CERTIFICATE OF DESIGNATIONS OF
SERIES C CONVERTIBLE PREFERRED STOCK
OF
TRO LEARNING, INC.
I, Patricia Hlavacek, duly elected Secretary of TRO LEARNING, INC., a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware, do hereby certify that:
The Board of Directors of said corporation, at a meeting held on
December 10, 1998, duly approved and adopted resolutions providing for the
creation of Five Hundred Forty (540) shares of Series C Convertible Preferred
Stock:
SEE ATTACHED EXHIBIT A
IN WITNESS WHEREOF, I have signed this Certificate on this 11th day of
January, 1999.
By: /s/ Patricia Hlavacek
------------------------
Patricia Hlavacek
Secretary
EXHIBIT A
FURTHER RESOLVED, that for purposes of the Offering the Directors
approve and authorize the issuance of Five Hundred Forty (540) shares of
Series C Convertible Preferred Stock in the form approved by the officers of
the Corporation, and approve and authorize the issuance of the Warrants;
APPROVAL OF DOCUMENTS
FURTHER RESOLVED, in furtherance of the foregoing resolutions, that
the officers of the Corporation be, and they hereby are, authorized, empowered
and directed to execute, deliver, and file with the appropriate office, if
necessary, the following agreements in connection with the Offering:
1. Series C Convertible Preferred Stock issued by the Corporation to
the Purchasers;
2. Warrants issued by the Corporation to the Purchasers;
3. Convertible Preferred Stock Purchase Agreement;
4. Registration Rights Agreement;
5. Certificate of Designations providing the terms of the Preferred
Stock as provided in Exhibit A to the Convertible Preferred Stock
Purchase Agreement;
FURTHER RESOLVED, that each of the foregoing documents shall be in
such form as the officers of the Corporation executing such agreements may deem
appropriate or advisable and may approve, such approval to be conclusively
evidenced by the execution and delivery of any such agreement by such officer.
CERTIFICATE OF DESIGNATIONS
FOR
SERIES C CONVERTIBLE PREFERRED STOCK
OF
TRO LEARNING, INC.
TERMS OF SERIES C CONVERTIBLE PREFERRED STOCK
Section 1. DESIGNATION, AMOUNT AND PAR VALUE. The series of
preferred stock shall be designated as Series C Convertible Preferred Stock (the
"PREFERRED STOCK") and the number of shares so designated shall be 540 (which
shall not be subject to increase without the consent of the holders of the
Preferred Stock (each, a "HOLDER" and collectively, the "HOLDERS")); Each share
of Preferred Stock shall have a par value of $.01 and a stated value of $10,000
(the "STATED VALUE"). Notwithstanding anything to the contrary in the
Certificate of Incorporation of TRO Learning, Inc. (the "Company"), this
Certificate of Designation for the Series C Preferred Stock of the Company
constitutes the full and complete description of the rights and preferences of
the Series C Preferred Stock of the Company and Section 2 of Article 4 of the
Company's Certificate of Incorporation is inapplicable pursuant to Part 15 of
Section 2 of Article 4.
Section 2. DIVIDENDS. Holders shall not be entitled to receive
any dividends on the Preferred Stock.
Section 3. VOTING RIGHTS. Except as otherwise provided herein
and as otherwise required by law, the Preferred Stock shall have no voting
rights. However, so long as any shares of Preferred Stock are outstanding,
the Company shall not and shall cause its subsidiaries not to, without the
affirmative vote of the Holders of all of the shares of the Preferred Stock
then outstanding, (a) alter or change adversely the powers, preferences or
rights given to the Preferred Stock, (b) alter or amend this Certificate of
Designation, (c) authorize or create any class of stock ranking as to
dividends or distribution of assets upon a Liquidation (as defined in Section
4) senior to or otherwise pari passu with or senior to the Preferred Stock,
(d) amend its Certificate of Incorporation, bylaws or other charter documents
so as to affect adversely any rights of any Holders, (e) increase the
authorized number of shares of Preferred Stock, or (f) enter into any
agreement with respect to the foregoing.
