation of securities not subject to investment
letter or other similar restrictions on free marketability shall be as
follows:
(i) if the securities are then traded on a national securities
exchange or the Nasdaq National Market (or a similar national
quotation system), then the value shall be deemed to be the average of
the closing prices of the securities on such exchange or system over
the ten (10) day period ending three (3) days prior to the
distribution; and,
(ii) if actively traded over-the-counter, then the value shall be
deemed to be the average of the closing bid prices over the ten (10)
day period ending three (3) days prior to the distribution; and
(iii) if there is no active public market, then the value shall
be the fair market value thereof, as determined mutually in good faith
by (i) the Board of Directors of the Company and (ii) the holders of
the Series A Convertible Preferred Stock acting as a group. In the
event the Company and the holders cannot mutually agree upon a value,
then the value shall be determined by a mutually acceptable third
party licensed business valuation expert paid for equally by both
parties.
(b) The method of valuation of securities subject to investment letter
or other restrictions on free marketability shall be to make an appropriate
discount from the market value determined as above in subparagraphs (a)(i),
(ii) or (iii) of this subsection to reflect the approximate fair market
value thereof.
4. Conversion Rights.
4.1 Conversion of Preferred Stock. Each share of Series A Convertible
Preferred Stock shall be convertible, at the option of the holder thereof, at
any time after the issuance of such share, by dividing One Thousand Dollars
($1,000) by the Preferred Conversion Price to determine the number of fully paid
and nonassessable shares of Common Stock of the Corporation.
4.2 Procedures for Exercise of Conversion Rights. The holders of any shares
of Series A Convertible Preferred Stock may exercise their conversion rights as
to all such shares or any part thereof, subject to the limitation set forth in
Section 4.3, by delivering to the Corporation during regular business hours, at
the office of any transfer agent of the Corporation for the Series A Convertible
Preferred Stock, or at the principal office of the Corporation or at such other
place as may be designated by the Corporation, the certificate or certificates
for the shares to be converted, duly endorsed for transfer to the Corporation
(if required by the Corporation), accompanied by written notice stating that the
holder elects to convert such shares. Conversion shall be deemed to have been
effected on the date when such delivery is made, and such date is referred to
herein as the "Conversion Date." As promptly as practicable after the Conversion
Date, the Corporation shall issue and deliver to or upon the written order of
such holder, at such office or other place designated by the Corporation, a
certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled and a check for cash with respect to any
fractional interest in a share of Common Stock as provided in section 4.3 below.
The holder shall be deemed to have become a shareholder of record on the
Conversion Date. Upon conversion of only a portion of the number of shares of
Series A Convertible Preferred Stock represented by a certificate surrendered
for conversion, the Corporation shall issue and deliver to or upon the written
order of the holder of the certificate so surrendered for conversion, at the
expense of the Corporation, a new certificate covering the number of shares of
Series A Convertible Preferred Stock representing the unconverted portion of the
certificate so surrendered.
4.3 No Fractional Shares. No fractional shares of Common Stock or scrip
shall be issued upon conversion of shares of Series A Convertible Preferred
Stock. If more than one share of Series A Convertible Preferred Stock shall be
surrendered for conversion at any 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 Series A Convertible Preferred
Stock so surrendered. Instead of any fractional shares of Common Stock, which
would otherwise be issuable upon conversion of any shares of Series A
Convertible Preferred Stock, the Corporation shall pay a cash adjustment in
respect of such fractional interest equal to the fair market value of such
fractional interest as determined by the Corporation's Board of Directors.
4.4 Payment of Taxes for Conversions. The Corporation shall pay any and all
issue and other taxes that may be payable in respect of any issue or delivery of
shares of Common Stock on conversion pursuant hereto of Series A Convertible
Preferred Stock. The Corporation shall not, however, be required to pay any tax
which may be payable in respect of any transfer involved in the issue and
delivery of shares of Common Stock in a name other than that in which the shares
of Series A Convertible Preferred Stock so converted were registered, and no
such issue or delivery shall be made unless and until the person requesting such
issue has paid to the Corporation the amount of any such tax, or has
established, to the satisfaction of the Corporation, that such tax has been
paid.
4.5 Reservation of Common Stock. The Corporation shall at all times reserve
and keep available, out of its authorized but unissued Common Stock, solely for
the purpose of effecting the conversion of the Series A Convertible Preferred
Stock, the full number of shares of Common Stock deliverable upon the conversion
of all shares of all series of preferred stock from time to time outstanding.
4.6 Registration or Listing of Shares of Common Stock. If any shares of
Common Stock to be reserved for the purpose of conversion of shares of Series A
Convertible Preferred Stock require registration or listing with, or approval
of, any governmental authority, stock exchange or other regulatory body under
any federal or state law or regulation or otherwise, before such shares may be
validly issued or delivered upon conversion, the Corporation will in good faith
and as expeditiously as possible endeavor to secure such registration, listing
or approval, as the case may be.
