EXHIBIT 3.1
CERTIFICATE OF
DESIGNATIONS, PREFERENCES AND RIGHTS
OF
SERIES B CONVERTIBLE PREFERRED STOCK
OF
KANAKARIS WIRELESS
(Pursuant to Section 78.1955 of the
Nevada General Corporation Law)
KANAKARIS WIRELESS, a corporation organized and existing under
the Nevada General Corporation Law (the "CORPORATION"), hereby certifies that
the following resolutions were adopted by the Board of Directors of the
Corporation on April 10, 2002 pursuant to authority of the Board of Directors as
required by Section 78.1955 of the Nevada General Corporation Law:
RESOLVED, that pursuant to the authority granted to and vested
in the Board of Directors of this Corporation (the "BOARD OF DIRECTORS" or the
"BOARD") in accordance with the provisions of its Restated Articles of
Incorporation, the Board of Directors hereby authorizes a series of the
Corporation's previously authorized Preferred Stock, par value $.01 per share
(the "PREFERRED STOCK"), and hereby states the designation and number of shares,
and fixes the relative rights, preferences, privileges, powers and restrictions
thereof as follows:
Series B Convertible Preferred Stock:
I. DESIGNATION AND AMOUNT
-------------------------
The designation of this series, which consists of 900 shares of
Preferred Stock, is Series B Convertible Preferred Stock (the "SERIES B
PREFERRED STOCK") and the stated value shall be One Thousand Dollars ($1,000)
per share (the "STATED VALUE").
II. RANK
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The Series B Preferred Stock shall rank (i) prior to the Corporation's
common stock, par value $.001 per share (the "COMMON STOCK"); (ii) prior to the
Class A Convertible Preferred Stock and any class or series of capital stock of
the Corporation hereafter created (unless, with the consent of
the holders of Series B Preferred Stock obtained in accordance with Article VIII
hereof, such class or series of capital stock specifically, by its terms, ranks
senior to or PARI PASSU with the Series B Preferred Stock) (collectively, with
the Common Stock, "JUNIOR SECURITIES"); (iii) PARI PASSU with any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series B Preferred Stock obtained in accordance with Article
VIII hereof) specifically ranking, by its terms, on parity with the Series B
Preferred Stock ("PARI PASSU SECURITIES"); and (iv) junior to any class or
series of capital stock of the Corporation hereafter created (with the consent
of the holders of Series B Preferred Stock obtained in accordance with Article
VIII hereof) specifically ranking, by its terms, senior to the Series B
Preferred Stock ("SENIOR SECURITIES"), in each case as to distribution of assets
upon liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary.
III. DIVIDENDS
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The Series B Preferred Stock shall bear dividends at the rate of eight
percent (8%) per annum from the date of issuance of the Series B Preferred Stock
until conversion or redemption thereof. The eight percent (8%) dividend shall be
computed on the basis of a 365-day year and the actual number of days elapsed
and shall be payable, at the option of the holder of the Series B Preferred
Stock, either quarterly on March 31, June 30, September 30 and December 31 of
each year beginning on June 30, 2002, or at the time of conversion of Series B
Preferred Stock in accordance with terms hereof. All dividends due hereunder (to
the extent not converted into Common Stock in accordance with the terms hereof)
shall be made in lawful money of the United States of America or, at the option
of the holder of the Series B Preferred Stock, in whole or in part, in shares of
Common Stock of the Corporation valued at the then applicable Conversion Price
(as defined herein). All payments shall be made at such address as the holder of
the Series B Preferred Stock shall hereafter give to the Corporation by written
notice made in accordance with the provisions hereof. Whenever any amount
expressed to be due by the terms hereof is due on any day which is not a
business day, the same shall instead be due on the next succeeding day which is
a business day and, in the case of any dividend payment date which is not the
date on which the Series B Preferred Stock is converted, the extension of the
due date thereof shall not be taken into account for purposes of determining the
amount of dividend due on such date. As used herein, the term "business day"
shall mean any day other than a Saturday, Sunday or a day on which commercial
banks in the city of Los Angeles, California are authorized or required by law
or executive order to remain closed. In no event, so long as any Series B
Preferred Stock shall remain outstanding, shall any dividend whatsoever be
declared or paid upon, nor shall any distribution be made upon, any Junior
Securities, nor shall any shares of Junior Securities be purchased or redeemed
by the Corporation nor shall any moneys be paid to or made available for a
sinking fund for the purchase or redemption of any Junior Securities (other than
a distribution of Junior Securities), without, in each such case, the written
consent of the holders of a majority of the outstanding shares of Series B
Preferred Stock, voting together as a class.
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IV. LIQUIDATION PREFERENCE
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A. LIQUIDATION EVENT.
---------------------
If the Corporation shall commence a voluntary case under the Federal
bankruptcy laws or any other applicable Federal or State bankruptcy, insolvency
or similar law, or consent to the entry of an order for relief in an involuntary
case under any law or to the appointment of a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or other similar official) of the Corporation
or of any substantial part of its property, or make an assignment for the
benefit of its creditors, or admit in writing its inability to pay its debts
generally as they become due, or if a decree or order for relief in respect of
the Corporation shall be entered by a court having jurisdiction in the premises
in an involuntary case under the Federal bankruptcy laws or any other applicable
Federal or state bankruptcy, insolvency or similar law resulting in the
appointment of a receiver, liquidator, assignee, custodian, trustee,
sequestrator (or other similar official) of the Corporation or of any
substantial part of its property, or ordering the winding up or liquidation of
its affairs, and any such decree or order shall be unstayed and in effect for a
period of thirty (30) consecutive days and, on account of any such event, the
Corporation shall liquidate, dissolve or wind up, or if the Corporation shall
otherwise liquidate, dissolve or wind up (each such event being considered a
"LIQUIDATION EVENT"), no distribution shall be made to the holders of any shares
of capital stock of the Corporation (other than Senior Securities) upon
liquidation, dissolution or winding up unless prior thereto, the holders of
shares of Series B Preferred Stock, subject to Article VI, shall have received
the Liquidation Preference (as defined in Article IV.C) with respect to each
share. If upon the occurrence of a Liquidation Event, the assets and funds
available for distribution among the holders of the Series B Preferred Stock and
holders of PARI PASSU Securities (including any dividends or distribution paid
on any PARI PASSU Securities after the date of filing of this Certificate of
Designation) shall be insufficient to permit the payment to such holders of the
preferential amounts payable thereon, then the entire assets and funds of the
Corporation legally available for distribution to the Series B Preferred Stock
and the PARI PASSU Securities shall be distributed ratably among such shares in
proportion to the ratio that the Liquidation Preference payable on each such
share bears to the aggregate liquidation preference payable on all such shares.
Any prior dividends or distribution made after the date of filing of this
Certificate of Designation shall offset, dollar for dollar, the amount payable
to the class or series to which such distribution was made.
B. CERTAIN ACTS DEEMED LIQUIDATION EVENT.
-----------------------------------------
At the option of any holder of Series B Preferred Stock, the sale,
conveyance or disposition of all or substantially all of the assets of the
Corporation, the effectuation by the Corporation of a transaction or series of
related transactions in which more than 50% of the voting power of the
Corporation is disposed of, or the consolidation, merger or other business
combination of the Corporation with or into any other Person (as defined below)
or Persons when the Corporation is not the survivor shall either: (i) be deemed
to be a liquidation, dissolution or winding up of the Corporation pursuant to
which the Corporation shall be required to distribute upon consummation of and
as a condition to such transaction an amount equal to 120% of the Liquidation
Preference with respect to each outstanding share of Series B Preferred Stock or
(ii) be treated pursuant to Article VI.C(b) hereof. "PERSON" shall mean any
individual, corporation, limited liability company, partnership, association,
trust or other entity or organization.