Section 4. LIQUIDATION. Upon any liquidation, dissolution or
winding-up of the Company, whether voluntary or involuntary (a
"LIQUIDATION"), the Holders shall be entitled to receive out of the assets of
the Company, whether such assets are capital or surplus, for each share of
Preferred Stock an amount equal to the Stated Value, before any distribution
or payment shall be made to the holders of any Junior Securities, and if the
assets of the Company shall be insufficient to pay in full such amounts, then
the entire assets to be distributed to the Holders shall be distributed among
the Holders ratably in accordance with the respective amounts that would be
payable on such shares if all amounts payable thereon were paid in full. A
sale, conveyance or disposition of all or substantially all of the assets of
the Company or the effectuation by the Company of a transaction
or series of related transactions in which more than 33% of the voting power
of the Company is disposed of, or a consolidation or merger of the Company
with or into any other company or companies shall not be treated as a
Liquidation, but instead shall be subject to the provisions of Section 5.
The Company shall mail written notice of any such Liquidation, not less than
45 days prior to the payment date stated therein, to each record Holder.
Section 5. CONVERSION.
(a)(i) CONVERSIONS AT OPTION OF HOLDER. Each share of Preferred Stock
shall be convertible into shares of Common Stock (subject to the limitations set
forth in Section 5(a)(iii) hereof) at the Conversion Ratio (as defined in
Section 8), at the option of the Holder, at any time and from time to time, from
and after the earlier to occur of (i) the date the Registration Statement is
declared effective by the Commission or (ii) the 90th day following the Original
Issue Date, the ("INITIAL CONVERSION DATE"). Holders shall effect conversions
by surrendering the certificate or certificates representing the shares of
Preferred Stock to be converted to the Company, together with the form of
conversion notice attached hereto as EXHIBIT A (a "CONVERSION NOTICE"). Each
Conversion Notice shall specify the number of shares of Preferred Stock to be
converted and the date on which such conversion is to be effected, which date
may not be prior to the date the Holder delivers such Conversion Notice by
facsimile (the "CONVERSION DATE"). If no Conversion Date is specified in a
Conversion Notice, the Conversion Date shall be the date that the Conversion
Notice is deemed delivered hereunder. If the Holder is converting less than all
shares of Preferred Stock represented by the certificate or certificates
tendered by the Holder with the Conversion Notice, or if a conversion hereunder
cannot be effected in full for any reason, the Company shall promptly deliver to
such Holder (in the manner and within the time set forth in Section 5(b)) a
certificate for such number of shares as have not been converted.
(ii) AUTOMATIC CONVERSION. Subject to the provisions in this
paragraph, all outstanding shares of Preferred Stock for which conversion
notices have not previously been received or for which redemption has not been
made or required hereunder shall be automatically converted on January 13, 2001
(such date the "AUTOMATIC CONVERSION DATE"), at the Conversion Price on the
Automatic Conversion Date. The conversion contemplated by this paragraph shall
not occur if (a) either (1) an Underlying Securities Registration Statement is
not then effective or (2) the Holder is not permitted to resell Underlying
Shares pursuant to Rule 144(k) promulgated under the Securities Act of 1933, as
amended (the "SECURITIES ACT"), without volume restrictions; (b) there are not
sufficient shares of Common Stock authorized and reserved for issuance upon such
conversion; or (c) the Company shall have defaulted on its covenants and
obligations hereunder or under the Purchase Agreement or Registration Rights
Agreement. Notwithstanding the foregoing, the period for conversion under this
Section shall be extended (on a day-for-day basis) and therefore the Automatic
Conversion Date shall be deemed to be the date which is the number of Trading
Days that the Purchaser is unable to resell Underlying Shares under an
Underlying Securities Registration Statement due to (a) the Common Stock not
being listed for trading on the Nasdaq National Market ("NASDAQ") or on the New
York Stock Exchange, American Stock Exchange, or the Nasdaq SmallCap Market
(each, a "SUBSEQUENT MARKET"), (b) the failure of an Underlying Securities
Registration Statement to be declared effective by the Securities and Exchange
Commission (the
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"COMMISSION") by the Effectiveness Date (as defined in the Registration
Rights Agreement), or (c) if an Underlying Securities Registration Statement
shall have been declared effective by the Commission, (x) the failure of such
Underlying Securities Registration Statement to remain effective at all times
thereafter as to all Underlying Shares, or (y) the suspension of the Holder's
ability to resell Underlying Shares thereunder after the Automatic Conversion
Date originally noted above.