4.7 Status of Common Stock Issued Upon Conversion. All shares of Common
Stock which may be issued upon conversion of the shares of Series A Convertible
Preferred Stock will upon issuance by the Corporation be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issuance thereof.
4.8 Status of Converted Preferred Stock. In case any shares of Series A
Convertible Preferred Stock shall be converted pursuant to this Section 4, the
shares so converted shall be canceled and shall not be issuable by the
Corporation.
5. Adjustment of Conversion Price.
5.1 General Provisions. In case, at any time after the date hereof, of any
capital reorganization, or any reclassification of the stock of the Corporation
(other than a change in par value or as a result of a stock dividend or
subdivision, split-up or combination of shares), or the consolidation or merger
of the Corporation with or into another person (other than a consolidation or
merger in which the Corporation is the continuing entity and which does not
result in any change in the Common Stock), or of the sale or other disposition
of all or substantially all the properties and assets of the Corporation as an
entirety to any other person, the shares of Series A Convertible Preferred Stock
shall, after such reorganization, reclassification, consolidation, merger, sale
or other disposition, be convertible into the kind and number of shares of stock
or other securities or property of the Corporation or of the entity resulting
from such consolidation or surviving such merger or to which such properties and
assets shall have been sold or otherwise disposed to which such holder would
have been entitled if immediately prior to such reorganization,
reclassification, consolidation, merger, sale or other disposition it had
converted its shares of Series A Convertible Preferred Stock into Common Stock.
The provisions of this section 5 shall similarly apply to successive
reorganizations, reclassifications, consolidations, mergers, sales or other
dispositions.
5.2 No Impairment. The Corporation will not, through any reorganization,
transfer of assets, consolidation, merger, dissolution, issue or sale of
securities or any other voluntary action, including amending this Certificate of
Designation, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but will at all
times in good faith assist in the carrying out of all the provisions of this
section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of Series A
Convertible Preferred Stock against impairment. This provision shall not
restrict the Corporation from amending its Certificate of Incorporation in
accordance with the Delaware General Corporation Law and the terms hereof.
6. Redemption.
6.1 Reserved.
6.2 Mandatory Redemption. Upon the occurrence of
(i) a Change in Control;
(ii) a transfer of all or substantially all of the assets of the
Corporation in a single transaction or series of related transactions;
(iii) a consolidation, merger or amalgamation of the Corporation with
or into another entity in which the Corporation is not the surviving entity
(other than a merger which is effected solely to change the jurisdiction of
incorporation of the Corporation and results in a reclassification,
conversion or exchange of outstanding shares of Common Stock solely into
shares of Common Stock);
(iv) the failure of the Corporation to maintain for a period of sixty
(60) consecutive days, out of its authorized but unissued Common Stock,
sufficient shares of Common Stock to effect the conversion of all of the
Series A Convertible Preferred Stock;
(v) the consummation of a Qualified Future Financing that grants
rights to the holders of the instruments issued in connection with such
Qualified Future Financing that are in addition to or superior to those
granted to the holders of the Series A Convertible Preferred Stock, as
evidenced by this Certificate of Designation or any subsequent amendment
hereto (a "Superior Right"); provided, however, that any terms which
provide for a conversion price that -------- ------- is, whether expressly
stated or calculated as a result of a formula, greater than or equal to the
conversion price then in place for the Series A Convertible Preferred stock
shall not be deemed to be a Superior Right.
then, in each case, the Corporation shall, within thirty (30) days of
receipt of the request of at least fifty-one percent (51%) of the holders of the
Series A Convertible Preferred Stock, redeem the Series A Convertible Preferred
Stock.
6.3 Partial Redemption. Upon the consummation of one or more Financings,
except Qualified Future Financings and other than from the issuance of the
Series A Convertible Preferred Stock pursuant to the Securities Purchase
Agreement or Exchange Agreement, the Corporation shall, at the request of at
least fifty-one percent (51%) of the holders of the Series A Convertible
Preferred Stock, use twenty five percent (25%) of the net proceeds from the
Qualified Future Financings to redeem the applicable amount of Series A
Convertible Preferred Stock.
6.4 Redemption Price. For purposes of this Section 6, the redemption price
of the Series A Convertible Preferred Stock shall be equal to the greater of (i)
the Original Issue Price, plus all cumulative accrued and unpaid dividends, or
(ii) the number of shares of Common Stock into which the redeemed shares may be
converted times the Market Price.