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C. LIQUIDATION PREFERENCE.
--------------------------
For purposes hereof, the "LIQUIDATION PREFERENCE" with respect to a
share of the Series B Preferred Stock shall mean an amount equal to the sum of
(i) the Stated Value thereof plus (ii) any accrued and unpaid dividends for the
period beginning on the date of issuance of the Series B Preferred Stock (the
"ISSUE DATE") and ending on the date of final distribution to the holder thereof
(prorated for any portion of such period) plus (iii) all Conversion Default
Payments (as defined in Article VI.E below), Delivery Default Payments (as
defined in Article VI.D below) and any other amounts owed to such holder
pursuant to Section 2(c) of the Registration Rights Agreement (as defined below)
or pursuant to the Exchange Agreement. The liquidation preference with respect
to any PARI PASSU Securities shall be as set forth in a certificate of
designation filed in respect thereof.
V. REDEMPTION
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A. MANDATORY REDEMPTION.
------------------------
If any of the following events (each, a "MANDATORY REDEMPTION EVENT")
shall occur:
(i) The Corporation (a) fails to issue shares of Common Stock
to the holders of Series B Preferred Stock upon exercise by the holders of their
conversion rights in accordance with the terms of this Certificate of
Designation (for a period of at least thirty (30) days if such failure is solely
as a result of the circumstances governed by the second paragraph of Article
VI.E below and the Corporation is using its best efforts to authorize a
sufficient number of shares of Common Stock as soon as practicable), (b) fails
to transfer or to cause its transfer agent to transfer (electronically or in
certificated form) any certificate for shares of Common Stock issued to the
holders upon conversion of the Series B Preferred Stock as and when required by
this Certificate of Designation or the Registration Rights Agreement, dated as
of April 10, 2002, by and among the Corporation and the other signatory thereto
(the "REGISTRATION RIGHTS AGREEMENT"), (c) fails to remove any restrictive
legend (or to withdraw any stop transfer instructions in respect thereof) on any
certificate or any shares of Common Stock issued to the holders of Series B
Preferred Stock upon conversion of the Series B Preferred Stock as and when
required by this Certificate of Designation, the Exchange Agreement dated as of
April 10, 2002, by and between the Corporation and the other signatories thereto
(the "EXCHANGE AGREEMENT") or the Registration Rights Agreement, or (d) fails to
fulfill its obligations pursuant to the Exchange Agreement (or makes any
announcement, statement or threat that it does not intend to honor the
obligations described in this paragraph) and any such failure shall continue
uncured (or any announcement, statement or threat not to honor its obligations
shall not be rescinded in writing) for ten (10) days after the Corporation shall
have been notified thereof in writing by any holder of Series B Preferred Stock;
(ii) The Corporation fails to obtain effectiveness of the
Registration Statement (as defined in the Registration Rights Agreement) (the
"REGISTRATION STATEMENT") with the Securities and Exchange Commission (the
"SEC"), prior to 210 days from the date of the Registration Rights Agreement,
required to be filed pursuant to Section 2(a) of the Registration Rights
Agreement, or fails to obtain the effectiveness of any additional Registration
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Statement (required to be filed pursuant to Section 3(b) of the Registration
Rights Agreement) within thirty (30) days after the Registration Trigger Date
(as defined in the Registration Rights Agreement), or any such Registration
Statement, after its initial effectiveness and during the Registration Period
(as defined in the Registration Rights Agreement), lapses in effect or sales of
all of the Registrable Securities (as defined in the Registration Rights
Agreement, the "REGISTRABLE SECURITIES") otherwise cannot be made thereunder
(whether by reason of the Corporation's failure to amend or supplement the
prospectus included therein in accordance with the Registration Rights
Agreement, the Corporation's failure to file and obtain effectiveness with the
SEC of an additional Registration Statement required to be filed pursuant to
Section 3(b) of the Registration Rights Agreement or otherwise) for more than
thirty (30) consecutive days or more than forty-five (45) days in any twelve
(12) month period after such Registration Statement becomes effective;
(iii) The Corporation or any subsidiary of the Corporation
shall make an assignment for the benefit of creditors, or apply for or consent
to the appointment of a receiver or trustee for it or for all or substantially
all of its property or business; or such a receiver or trustee shall otherwise
be appointed;
(iv) Bankruptcy, insolvency, reorganization or liquidation
proceedings or other proceedings for relief under any bankruptcy law or any law
for the relief of debtors shall be instituted by or against the Corporation or
any subsidiary of the Corporation;
(v) The Corporation shall fail to maintain the listing of the
Common Stock on the Nasdaq National Market, the Nasdaq SmallCap Market, the New
York Stock Exchange or the American Stock Exchange, or the
Over-the-Counter-Bulletin Board ("OTCBB"),
then, upon the occurrence and during the continuation of any Mandatory
Redemption Event specified in subparagraphs (i), (ii) or (v), at the option of
the holders of at least 50% of the then outstanding shares of Series B Preferred
Stock exercisable by delivery of written notice (the "Mandatory Redemption
Notice") to the Corporation of such Mandatory Redemption Event, or upon the
occurrence of any Mandatory Redemption Event specified in subparagraphs (iii) or
(iv), the then outstanding shares of Series B Preferred Stock shall become
immediately redeemable and the Corporation shall purchase each holder's
outstanding shares of Series B Preferred Stock for an amount per share equal to
the greater of (1) 120% multiplied by the sum of (a) the Stated Value of the
shares to be redeemed plus (b) any accrued and unpaid dividends for the period
beginning on the Issue Date and ending on the date of payment of the Mandatory
Redemption Amount (the "MANDATORY REDEMPTION DATE") plus (c) all Conversion
Default Payments (as defined in Article VI.E below), Delivery Default Payments
(as defined in Article VI.D below) and any other amounts owed to such holder
pursuant to Section 2(c) of the Registration Rights Agreement or pursuant to the
Exchange Agreement, and (2) the "PARITY VALUE" of the shares to be redeemed,
where parity value means the product of (a) the highest number of shares of
Common Stock issuable upon conversion of such shares of Series B Preferred Stock
in accordance with Article VI below (without giving any effect to any
limitations on conversions of shares contained herein, and treating the Trading
Day (as defined in Article VI.B) immediately preceding the Mandatory Redemption
Date as the "CONVERSION DATE" (as defined in Article VI.B(a)) for purposes of
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determining the lowest applicable Conversion Price, unless the Mandatory
Redemption Event arises as a result of a breach in respect of a specific
Conversion Date in which case such specific Conversion Date shall be the
Conversion Date), multiplied by (b) the highest Closing Price (as defined below)
for the Common Stock during the period beginning on the date of first occurrence
of the Mandatory Redemption Event and ending one day prior to the Mandatory
Redemption Date (the greater of such amounts being referred to as the "MANDATORY
REDEMPTION AMOUNT"). "CLOSING PRICE," as of any date, means the last sale price
of the Common Stock on the OTCBB as reported by Bloomberg Financial Markets or
an equivalent reliable reporting service mutually acceptable to and hereafter
designated by the holders of a majority in interest of the shares of Series B
Preferred Stock and the Corporation ("BLOOMBERG") or, if OTCBB is not the
principal trading market for such security, the last sale price of such security
on the principal securities exchange or trading market where such security is
listed or traded as reported by Bloomberg, or if the foregoing do not apply, the
last sale price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
last sale price of such security is available in the over-the-counter market on
the electronic bulletin board for such security or in any of the foregoing
manners, the average of the bid prices of any market makers for such security
that are listed in the "PINK SHEETS" by the National Quotation Bureau, Inc. If
the Closing Price cannot be calculated for such security on such date in the
manner provided above, the Closing Price shall be the fair market value as
mutually determined by the Corporation and the holders of a majority in interest
of shares of Series B Preferred Stock for which the calculation of the Closing
Price is required.