(iii) CERTAIN CONVERSION RESTRICTIONS.
(A) The Holder agrees not to convert shares of Preferred Stock
to the extent such conversion would result in the Holder beneficially owning
(as determined in accordance with Section 13(d) of the Securities Exchange Act
of 1934, as amended (the "EXCHANGE ACT") and the rules thereunder) in excess of
4.999% of the then issued and outstanding shares of Common Stock, including
shares issuable upon conversion of the shares of Preferred Stock held by such
Holder after application of this Section. To the extent that the limitation
contained in this Section applies, the determination of whether shares of
Preferred Stock are convertible (in relation to other securities owned by a
Holder) and of which shares of Preferred Stock are convertible shall be in the
sole discretion of the Holder, and the submission of shares of Preferred Stock
for conversion shall be deemed to be the Holder's determination of whether such
shares of Preferred Stock are convertible (in relation to other securities owned
by the Holder) and of which portion of such shares of Preferred Stock are
convertible, in each case subject to such aggregate percentage limitation, and
the Company shall have no obligation to verify or confirm the accuracy of such
determination. Nothing contained herein shall be deemed to restrict the right
of the Holder to convert shares of Preferred Stock at such time as such
conversion will not violate the provisions of this Section. The provisions of
this Section will not apply to any conversion pursuant to Section 5 (a)(ii)
hereof, and may be waived by a Holder (but only as to itself and not to any
other Holder) upon not less than 75 days prior notice to the Company (in which
case, the Holder shall make such filings with the Commission as are required by
applicable law), and the provisions of this Section shall continue to apply
until such 75th day (or later, if stated in the notice of waiver). Other
Holders shall be unaffected by any such waiver.
(B) The Holder agrees not to convert shares of Preferred Stock
to the extent such conversion would result in the Holder beneficially owning
(as determined in accordance with Section 13(d) of the Exchange Act and the
rules thereunder) in excess of 9.999% of the then issued and outstanding shares
of Common Stock, including shares issuable upon conversion of the shares of
Preferred Stock held by such Holder after application of this Section. To the
extent that the limitation contained in this Section applies, the determination
of whether shares of Preferred Stock are convertible (in relation to other
securities owned by a Holder) and of which shares of Preferred Stock are
convertible shall be in the sole discretion of the Holder, and the submission of
shares of Preferred Stock for conversion shall be deemed to be the Holder's
determination of whether such shares of Preferred Stock are convertible (in
relation to other securities owned by the Holder) and of which portion of such
shares of Preferred Stock are convertible, in each case subject to such
aggregate percentage limitation, and the Company shall have no obligation to
verify or confirm the accuracy of such determination. Nothing contained herein
shall be deemed to restrict the right of the Holder to convert shares of
Preferred Stock at such time as such conversion will not
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violate the provisions of this Section. The provisions of this Section will
not apply to any conversion pursuant to Section 5 (a)(ii) hereof, and may be
waived by a Holder (but only as to itself and not to any other Holder) upon
not less than 75 days prior notice to the Company (in which case, the Holder
shall make such filings with the Commission as are required by applicable
law), and the provisions of this Section shall continue to apply until such
75th day (or later, if stated in the notice of waiver). Other Holders shall
be unaffected by any such waiver.
(C) Notwithstanding anything to the contrary set forth herein,
the Company shall not be obligated to issue in excess of 1,151,525 shares of
Common Stock upon conversion of Preferred Stock (the "MAXIMUM SHARE AMOUNT"),
which number shall be subject to adjustment pursuant to Section 5, PROVIDED,
however that in the event that the 1999 fiscal year end pre-tax earnings are (i)
less than $3,068,000.00, then the Maximum Share Amount shall be 1,703,470 shares
of Common Stock or (ii) equal to or greater than $3,068,000.00 but less than
$4,763,000.00, then the Maximum Share Amount shall be 1,362,776 shares of Common
Stock. In accordance with the Purchase Agreement such number of shares of
Common Stock shall be available on a pro rata basis based upon the pro rata
purchase price for the Preferred Stock paid by the original Holders of Preferred
Stock. Shares of Common Stock issued on the Automatic Conversion Date pursuant
to Section 5(a)(ii) and in respect of penalties and liquidated damages hereunder
shall not count towards the Maximum Share Amount referenced in this paragraph
and penalties and liquidated damages shall be paid in cash unless otherwise
agreed to by the Holder.