6.5 Redemption Procedures.
(a) Any permitted redemption of the Series A Convertible Preferred
Stock pursuant to Sections 6.1, 6.2, or 6.3 above shall be deemed to be
effective and consummated (for purposes of determining the Redemption Price
and the time at which the holders shall thereafter not be entitled to
deliver a Notice of Conversion for the Preferred Shares) as follows:
(i) A redemption pursuant to Section 6.1, the Redemption Date
specified therein;
(ii) A redemption pursuant to Section 6.2(i), (ii), (iii), or
(iv), the date of consummation of the applicable event;
(iii) A redemption pursuant to Section 6.2(v), three (3) business
days following the date of consummation of the applicable Qualified
Future Financing (meaning closing and funding).
(b) On the effective date of a redemption of the Series A Convertible
Preferred Stock as specified above, the Corporation shall deliver by wire
transfer of funds the redemption price to the holders of the Series A
Convertible Preferred Stock subject to redemption. Should a holder not
receive payment of any amounts due on redemption of its Series A
Convertible Preferred Stock by reason of the Corporation's failure to make
payment at the times prescribed above for any reason, the Corporation shall
pay to the applicable holder on demand (x) interest on the sums not paid
when due at an annual rate equal to the lesser of (I)the maximum lawful
rate and (II) 18% per annum, compounded at the end of each thirty (30)
days, until the applicable holder is paid in full and (y) all costs of
collection, including, but not limited to, reasonable attorneys' fees and
costs, whether or not suit or other formal proceedings are instituted.
(c) The Corporation shall select the Series A Convertible Preferred
Stock to be redeemed in any redemption in which not all of the Series A
Convertible Preferred Stock are to be redeemed so that the ratio of the
Series A Convertible Preferred Stock of each holder selected for redemption
to the total Series A Convertible Preferred Stock owned by that holder
shall be the same as the ratio of all such Series A Convertible Preferred
Stock selected for redemption bears to the total of all then outstanding
Series A Convertible Preferred Stock. Should any Series A Convertible
Preferred Stock required to be redeemed under the terms hereof not be
redeemed solely by reason of limitations imposed by law, the applicable
Series A Convertible Preferred Stock shall be redeemed on the earliest
possible dates thereafter to the maximum extent permitted by law.
(d) Any Notice of Conversion delivered by a holder (including delivery
via facsimile) to the Corporation prior to the effective date of a
voluntary redemption pursuant to Section 6.1 or a mandatory redemption
pursuant to Section 6.2 shall be honored by the Corporation and the
conversion of the Series A Convertible Preferred Stock shall be deemed
effected on the Conversion Date. In addition, between the effective date of
a voluntary redemption pursuant to Section 6.1 or a mandatory redemption
pursuant to Section 6.2 above and the date the Corporation is required to
deliver the redemption proceeds in full to the applicable holder(s), the
holder may deliver a Notice of Conversion to the Corporation. Such notice
will be (x) of no force or effect if the Corporation timely pays the
redemption proceeds to holder when due or (y) honored on or as of the date
of the Notice of Conversion if the Corporation fails to timely pay the
redemption proceeds to holder when due. Additionally, in the event the
Corporation fails to make full payment of the redemption price of the
Series A Convertible Preferred Stock being redeemed by the tenth (10)
business day following the notice of redemption, then the Corporation
waives its right to redeem any of the remaining then outstanding Series A
Convertible Preferred Stock, unless such redemption is approved by the
holder.
7. Notices. Any notices required by the provisions of this Certificate of
Designation to be given to the holders of shares of Series A Convertible
Redeemable Preferred Stock shall be deemed given if given in accordance with the
Securities Purchase Agreement.
8. Voting Provisions. Each share of Series A Convertible Preferred Stock
shall be entitled to the number of votes to which the holders thereof would be
entitled if they converted their shares of Series A Convertible Preferred Stock
at the time of voting in accordance with Section 4 hereof.
9. Paramount Provision. Upon consummation of a Qualified Future Financing
which contains a Superior Right, the terms and conditions of such Superior Right
shall be automatically incorporated into the rights of the Series A Convertible
Preferred Stock contained herein and will supersede any provisions contained
herein relating to such Superior Right that would conflict with the exercise or
application of such Superior Right. If the Company provides any consideration to
the holders of any equity or convertible debt instrument issued in connection
with such Qualified Future Financing that is in addition to the consideration
provided to the holders of the Series A Convertible Preferred Stock (such as,
for purposes of illustration, a warrant agreement other that a warrant
substantially identical to the warrants held by a holder of the Series A
Convertible Preferred Stock and issued in similar denominations and for
substantially identical consideration provided or a registration rights
agreement providing additional registration rights), then the Company will take
all lawful and reasonable steps necessary to ensure that the holders of the
Series A Convertible Preferred Stock also receive such additional consideration.
Signature Page Follows
IN WITNESS WHEREOF, the Corporation has caused this Certificate of
Designation of Series A Convertible Preferred Stock to be duly executed by its
President and attested to by its Secretary this 25th day of May, 2004.
By: ____/s/__________________________
Peter P. Phildius, President
By: ______/s/________________________
Jay Leatherman, Secretary