B. TRADING MARKET REDEMPTION.
-----------------------------
If the Series B Preferred Stock ceases to be convertible by any holder
as a result of the limitations described in Article VI.A(c) below (a "TRADING
MARKET REDEMPTION EVENT"), and the Corporation has not, prior to, or within
thirty (30) days of, the date that such Trading Market Redemption Event arises,
(i) obtained the Stockholder Approval (as defined in Article VI.A(c)) or (ii)
eliminated any prohibitions under applicable law or the rules or regulations of
any stock exchange, interdealer quotation system or other self-regulatory
organization with jurisdiction over the Corporation or any of its securities on
the Corporation's ability to issue shares of Common Stock in excess of the
Maximum Share Amount (as defined in Article VI.A(c)), then the Corporation shall
be obligated to redeem immediately all of the then outstanding Series B
Preferred Stock, in accordance with this Article V.B. An irrevocable redemption
notice (the "TRADING MARKET REDEMPTION NOTICE") shall be delivered promptly to
the holders of Series B Preferred Stock at their registered address appearing on
the records of the Corporation and shall state (i) that the Maximum Share Amount
(as defined in Article VI.A) has been issued upon exercise of the Series B
Preferred Stock, (ii) that the Corporation is obligated to redeem all of the
outstanding Series B Preferred Stock and (iii) the Mandatory Redemption Date,
which shall be a date within five (5) business days of the earlier of (a) the
date of the Trading Market Redemption Notice or (b) the date on which the
holders of the Series B Preferred Stock notify the Corporation of the occurrence
of a Trading Market Redemption Event. On the Mandatory Redemption Date, the
Corporation shall make payment of the Mandatory Redemption Amount (as defined in
Article V.A above) in cash.
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C. OPTIONAL REDEMPTION.
-----------------------
Notwithstanding anything to the contrary contained in this Article V,
so long as (i) no Mandatory Redemption Event or Trading Market Redemption Event
shall have occurred and be continuing, (ii) any Registration Statement required
to be filed and be effective pursuant to the Registration Rights Agreement is
then in effect and has been in effect and sales of all of the Registrable
Securities can be made thereunder for at least twenty (20) days prior to the
Optional Redemption Date (as defined below) and (iii) the Corporation has a
sufficient number of authorized shares of Common Stock reserved for issuance
upon full conversion of the Series B Preferred Stock, then at any time after the
Issue Date, the Corporation shall have the right on any Trading Day to deliver
written notice to the holders of Series B Preferred Stock (which notice may not
be sent to the holders of the Series B Preferred Stock until the Corporation is
permitted to redeem the Series B Preferred Stock pursuant to this Article V.C)
of its intention to redeem all of the outstanding shares of Series B Preferred
Stock in accordance with this Article V.C. Any notice (the "OPTIONAL REDEMPTION
NOTICE") of redemption hereunder (an "OPTIONAL REDEMPTION") shall be delivered
to the holders of Series B Preferred Stock at their registered addresses
appearing on the books and records of the Corporation and shall state (1) that
the Corporation is exercising its right to redeem all of the outstanding shares
of Series B Preferred Stock issued and (2) the date of redemption (the "OPTIONAL
REDEMPTION DATE"), which date shall be ten (10) Trading Days after the date of
delivery of the Optional Redemption Notice. On the Optional Redemption Date, the
Corporation shall make payment of the Optional Redemption Amount (as defined
below) to or upon the order of the holders as specified by the holders in
writing to the Corporation at least one (1) business day prior to the Optional
Redemption Date. If the Corporation exercises its right to redeem the Series B
Preferred Stock, the Corporation shall make payment to the holders of an amount
in cash (the "OPTIONAL REDEMPTION AMOUNT") equal to 120% multiplied by the sum
of (i) the Stated Value of the shares of Series B Preferred Stock to be redeemed
plus (ii) any accrued and unpaid dividends for the period beginning on the Issue
Date and ending on the Optional Redemption Date plus (iii) all Conversion
Default Payments (as defined in Article VI.E below), Delivery Default Payments
(as defined in Article VI.D below) and any other amounts owed to such holder
pursuant to Section 2(c) of the Registration Rights Agreement or pursuant to the
Exchange Agreement, for each share of Series B Preferred Stock then held.
Notwithstanding notice of an Optional Redemption, the holders shall at all times
prior to the Optional Redemption Date maintain the right to convert all or any
shares of Series B Preferred Stock in accordance with Article VI and any shares
of Series B Preferred Stock so converted after receipt of an Optional Redemption
Notice and prior to the Optional Redemption Date set forth in such notice and
payment of the aggregate Optional Redemption Amount shall be deducted from the
shares of Series B Preferred Stock which are otherwise subject to redemption
pursuant to such notice. If the Corporation delivers an Optional Redemption
Notice and fails to pay the Optional Redemption Amount due to the holders of the
Series B Preferred Stock within two (2) business days following the Optional
Redemption Date, the Corporation shall forever forfeit its right to redeem the
Series B Preferred Stock pursuant to this Article V.C.
D. FAILURE TO PAY REDEMPTION AMOUNTS.
-------------------------------------
In the case of a Mandatory Redemption Event or the delivery of an
Optional Redemption Notice, if the Corporation fails to pay the Mandatory
Redemption Amount or Optional Redemption Amount within five (5) business days of
written notice that such amount is due and payable, then (assuming there are
sufficient authorized shares) in addition to all other available remedies, each
holder of Series B Preferred Stock shall have the right at any time, so long as
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the Mandatory Redemption Event continues, or at any time after delivery of an
Optional Redemption Notice, to require the Corporation, upon written notice, to
immediately issue (in accordance with and subject to the terms of Article VI
below), in lieu of the Mandatory Redemption Amount or the Optional Redemption
Amount, the number of shares of Common Stock of the Corporation equal to such
applicable redemption amount divided by any Conversion Price (as defined below),
as chosen in the sole discretion of the holder of Series B Preferred Stock, in
effect from the date of the Mandatory Redemption Event or the date of delivery
of an Optional Redemption Notice until the date such holder elects to exercise
its rights pursuant to this Article V.D.
VI. CONVERSION AT THE OPTION OF THE HOLDER
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A. OPTIONAL CONVERSION
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(a) CONVERSION AMOUNT.
----------------------
Subject to the conversion restriction set forth in Article VI.A(b)
below, each holder of shares of Series B Preferred Stock may, at its option at
any time and from time to time, upon surrender of the certificates therefor,
convert any or all of its shares of Series B Preferred Stock into Common Stock
as set forth below (an "OPTIONAL CONVERSION"). Each share of Series B Preferred
Stock shall be convertible into such number of fully paid and nonassessable
shares of Common Stock as such Common Stock exists on the Issue Date, or any
other shares of capital stock or other securities of the Corporation into which
such Common Stock is thereafter changed or reclassified, as is determined by
dividing (1) the sum of the Stated Value thereof plus any accrued and unpaid
dividends by (2) the then effective Conversion Price (as defined below);
provided, however, that in no event shall a holder of shares of Series B
Preferred Stock be entitled to convert any such shares in excess of that number
of shares upon conversion of which the sum of (x) the number of shares of Common
Stock beneficially owned by the holder and its affiliates (other than shares of
Common Stock which may be deemed beneficially owned through the ownership of the
unconverted portion of the shares of Series B Preferred Stock or the unexercised
or unconverted portion of any other securities of the Corporation subject to a
limitation on conversion or exercise analogous to the limitations contained
herein) and (y) the number of shares of Common Stock issuable upon the
conversion of the shares of Series B Preferred Stock with respect to which the
determination of this proviso is being made, would result in beneficial
ownership by a holder and such holder's affiliates of more than 4.9% of the
outstanding shares of Common Stock. The holder may waive the limitations set
forth herein by sixty-one (61) days written notice to the Corporation. For
purposes of the proviso to the immediately preceding sentence, beneficial
ownership shall be determined in accordance with Section 13(d) of the Securities
Exchange Act of 1934, as amended, and Regulation 13D-G thereunder, except as
otherwise provided in clause (x) of such proviso.