(D) If on any Conversion Date (A) the Common Stock is listed for
trading on NASDAQ or the Nasdaq SmallCap Market, (B) the Conversion Price then
in effect is such that the aggregate number of shares of Common Stock that would
then be issuable upon conversion in full of all then outstanding shares of
Preferred Stock, together with any shares of Common Stock previously issued upon
conversion of shares of Preferred Stock, would equal or exceed 20% of the number
of shares of Common Stock outstanding on the Original Issue Date (such number of
shares as would not equal or exceed such 20% limit, the "ISSUABLE MAXIMUM"), and
(C) the Company shall not have previously obtained the vote of shareholders (the
"SHAREHOLDER APPROVAL"), if any, as may be required by the applicable rules and
regulations of The Nasdaq Stock Market (or any successor entity) applicable to
approve the issuance of shares of Common Stock in excess of the Issuable Maximum
in a private placement whereby shares of Common Stock are deemed to have been
issued at a price that is less than the greater of book or fair market value of
the Common Stock, then the Company shall issue to the Holder so requesting a
conversion a number of shares of Common Stock equals such Holder's pro rata
portion of the Issuable Maximum and, with respect to the remainder of the shares
of Preferred Stock then held by such Holder for which a conversion in accordance
with the Conversion Price would result in an issuance of Common Stock in excess
of such Holder's pro rata portion of the Issuable Maximum (the "EXCESS
PRINCIPAL"), the converting Holder shall have the option to require the Company
to either (1) use its best efforts to obtain the Shareholder Approval applicable
to such issuance as soon as is possible, but in any event not later than the
60th day after such request, or (2)(i) issue and deliver to such Holder a number
of shares of Common Stock as equals (x) the Excess Principal divided by (y) the
Conversion Price, and (ii) cash in an amount equal to the product of (x) the Per
Share Market Value on the Conversion Date and (y) a number of shares of Common
Stock as equals the Excess Principal divided by the Conversion Price (such
amount of
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cash being hereinafter referred to as the "DISCOUNT EQUIVALENT"), or (3) pay
cash to the converting Holder in an amount equal to the Mandatory Redemption
Amount for the shares of Common Stock otherwise issuable on account of the
Excess Principal. If the Company fails to pay the Discount Equivalent or the
Mandatory Redemption Amount, as the case may be, in full pursuant to this
Section within seven (7) days after the date payable, the Company will pay
interest thereon at a rate of 18% per annum to the converting Holder,
accruing daily from the Conversion Date until such amount, plus all such
interest thereon, is paid in full.
(b) (i) Not later than three (3) Trading Days after any Conversion
Date, the Company will deliver to the Holder (i) a certificate or certificates
which shall be free of restrictive legends and trading restrictions (other than
those required by Section 3.1(b) of the Purchase Agreement) representing the
number of shares of Common Stock being acquired upon the conversion of shares of
Preferred Stock (subject to the limitations set forth in Section 5(a)(iii)
hereof), and (ii) one or more certificates representing the number of shares of
Preferred Stock not converted, certificates, which shall be free of restrictive
legends and trading restrictions (other than those required by Section 3.1 (b)
of the Purchase Agreement), representing such shares of Common Stock; PROVIDED,
HOWEVER, that the Company shall not be obligated to issue certificates
evidencing the shares of Common Stock issuable upon conversion of any shares of
Preferred Stock until certificates evidencing such shares of Preferred Stock are
either delivered for conversion to the Company or any transfer agent for the
Preferred Stock or Common Stock, or the Holder of such Preferred Stock notifies
the Company that such certificates have been lost, stolen or destroyed and
provides a bond (or other adequate security) reasonably satisfactory to the
Company to indemnify the Company from any loss incurred by it in connection
therewith. The Company shall, upon request of the Holder, if available, use its
best efforts to deliver any certificate or certificates required to be delivered
by the Company under this Section electronically through the Depository Trust
Corporation or another established clearing corporation performing similar
functions. If in the case of any Conversion Notice such certificate or
certificates, are not delivered to or as directed by the applicable Holder by
the third (3rd) Trading Day after the Conversion Date, the Holder shall be
entitled by written notice to the Company at any time on or before its receipt
of such certificate or certificates thereafter, to rescind such conversion, in
which event the Company shall immediately return the certificates representing
the shares of Preferred Stock tendered for conversion.
(ii) If the Company fails to deliver to the Holder such
certificate or certificates pursuant to Section 5(b)(i), by the third (3rd)
Trading Day after the Conversion Date, the Company shall pay to such Holder, in
cash, as liquidated damages and not as a penalty, $3,500 for each day after such
third (3rd) Trading Day until such certificates are delivered. Nothing herein
shall limit a Holder's right to pursue actual damages for the Company's failure
to deliver certificates representing shares of Common Stock upon conversion
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it at law or in equity including, without
limitation, a decree of specific performance and/or injunctive relief. The
exercise of any such rights shall not prohibit the Holders from seeking to
enforce damages pursuant to any other Section hereof or under applicable law.
Further, if the Company shall not have delivered any cash due in respect of
conversions of Preferred Stock by the third (3rd) Trading Day after the
Conversion Date, the Holder may, by notice to the Company, require the Company
to issue Underlying Shares pursuant
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to Section 5(c), except that for such purpose the Conversion Price applicable
thereto shall be the lesser of the Conversion Price on the Conversion Date
and the Conversion Price on the date of such Holder demand. Any such
Underlying Shares will be subject to the provision of this Section.
(iii) In addition to any other rights available to the Holder,
if the Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 5(b)(i) by the third (3rd) Trading Day after the Conversion
Date, and if after such third (3rd) Trading Day the Holder purchases (in an open
market transaction or otherwise) shares of Common Stock to deliver in
satisfaction of a sale by such Holder of the Underlying Shares which the Holder
anticipated receiving upon such conversion (a "BUY-IN"), then the Company shall
pay in cash to the Holder (in addition to any remedies available to or elected
by the Holder) the amount by which (x) the Holder's total purchase price
(including brokerage commissions, if any) for the shares of Common Stock so
purchased exceeds (y) the aggregate stated value of the shares of Preferred
Stock for which such conversion was not timely honored. For example, if the
Holder purchases shares of Common Stock having a total purchase price of $11,000
to cover a Buy-In with respect to an attempted conversion of $10,000 aggregate
stated value of the shares of Preferred Stock, the Company shall be required to
pay the Holder $1,000. The Holder shall provide the Company written notice
indicating the amounts payable to the Holder in respect of the Buy-In.
(c) (i)(A) The conversion price (the "CONVERSION PRICE") in effect
on any Conversion Date shall be the lesser of (1) $9.51 or (2) the Applicable
Percentage (as defined in Section 8) of the average of the lowest three (3) Per
Share Market Values during the thirty (30) Trading Days immediately preceding
such Conversion Date.