(b) CONVERSION RESTRICTIONS.
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Each holder of shares of Series B Preferred Stock shall not convert
shares of Series B Preferred Stock received by such holder prior to 120 days
following the Issue Date; provided, however, that the restriction on conversion
set forth above shall not apply to conversions taking place on any Conversion
Date (i) occurring on or after the date the Corporation makes a public
announcement that it intends to merge or consolidate with any other corporation
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or sell or transfer substantially all of the assets of the Corporation or (ii)
occurring on or after the date any person, group or entity (including the
Corporation) publicly announces a tender offer to purchase 50% or more of the
Corporation's Common Stock (or any other takeover scheme) or (iii) occurring on
or after the date on which there is a material adverse change in the business,
operation, assets, financial condition or prospects of the Corporation or its
subsidiaries, taken as a whole, or (iv) occurring on or after the occurrence of
any Mandatory Redemption Event or on or after the date of delivery of an
Optional Redemption Notice.
(c) TRADING MARKET LIMITATION.
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Unless the Corporation either (i) is permitted by the applicable rules
and regulations of the principal securities market on which the Common Stock is
listed or traded or (ii) has obtained approval of the issuance of the Common
Stock upon conversion of or otherwise pursuant to the Series B Preferred Stock
in accordance with applicable law and the rules and regulations of any stock
exchange, interdealer quotation system or other self-regulatory organization
with jurisdiction over the Corporation or any of its securities (the
"STOCKHOLDER APPROVAL"), in no event shall the total number of shares of Common
Stock issued upon conversion of or otherwise pursuant to the Series B Preferred
Stock (including any shares of capital stock or rights to acquire shares of
capital stock issued by the Corporation which are aggregated or integrated with
the Common Stock issued or issuable upon conversion of or otherwise pursuant to
the Series B Preferred Stock for purposes of any such rule or regulation) exceed
the maximum number of shares of Common Stock that the Corporation can so issue
pursuant to any rule of the principal United States securities market on which
the Common Stock trades (the "MAXIMUM SHARE AMOUNT") which, as of the Issue
Date, shall be 1,984,261 shares (19.99% of the total shares of Common Stock
outstanding on the Issue Date), subject to equitable adjustments from time to
time for stock splits, stock dividends, combinations, capital reorganizations
and similar events relating to the Common Stock occurring after the Issue Date.
With respect to each holder of Series B Preferred Stock, the Maximum Share
Amount shall refer to such holder's pro rata share thereof determined in
accordance with Article IX below. In the event that the sum of (x) the aggregate
number of shares of Common Stock actually issued upon conversion of or otherwise
pursuant to the outstanding Series B Preferred Stock plus (y) the aggregate
number of shares of Common Stock that remain issuable upon conversion of or
otherwise pursuant to the Series B Preferred Stock at the then effective
Conversion Price, represents at least one hundred percent (100%) of the Maximum
Share Amount (the "TRIGGERING EVENT"), the Corporation will use its best efforts
to seek and obtain Stockholder Approval (or obtain such other relief as will
allow conversions hereunder in excess of the Maximum Share Amount) as soon as
practicable following the Triggering Event.
B. CONVERSION PRICE.
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(a) CALCULATION OF CONVERSION PRICE.
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Subject to subparagraph (b) below, the "CONVERSION PRICE" shall be the
lesser of the Variable Conversion Price (as defined herein) and the Fixed
Conversion Price (as defined herein), subject to adjustments pursuant to the
provisions of Article VI.C below. The "VARIABLE CONVERSION PRICE" shall mean the
Market Price (as defined below), multiplied by .82. "MARKET PRICE" means the
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average of the lowest three (3) Intraday Trading Prices (as defined below) for
the Common Stock during the twenty (30) Trading Day period ending one Trading
Day prior to the date the Notice of Conversion is sent by the holder of Series B
Preferred Stock to the Corporation via facsimile (the "PRICING PERIOD").
"INTRADAY TRADING PRICE" means, for any security as of any date, the intraday
trading price on the OTCBB as reported by Bloomberg or, if the OTCBB is not the
principal trading market for such security, the intraday trading price of such
security on the principal securities exchange or trading market where such
security is listed or traded or, if no intraday trading price of such security
is available in any of the foregoing manners, the average of the intraday
trading prices of any market makers for such security that are listed in the
"pink sheets" by the National Quotation Bureau, Inc. If the Intraday Trading
Price cannot be calculated for such security on such date in the manner provided
above, the Intraday Trading Price shall be the fair market value as mutually
determined by the Corporation and the holders of a majority in interest of the
Series B Preferred Stock for which the calculation of the Intraday Trading Price
of Common Stock is required in order to determine the Conversion Price of such
Series B Preferred Stock. "TRADING DAY" shall mean any day on which the Common
Stock is traded for any period on the OTCBB, or on the principal securities
exchange or other securities market on which the Common Stock is then being
traded. The "FIXED CONVERSION PRICE" shall mean $.086.
(b) CONVERSION PRICE DURING MAJOR ANNOUNCEMENTS.
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Notwithstanding anything contained in subparagraph (a) of this
Paragraph B to the contrary, in the event the Corporation (i) makes a public
announcement that it intends to consolidate or merge with any other corporation
(other than a merger in which the Corporation is the surviving or continuing
corporation and its capital stock is unchanged) or sell or transfer all or
substantially all of the assets of the Corporation or (ii) any person, group or
entity (including the Corporation) publicly announces a tender offer to purchase
50% or more of the Corporation's Common Stock (or any other takeover scheme)
(the date of the announcement referred to in clause (i) or (ii) is hereinafter
referred to as the "ANNOUNCEMENT DATE"), then the Conversion Price shall,
effective upon the Announcement Date and continuing through the Adjusted
Conversion Price Termination Date (as defined below), be equal, for each such
date, to the lower of (x) the Conversion Price which would have been applicable
for an Optional Conversion occurring on the Announcement Date and (y) the
Conversion Price that would otherwise be in effect. From and after the Adjusted
Conversion Price Termination Date, the Conversion Price shall be determined as
set forth in subparagraph (a) of this Article VI.B. For purposes hereof,
"ADJUSTED CONVERSION PRICE TERMINATION Date" shall mean, with respect to any
proposed transaction or tender offer (or takeover scheme) for which a public
announcement as contemplated by this subparagraph (b) has been made, the date
upon which the Corporation (in the case of clause (i) above) or the person,
group or entity (in the case of clause (ii) above) consummates or publicly
announces the termination or abandonment of the proposed transaction or tender
offer (or takeover scheme) which caused this subparagraph (b) to become
operative.
C. ADJUSTMENTS TO CONVERSION PRICE.
-----------------------------------
The Conversion Price shall be subject to adjustment from time to time
as follows:
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(a) ADJUSTMENT TO CONVERSION PRICE DUE TO STOCK SPLIT, STOCK
------------------------------------------------------------
DIVIDEND, ETC.
- --------------
If at any time when Series B Preferred Stock is issued and outstanding,
the number of outstanding shares of Common Stock is increased or decreased by a
stock split, stock dividend, combination, reclassification, rights offering
below the Trading Price (as defined below) to all holders of Common Stock or
other similar event, which event shall have taken place during the reference
period for determination of the Conversion Price for any Optional Conversion of
the Series B Preferred Stock, then the Conversion Price shall be calculated
giving appropriate effect to the stock split, stock dividend, combination,
reclassification or other similar event. In such event, the Corporation shall
notify the Transfer Agent of such change on or before the effective date
thereof. "TRADING PRICE," which shall be measured as of the record date in
respect of the rights offering, means (i) the average of the last reported sale
prices for the shares of Common Stock on the OTCBB as reported by Bloomberg, as
applicable, for the five (5) Trading Days immediately preceding such date, or
(ii) if OTCBB is not the principal trading market for the shares of Common
Stock, the average of the last reported sale prices on the principal trading
market for the Common Stock during the same period as reported by Bloomberg, or
(iii) if market value cannot be calculated as of such date on any of the
foregoing bases, the Trading Price shall be the fair market value as reasonably
determined in good faith by (a) the Board of Directors of the Corporation or,
(b) at the option of a majority-in-interest of the holders of the outstanding
Series B Preferred Stock by an independent investment bank of nationally
recognized standing in the valuation of businesses similar to the business of
the Corporation.
(b) ADJUSTMENT DUE TO MERGER, CONSOLIDATION, ETC.
-------------------------------------------------
If, at any time when Series B Preferred Stock is issued and outstanding
and prior to the conversion of all Series B Preferred Stock, there shall be any
merger, consolidation, exchange of shares, recapitalization, reorganization, or
other similar event, as a result of which shares of Common Stock of the
Corporation shall be changed into the same or a different number of shares of
another class or classes of stock or securities of the Corporation or another
entity, or in case of any sale or conveyance of all or substantially all of the
assets of the Corporation other than in connection with a plan of complete
liquidation of the Corporation (each, a "CHANGE OF CONTROL TRANSACTION"), then
the holders of Series B Preferred Stock shall thereafter have the right to
receive upon conversion of the Series B Preferred Stock, upon the basis and upon
the terms and conditions specified herein and in lieu of the shares of Common
Stock immediately theretofore issuable upon conversion, such stock, securities
or assets which the holders of Series B Preferred Stock would have been entitled
to receive in such transaction had the Series B Preferred Stock been converted
in full immediately prior to such transaction (without regard to any limitations
on conversion contained herein), and in any such case appropriate provisions
shall be made with respect to the rights and interests of the holders of Series
B Preferred Stock to the end that the provisions hereof (including, without
limitation, provisions for adjustment of the Conversion Price and of the number
of shares of Common Stock issuable upon conversion of the Series B Preferred
Stock) shall thereafter be applicable, as nearly as may be practicable in
relation to any securities or assets thereafter deliverable upon the conversion
of Series B Preferred Stock. The Corporation shall not effect any transaction
described in this subsection (b) unless (a) it first gives, to the extent
practical, thirty (30) days' prior written notice (but in
-11-
any event at least fifteen (15) business days prior written notice) of the
record date of the special meeting of stockholders to approve, or if there is no
such record date, the consummation of, such Change of Control Transaction
(during which time the holders of Series B Preferred Stock shall be entitled to
convert the Series B Preferred Stock) and (b) the resulting successor or
acquiring entity (if not the Corporation) and, if an entity different from the
successor or acquiring entity, the entity whose capital stock or assets the
holders of the Common Stock are entitled to receive as a result of such Change
of Control Transaction, assumes by written instrument the obligations of this
Certificate of Designation (including this subsection (b)). The above provisions
shall similarly apply to successive consolidations, mergers, sales, transfers or
share exchanges.
(c) OTHER SECURITIES OFFERINGS.
-------------------------------
If, at any time after the Issue Date, the Corporation sells Common
Stock or securities convertible into, or exchangeable for, Common Stock, other
than a sale pursuant to a bona fide firm commitment underwritten public offering
of Common Stock by the Corporation (not including a continuous offering pursuant
to Rule 415 under the Securities Act of 1933, as amended) (collectively, the
"OTHER COMMON STOCK"), then, if the effective or maximum sales price of the
Common Stock with respect to such transaction (including the effective or
maximum conversion, or exchange price) (the "OTHER PRICE") is less than the
effective Conversion Price of the Series B Preferred Stock at such time and such
Other Common Stock is eligible for resale prior to the date that is 210 days
following the Issue Date, at the option of each holder of Series B Preferred
Stock, the Corporation shall adjust the Conversion Price applicable to the
Series B Preferred Stock not yet converted in form and substance reasonably
satisfactory to the holders of Series B Preferred Stock so that the Conversion
Price applicable to the Series B Preferred Stock shall not, in any event, be
greater, after giving effect to all other adjustments contained herein, than the
Other Price.
(d) ADJUSTMENT DUE TO DISTRIBUTION.
-----------------------------------
Subject to Article III, if the Corporation shall declare or make any
distribution of its assets (or rights to acquire its assets) to holders of
Common Stock as a dividend, stock repurchase, by way of return of capital or
otherwise (including any dividend or distribution to the Corporation's
shareholders in cash or shares (or rights to acquire shares) of capital stock of
a subsidiary (i.e., a spin-off)) (a "DISTRIBUTION"), then the holders of Series
B Preferred Stock shall be entitled, upon any conversion of shares of Series B
Preferred Stock after the date of record for determining shareholders entitled
to such Distribution, to receive the amount of such assets which would have been
payable to the holder with respect to the shares of Common Stock issuable upon
such conversion had such holder been the holder of such shares of Common Stock
on the record date for the determination of shareholders entitled to such
Distribution.
(e) PURCHASE RIGHTS.
--------------------
Subject to Article III, if at any time when any Series B Preferred
Stock is issued and outstanding, the Corporation issues any convertible
securities or rights to purchase stock, warrants, securities or other property
(the "PURCHASE RIGHTS") pro rata to the record holders of any class of Common
Stock, then the holders of Series B Preferred Stock will be entitled to acquire,
upon the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
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shares of Common Stock acquirable upon complete conversion of the Series B
Preferred Stock (without regard to any limitations on conversion contained
herein) immediately before the date on which a record is taken for the grant,
issuance or sale of such Purchase Rights, or, if no such record is taken, the
date as of which the record holders of Common Stock are to be determined for the
grant, issue or sale of such Purchase Rights.
(f) ADJUSTMENT FOR RESTRICTED PERIODS.