(B) If: (a) an Underlying Securities Registration
Statement is not filed on or prior to the Filing Date (as defined in the
Registration Rights Agreement) (if the Company files such Underlying
Securities Registration Statement without affording the Holder the
opportunity to review and comment on the same as required by Section 3(a) of
the Registration Rights Agreement, the Company shall not be deemed to have
satisfied this clause (a)), or (b) the Company fails to file with the
Commission a request for acceleration in accordance with Rule 12d1-2
promulgated under the Exchange Act, within five (5) Trading Days of the date
that the Company is notified (orally or in writing, whichever is earlier) by
the Commission that an Underlying Securities Registration Statement will not
be "reviewed," or not subject to further review, or (c) the Underlying
Securities Registration Statement is not declared effective by the Commission
on or prior to the Effectiveness Date (as defined in the Registration Rights
Agreement), provided, however that the Effectiveness Date shall be extended
for fifteen (15) days in the event that the Company is using its best efforts
to cause the Registration Statement to be declared effective by the
Commission within ninety (90) days of the Original Issue Date, or (d) such
Underlying Securities Registration Statement is filed with and declared
effective by the Commission but thereafter ceases to be effective as to all
Registrable Securities (as defined in the Registration Rights Agreement) at
any time prior to the expiration of the "Effectiveness Period" (as defined in
the Registration Rights Agreement), without being succeeded within ten (10)
Trading Days by an amendment to such Underlying Securities Registration
Statement or a subsequent Underlying Securities Registration Statement filed
with and declared effective by the Commission, or (e) trading in the Common
Stock shall be suspended from
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the NASDAQ or a Subsequent Market for more than three (3) Business Days
(which need not be consecutive Business Days), (f) the conversion rights of
the Holders are suspended for any reason or (g) an amendment to the
Underlying Securities Registration Statement is not filed by the Company with
the Commission within ten (10) Trading Days of the Commission's notifying the
Company that such amendment is required in order for the Underlying
Securities Registration Statement to be declared effective (any such failure
or breach being referred to as an "EVENT," and for purposes of clauses (a),
(c), (f) the date on which such Event occurs, or for purposes of clause (b)
the date on which such five (5) Trading Day period is exceeded, or for
purposes of clauses (d) and (g) the date which such 10 Trading Day period is
exceeded, or for purposes of clause (e) the date on which such three (3)
Business Day-period is exceeded, being referred to as "EVENT DATE"), then the
Company shall, on the first day of each monthly anniversary of the Event Date
and until the earlier to occur of the third monthly anniversary of the Event
Date or such time as the applicable Event is cured, pay to the Holder $40,000
in cash, as liquidated damages and not as a penalty. Commencing the third
month anniversary after the Event Date and on each monthly anniversary
thereafter until such time as the applicable Event is cured, the Company
shall pay to the Holder $120,000 in cash, as liquidated damages and not as a
penalty. The provisions of this Section are not exclusive and shall in no
way limit the Company's obligations under the Registration Rights Agreement.
(ii) If the Company, at any time while any shares of Preferred
Stock are outstanding, shall (a) pay a stock dividend or otherwise make a
distribution or distributions on shares of its Junior Securities or pari passu
securities payable in shares of Common Stock, (b) subdivide outstanding shares
of Common Stock into a larger number of shares, (c) combine outstanding shares
of Common Stock into a smaller number of shares, or (d) issue by
reclassification of shares of Common Stock any shares of capital stock of the
Company, the Conversion Price shall be multiplied by a fraction of which the
numerator shall be the number of shares of Common Stock outstanding before such
event and of which the denominator shall be the number of shares of Common Stock
outstanding after such event. Any adjustment made pursuant to this Section
5(c)(ii) shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution
and shall become effective immediately after the effective date in the case of a
subdivision, combination or re-classification.
(iii) If the Company, at any time while any shares of
Preferred Stock are outstanding, shall issue rights, warrants or options to
all holders of Common Stock entitling them to subscribe for or purchase
shares of Common Stock at a price per share less than the Per Share Market
Value at the record date mentioned below, then the Conversion Price shall be
multiplied by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding immediately prior to the issuance of such
rights, warrants or options, plus the number of shares of Common Stock which
the aggregate offering price of the total number of shares so offered would
purchase at such Per Share Market Value, and the denominator of which shall
be the sum of the number of shares of Common Stock outstanding immediately
prior to such issuance plus the number of shares of Common Stock offered for
subscription or purchase. Such adjustment shall be made whenever such rights
or warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights or warrants. However, upon
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the expiration of any right, warrant or option to purchase shares of Common
Stock the issuance of which resulted in an adjustment in the Conversion Price
pursuant to this Section 5(c)(iii), if any such right, warrant or option
shall expire and shall not have been exercised, the Conversion Price shall
immediately upon such expiration shall be recomputed and effective
immediately upon such expiration shall be increased to the price which it
would have been (but reflecting any other adjustments in the Conversion Price
made pursuant to the provisions of this Section 5 upon the issuance of other
rights or warrants) had the adjustment of the Conversion Price made upon the
issuance of such rights, warrants, or options been made on the basis of
offering for subscription or purchase only that number of shares of Common
Stock actually purchased upon the exercise of such rights, warrants or
options actually exercised.