--------------------------------------
In the event that (i) the Corporation fails to obtain effectiveness
with the SEC of any Registration Statement required to be filed pursuant to the
Registration Rights Agreement on or prior to the date on which such Registration
Statement is required to become effective pursuant to the terms of the
Registration Rights Agreement, or (ii) any such Registration Statement after its
initial effectiveness and during the Registration Period (as defined in the
Registration Rights Agreement) lapses in effect, or sales of all the Registrable
Securities otherwise cannot be made thereunder, whether by reason of the
Corporation's failure or inability to amend or supplement the prospectus (the
"PROSPECTUS") included therein in accordance with the Registration Rights
Agreement or otherwise, after such Registration Statement becomes effective
(including, without limitation, during an Allowed Delay (as defined in Section
3(f) of the Registration Rights Agreement)), then, at the election of each
holder of Series B Preferred Stock, the Pricing Period shall be comprised of,
(x) in the case of an event described in clause (i), the thirty-two (32) Trading
Days preceding the date on which such Registration Statement is required to
become effective pursuant to the terms of the Registration Rights Agreement,
plus all Trading Days through and including the third (3rd) Trading Day
following the date of actual effectiveness of such Registration Statement; and
(y) in the case of an event described in clause (ii), the thirty-two (32)
Trading Days preceding the date on which the holder of the Series B Preferred
Stock is first notified that sales may not be made under the Prospectus, plus
all Trading Days through and including the third (3rd) Trading Day following the
date on which the Holder is first notified that such sales may again be made
under the Prospectus. If a holder of Series B Preferred Stock determines that
sales may not be made pursuant to the Prospectus (whether by reason of the
Corporation's failure or inability to amend or supplement the Prospectus or
otherwise) it shall so notify the Corporation in writing and, unless the
Corporation provides such holder with a written opinion of the Corporation's
counsel to the contrary, such determination shall be binding for purposes of
this paragraph.
D. MECHANICS OF CONVERSION.
---------------------------
In order to convert Series B Preferred Stock into full shares of Common
Stock, a holder of Series B Preferred Stock shall: (i) submit a copy of the
fully executed notice of conversion in the form attached hereto as Exhibit A
("NOTICE OF CONVERSION") to the Corporation by facsimile dispatched prior to
6:00 p.m., Los Angeles, California time (the "CONVERSION NOTICE DEADLINE") on
the date specified therein as the Conversion Date (as defined in Article
VI.D(d)) (or by other means resulting in, or reasonably expected to result in,
notice to the Corporation on the Conversion Date) to the office of the
Corporation or its designated Transfer Agent for the Series B Preferred Stock,
which notice shall specify the number of shares of Series B Preferred Stock to
be converted, the applicable Conversion Price and a calculation of the number of
shares of Common Stock issuable upon such conversion (together with a copy of
the first page of each certificate to be converted); and (ii) surrender the
-13-
original certificates representing the Series B Preferred Stock being converted
(the "PREFERRED STOCK CERTIFICATES"), duly endorsed, along with a copy of the
Notice of Conversion to the office of the Corporation or the Transfer Agent for
the Series B Preferred Stock as soon as practicable thereafter. The Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such conversion, unless either the Preferred Stock
Certificates are delivered to the Corporation or its Transfer Agent as provided
above, or the holder notifies the Corporation or its Transfer Agent that such
certificates have been lost, stolen or destroyed (subject to the requirements of
subparagraph (a) below). In the case of a dispute as to the calculation of the
Conversion Price, the Corporation shall promptly issue such number of shares of
Common Stock that are not disputed in accordance with subparagraph (b) below.
The Corporation shall submit the disputed calculations to its outside accountant
via facsimile within two (2) business days of receipt of the Notice of
Conversion. The accountant shall audit the calculations and notify the
Corporation and the holder of the results no later than 48 hours from the time
it receives the disputed calculations. The accountant's calculation shall be
deemed conclusive absent manifest error.
(a) LOST OR STOLEN CERTIFICATES.
--------------------------------
Upon receipt by the Corporation of evidence of the loss, theft,
destruction or mutilation of any Preferred Stock Certificates representing
shares of Series B Preferred Stock, and (in the case of loss, theft or
destruction) of indemnity reasonably satisfactory to the Corporation, and upon
surrender and cancellation of the Preferred Stock Certificate(s), if mutilated,
the Corporation shall execute and deliver new Preferred Stock Certificate(s) of
like tenor and date.
(b) DELIVERY OF COMMON STOCK UPON CONVERSION.
---------------------------------------------
Upon the surrender of certificates as described above together with a
Notice of Conversion, the Corporation shall issue and, within two (2) business
days after such surrender (or, in the case of lost, stolen or destroyed
certificates, after provision of agreement and indemnification pursuant to
subparagraph (a) above) (the "DELIVERY PERIOD"), deliver (or cause its Transfer
Agent to so issue and deliver) in accordance with the terms hereof and the
Exchange Agreement (including, without limitation, in accordance with the
requirements of the Exchange Agreement) to or upon the order of the holder (i)
that number of shares of Common Stock for the portion of the shares of Series B
Preferred Stock converted as shall be determined in accordance herewith and (ii)
a certificate representing the balance of the shares of Series B Preferred Stock
not converted, if any. In addition to any other remedies available to the
holder, including actual damages and/or equitable relief, the Corporation shall
pay to a holder $2,000 per day in cash for each day beyond a two (2) day grace
period following the Delivery Period that the Corporation fails to deliver
Common Stock (a "DELIVERY DEFAULT") issuable upon surrender of shares of Series
B Preferred Stock with a Notice of Conversion until such time as the Corporation
has delivered all such Common Stock (the "DELIVERY DEFAULT PAYMENTS"). Such
Delivery Default Payments shall be paid to such holder by the fifth day of the
month following the month in which it has accrued or, at the option of the
holder (by written notice to the Corporation by the first day of the month
following the month in which it has accrued), shall be convertible into Common
Stock in accordance with the terms of this Article VI.
In lieu of delivering physical certificates representing the Common
Stock issuable upon conversion, provided the Corporation's Transfer Agent is
participating in the Depository Trust Company ("DTC") Fast Automated Securities
-14-
Transfer ("FAST") program, upon request of the holder and its compliance with
the provisions contained in Article VI.A and in this Article VI.D, the
Corporation shall use its best efforts to cause its Transfer Agent to
electronically transmit the Common Stock issuable upon conversion to the holder
by crediting the account of holder's prime broker with DTC through its Deposit
Withdrawal Agent Commission ("DWAC") system. The time periods for delivery and
penalties described in the immediately preceding paragraph shall apply to the
electronic transmittals described herein.
(c) NO FRACTIONAL SHARES.
-------------------------
If any conversion of Series B Preferred Stock would result in a
fractional share of Common Stock or the right to acquire a fractional share of
Common Stock, such fractional share shall be disregarded and the number of
shares of Common Stock issuable upon Conversion of the Series B Preferred Stock
shall be the next higher number of shares.
(d) CONVERSION DATE.
--------------------
The "CONVERSION DATE" shall be the date specified in the Notice of
Conversion, provided that the Notice of Conversion is submitted by facsimile (or
by other means resulting in, or reasonably expected to result in, notice) to the
Corporation or its Transfer Agent before 6:00 p.m., Los Angeles, California
time, on the date so specified, otherwise the Conversion Date shall be the first
business day after the date so specified on which the Notice of Conversion is
actually received by the Corporation or its Transfer Agent. The person or
persons entitled to receive the shares of Common Stock issuable upon conversion
shall be treated for all purposes as the record holder or holders of such
securities as of the Conversion Date and all rights with respect to the shares
of Series B Preferred Stock surrendered shall forthwith terminate except the
right to receive the shares of Common Stock or other securities or property
issuable on such conversion and except that the holders preferential rights as a
holder of Series B Preferred Stock shall survive to the extent the Corporation
fails to deliver such securities.
E. RESERVATION OF SHARES.
-------------------------
A number of shares of the authorized but unissued Common Stock
sufficient to provide for the conversion of the Series B Preferred Stock
outstanding (based on the lesser of the then current Variable Conversion Price
and the Fixed Conversion Price in effect from time to time) shall at all times
be reserved by the Corporation, free from preemptive rights, for such conversion
or exercise. As of the date of issuance of the Series B Preferred Stock, 200% of
the authorized and unissued shares of Common Stock have been duly reserved for
issuance upon conversion of the Series B Preferred Stock (the "RESERVED
AMOUNT"). The Reserved Amount shall be increased from time to time in accordance
with the Corporation's obligations pursuant to the Exchange Agreement and
Registration Rights Agreement. In addition, if the Corporation shall issue any
securities or make any change in its capital structure which would change the
number of shares of Common Stock into which each share of the Series B Preferred
Stock shall be convertible, the Corporation shall at the same time also make
proper provision so that thereafter there shall be a sufficient number of shares
of Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Series B Preferred Stock.
-15-
If at any time a holder of shares of Series B Preferred Stock submits a
Notice of Conversion, and the Corporation does not have sufficient authorized
but unissued shares of Common Stock available to effect such conversion in
accordance with the provisions of this Article VI (a "CONVERSION Default"),
subject to Article IX, the Corporation shall issue to the holder all of the
shares of Common Stock which are available to effect such conversion. The number
of shares of Series B Preferred Stock included in the Notice of Conversion which
exceeds the amount which is then convertible into available shares of Common
Stock (the "EXCESS AMOUNT") shall, notwithstanding anything to the contrary
contained herein, not be convertible into Common Stock in accordance with the
terms hereof until (and at the holder's option at any time after) the date
additional shares of Common Stock are authorized by the Corporation to permit
such conversion, at which time the Conversion Price in respect thereof shall be
the lesser of (i) the Conversion Price on the Conversion Default Date (as
defined below) and (ii) the Conversion Price on the Conversion Date elected by
the holder in respect thereof. The Corporation shall use its best efforts to
effect an increase in the authorized number of shares of Common Stock as soon as
possible following the earlier of (i) such time that a holder of Series B
Preferred Stock notifies the Corporation or that the Corporation otherwise
becomes aware that there are or likely will be insufficient authorized and
unissued shares to allow full conversion thereof and (ii) a Conversion Default.
In addition, the Corporation shall pay to the holder payments ("CONVERSION
DEFAULT PAYMENTS") for a Conversion Default in the amount of (a) .24, multiplied
by (b) the sum of the Stated Value plus any accrued and unpaid dividends through
the Authorization Date (as defined below), multiplied by (c) (N/365), where N =
the number of days from the day the holder submits a Notice of Conversion giving
rise to a Conversion Default (the "Conversion Default Date") to the date (the
"Authorization Date") that the Corporation authorizes a sufficient number of
shares of Common Stock to effect conversion of the full number of shares of
Series B Preferred Stock. The Corporation shall send notice to the holder of the
authorization of additional shares of Common Stock, the Authorization Date and
the amount of holder's accrued Conversion Default Payments. The accrued
Conversion Default Payment for each calendar month shall be paid in cash or
shall be convertible into Common Stock at the applicable Conversion Price, at
the holder's option, as follows:
(a) In the event the holder elects to take such
payment in cash, cash payment shall be made to holder by the fifth day of the
month following the month in which it has accrued; and
(b) In the event the holder elects to take such
payment in Common Stock, the holder may convert such payment amount into Common
Stock at the Conversion Price (as in effect at the time of Conversion) at any
time after the fifth day of the month following the month in which it has
accrued in accordance with the terms of this Article VI (so long as there is
then a sufficient number of authorized shares of Common Stock).
The holder's election shall be made in writing to the Corporation at
any time prior to 6:00 p.m., Los Angeles, California time, on the third (3rd)
day of the month following the month in which Conversion Default payments have
accrued. If no election is made, the holder shall be deemed to have elected to
receive cash. Nothing herein shall limit the holder's right to pursue actual
damages (to the extent in excess of the Conversion Default Payments) for the
Corporation's failure to maintain a sufficient number of
-16-
authorized shares of Common Stock, and each holder shall have the right to
pursue all remedies available at law or in equity (including a decree of
specific performance and/or injunctive relief).
F. NOTICE OF CONVERSION PRICE ADJUSTMENTS.
------------------------------------------
Upon the occurrence of each adjustment or readjustment of the
Conversion Price pursuant to this Article VI, the Corporation, at its expense,
shall promptly compute such adjustment or readjustment in accordance with the
terms hereof and prepare and furnish to each holder of Series B Preferred Stock
a certificate setting forth such adjustment or readjustment and showing in
detail the facts upon which such adjustment or readjustment is based. The
Corporation shall, upon the written request at any time of any holder of Series
B Preferred Stock, furnish or cause to be furnished to such holder a like
certificate setting forth (i) such adjustment or readjustment, (ii) the
Conversion Price at the time in effect and (iii) the number of shares of Common
Stock and the amount, if any, of other securities or property which at the time
would be received upon conversion of a share of Series B Preferred Stock.
G. STATUS AS STOCKHOLDERS.
--------------------------
Upon submission of a Notice of Conversion by a holder of Series B
Preferred Stock, (i) the shares covered thereby (other than the shares, if any,
which cannot be issued because their issuance would exceed such holder's
allocated portion of the Reserved Amount or Maximum Share Amount) shall be
deemed converted into shares of Common Stock and (ii) the holder's rights as a
holder of such converted shares of Series B Preferred Stock shall cease and
terminate, excepting only the right to receive certificates for such shares of
Common Stock and to any remedies provided herein or otherwise available at law
or in equity to such holder because of a failure by the Corporation to comply
with the terms of this Certificate of Designation. Notwithstanding the
foregoing, if a holder has not received certificates for all shares of Common
Stock prior to the tenth (10th) business day after the expiration of the
Delivery Period with respect to a conversion of shares of Series B Preferred
Stock for any reason, then (unless the holder otherwise elects to retain its
status as a holder of Common Stock by so notifying the Corporation) the holder
shall regain the rights of a holder of such shares of Series B Preferred Stock
with respect to such unconverted shares of Series B Preferred Stock and the
Corporation shall, as soon as practicable, return such unconverted shares of
Series B Preferred Stock to the holder or, if such shares of Series B Preferred
Stock have not been surrendered, adjust its records to reflect that such shares
of Series B Preferred Stock have not been converted. In all cases, the holder
shall retain all of its rights and remedies (including, without limitation, (i)
the right to receive Delivery Default Payments pursuant to Article VI.E to the
extent required thereby for such Delivery Default and any subsequent Delivery
Default and (ii) the right to have the Conversion Price with respect to
subsequent conversions determined in accordance with Article VI.E.) for the
Corporation's failure to convert the Series B Preferred Stock.
VII. VOTING RIGHTS
------------------
The holders of the Series B Preferred Stock have no voting power
whatsoever, except as otherwise provided by the Nevada General Corporation Law,
in this Article VII, and in Article VIII below.
-17-
Notwithstanding the above, the Corporation shall provide each holder of
Series B Preferred Stock with prior notification of any meeting of the
shareholders (and copies of proxy materials and other information sent to
shareholders). In the event of any taking by the Corporation of a record of its
shareholders for the purpose of determining shareholders who are entitled to
receive payment of any dividend or other distribution, any right to subscribe
for, purchase or otherwise acquire (including by way of merger, consolidation or
recapitalization) any share of any class or any other securities or property, or
to receive any other right, or for the purpose of determining shareholders who
are entitled to vote in connection with any proposed sale, lease or conveyance
of all or substantially all of the assets of the Corporation, or any proposed
liquidation, dissolution or winding up of the Corporation, the Corporation shall
mail a notice to each holder, at least ten (10) days prior to the record date
specified therein (or thirty (30) days prior to the consummation of the
transaction or event, whichever is earlier), of the date on which any such
record is to be taken for the purpose of such dividend, distribution, right or
other event, and a brief statement regarding the amount and character of such
dividend, distribution, right or other event to the extent known at such time.
To the extent that under the Nevada General Corporation Law the vote of
the holders of the Series B Preferred Stock, voting separately as a class or
series as applicable, is required to authorize a given action of the
Corporation, the affirmative vote or consent of the holders of at least a
majority of the shares of the Series B Preferred Stock represented at a duly
held meeting at which a quorum is present or by written consent of a majority of
the shares of Series B Preferred Stock (except as otherwise may be required
under the Nevada General Corporation Law) shall constitute the approval of such
action by the class. To the extent that under the Nevada General Corporation Law
holders of the Series B Preferred Stock are entitled to vote on a matter with
holders of Common Stock, voting together as one class, each share of Series B
Preferred Stock shall be entitled to a number of votes equal to the number of
shares of Common Stock into which it is then convertible using the record date
for the taking of such vote of shareholders as the date as of which the
Conversion Price is calculated. Holders of the Series B Preferred Stock shall be
entitled to notice of all shareholder meetings or written consents (and copies
of proxy materials and other information sent to shareholders) with respect to
which they would be entitled to vote, which notice would be provided pursuant to
the Corporation's bylaws and the Nevada General Corporation Law.
VIII. PROTECTIVE PROVISIONS
---------------------------
So long as shares of Series B Preferred Stock are outstanding, the
Corporation shall not, without first obtaining the approval (by vote or written
consent, as provided by the Nevada General Corporation Law of the holders of at
least a majority of the then outstanding shares of Series B Preferred Stock:
(a) alter, amend or repeal (whether by merger,
consolidation or otherwise) the rights, preferences or privileges of the Series
B Preferred Stock or any capital stock of the Corporation so as to affect
adversely the Series B Preferred Stock;
(b) create any new class or series of capital stock
having a preference over the Series B Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article II hereof, "SENIOR SECURITIES");
-18-
(c) create any new class or series of capital stock
ranking pari passu with the Series B Preferred Stock as to distribution of
assets upon liquidation, dissolution or winding up of the Corporation (as
previously defined in Article II hereof, "PARI PASSU SECURITIES");
(d) increase the authorized number of shares of
Series B Preferred Stock;
(e) issue any Senior Securities or Pari Passu
Securities;
(f) increase the par value of the Common Stock, or
(g) do any act or thing not authorized or
contemplated by this Certificate of Designation which would result in taxation
of the holders of shares of the Series B Preferred Stock under Section 305 of
the Internal Revenue Code of 1986, as amended (or any comparable provision of
the Internal Revenue Code as hereafter from time to time amended).
In the event holders of at least a majority of the then outstanding
shares of Series B Preferred Stock agree to allow the Corporation to alter or
change the rights, preferences or privileges of the shares of Series B Preferred
Stock, pursuant to subsection (a) above, so as to affect the Series B Preferred
Stock, then the Corporation will deliver notice of such approved change to the
holders of the Series B Preferred Stock that did not agree to such alteration or
change (the "DISSENTING HOLDERS") and Dissenting Holders shall have the right
for a period of thirty (30) days to convert pursuant to the terms of this
Certificate of Designation as they exist prior to such alteration or change or
continue to hold their shares of Series B Preferred Stock.
IX. PRO RATA ALLOCATIONS
------------------------
The Maximum Share Amount and the Reserved Amount (including any
increases thereto) shall be allocated by the Corporation pro rata among the
holders of Series B Preferred Stock based on the number of shares of Series B
Preferred Stock issued to each holder. Each increase to the Maximum Share Amount
and the Reserved Amount shall be allocated pro rata among the holders of Series
B Preferred Stock based on the number of shares of Series B Preferred Stock held
by each holder at the time of the increase in the Maximum Share Amount or
Reserved Amount. In the event a holder shall sell or otherwise transfer any of
such holder's shares of Series B Preferred Stock, each transferee shall be
allocated a pro rata portion of such transferor's Maximum Share Amount and
Reserved Amount. Any portion of the Maximum Share Amount or Reserved Amount
which remains allocated to any person or entity which does not hold any Series B
Preferred Stock shall be allocated to the remaining holders of shares of Series
B Preferred Stock, pro rata based on the number of shares of Series B Preferred
Stock then held by such holders.
[Signature Page Follows]
-19-
IN WITNESS WHEREOF, this Certificate of Designation is
executed on behalf of the Corporation this 10th day of April, 2002.
KANAKARIS WIRELESS
By: /S/ ALEX KANAKARIS
------------------------
Alex Kanakaris
President and CEO
-20-
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert the Series B Preferred Stock)
The undersigned hereby irrevocably elects to convert ______ shares of
Series B Preferred Stock, represented by stock certificate No(s). __________
(the "Preferred Stock Certificates") into shares of common stock ("Common
Stock") of KANAKARIS WIRELESS, a Nevada corporation (the "Corporation")
according to the conditions of the Certificate of Designation of Series B
Preferred Stock, as of the date written below. If securities are to be issued in
the name of a person other than the undersigned, the undersigned will pay all
transfer taxes payable with respect thereto and is delivering herewith such
certificates. No fee will be charged to the Holder for any conversion, except
for transfer taxes, if any. A copy of each Preferred Stock Certificate is
attached hereto (or evidence of loss, theft or destruction thereof).
The undersigned hereby irrevocably elects to convert $___________ in
Conversion Default Payments, $__________ in Delivery Default Payments and/or
$___________ in payments pursuant to Section 2(c) of the Registration Rights
Agreement and pursuant to the Exchange Agreement at the Applicable Conversion
Price set forth below.
The Corporation shall electronically transmit the Common Stock issuable
pursuant to this Notice of Conversion to the account of the undersigned or its
nominee with DTC through its Deposit Withdrawal Agent Commission system ("DWAC
Transfer").
Name of DTC Prime Broker: _____________________________
Account Number: _______________________________________
? In lieu of receiving shares of Common Stock issuable pursuant to this
Notice of Conversion by way of a DWAC Transfer, the undersigned hereby
requests that the Corporation issue a certificate or certificates for
the number of shares of Common Stock set forth above (which numbers are
based on the Holder's calculation attached hereto) in the name(s)
specified immediately below or, if additional space is necessary, on an
attachment hereto:
Name:___________________________________
Address:________________________________
________________________________
The undersigned represents and warrants that all offers and sales by
the undersigned of the securities issuable to the undersigned upon conversion of
the Series B Preferred Stock shall be made pursuant to registration of the
securities under the Securities Act of 1933, as amended (the "Act"), or pursuant
to an exemption form registration under the Act.
Date of Conversion: ___________________________
Applicable Conversion Price: __________________
Number of Shares of
Common Stock to be Issued pursuant to:
(i) Conversion of Series B Preferred Stock:
_______________________________________________
(ii) Conversion of Conversion Default Payments,
Delivery Default Payments and/or payments pursuant
to Section 2(c) of the Registration Rights Agreement
and pursuant to the Exchange Agreement:
____________________________________
Signature: _________________________
Name: ______________________________
Address: ___________________________
___________________________
* The Corporation is not required to issue shares of Common Stock until
the original Series B Preferred Stock Certificate(s) (or evidence of loss, theft
or destruction thereof) to be converted are received by the Corporation or its
Transfer Agent. The Corporation shall issue and deliver shares of Common Stock
to an overnight courier not later than two (2) business days following receipt
of the original Preferred Stock Certificate(s) to be converted, and shall make
payments pursuant to the Certificate of Designation for the number of business
days such issuance and delivery is late.
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