(iv) Except as contemplated by Schedule 2.1(a) to the Purchase
Agreement, if the Company or any subsidiary thereof, as applicable with respect
to Common Stock Equivalents (as defined below), at any time while any shares of
Preferred Stock are outstanding, shall, issue shares of Common Stock or rights,
warrants, options or other securities or debt that is convertible into or
exchangeable for shares of Common Stock ("COMMON STOCK EQUIVALENTS") entitling
any Person to acquire shares of Common Stock at a price per share less than the
Conversion Price, then the Conversion Price shall be multiplied by a fraction,
the numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to the issuance of shares of Common Stock or such Common Stock
Equivalents plus the number of shares of Common Stock which the offering price
for such shares of Common Stock or Common Stock Equivalents would purchase at
the Conversion Price, and the denominator of which shall be the sum of the
number of shares of Common Stock outstanding immediately prior to such issuance
plus the number of shares of Common Stock so issued or issuable, provided, that
for purposes hereof, all shares of Common Stock that are issuable upon exercise
or exchange of Common Stock Equivalents shall be deemed outstanding immediately
after the issuance of such Common Stock Equivalents. Such adjustment shall be
made whenever such shares of Common Stock or Common Stock Equivalents are
issued; provided, however, that no such adjustments shall be made for Common
Stock Equivalents issued pursuant to the Company's Management Stock Incentive
Plan, 1993 Stock Option Plan, 1997 Stock Incentive Plan, 1993 Outside Director
Stock Option Plan, TRO 1994 and 1995 Outside Director Stock Option Plan and 1997
Non-Employee Directors Stock Option Plan.
(v) If the Company, at any time while shares of Preferred
Stock are outstanding, shall distribute to all holders of Common Stock (and not
to Holders) evidences of its indebtedness or assets or rights or warrants to
subscribe for or purchase any security (excluding those referred to in Sections
5(c)(ii)-(iv) above), then in each such case the Conversion Price at which each
share of Preferred Stock shall thereafter be convertible shall be determined by
multiplying the Conversion Price in effect immediately prior to the record date
fixed for determination of stockholders entitled to receive such distribution by
a fraction of which the denominator shall be the Per Share Market Value of
Common Stock determined as of the record date mentioned above, and of which the
numerator shall be such Per Share Market Value of the Common Stock on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of Common Stock as determined by the Board of Directors in
good faith; PROVIDED, HOWEVER, that in the event of a distribution exceeding
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ten percent (10%) of the net assets of the Company, if the Holders of a
majority in interest of the Preferred Stock dispute such valuation, such fair
market value shall be determined by a nationally recognized or major regional
investment banking firm or firm of independent certified public accountants
of recognized standing (which may be the firm that regularly examines the
financial statements of the Company) (an "APPRAISER") selected in good faith
by the Company, subject to approval by the Holders of a majority in interest
of the shares of Preferred Stock then outstanding whose approval shall not be
unreasonably withheld or delayed. The adjustments shall be described in a
statement provided to the Holders of the portion of assets or evidences of
indebtedness so distributed or such subscription rights applicable to one
share of Common Stock. Such adjustment shall be made whenever any such
distribution is made and shall become effective immediately after the record
date mentioned above.
(vi) All calculations under this Section 5 shall be made to the
nearest cent or the nearest 1/100th of a share, as the case may be.
(vii) Whenever the Conversion Price is adjusted pursuant to
Section 5(c)(ii),(iii),(iv), or (v) the Company shall promptly mail to each
Holder, a notice setting forth the Conversion Price after such adjustment and
setting forth a brief statement of the facts requiring such adjustment.
(viii) In case of any reclassification of the Common Stock, or
any compulsory share exchange pursuant to which the Common Stock is converted
into other securities, cash or property (other than compulsory share exchanges
which constitute Change of Control Transactions), the Holders of the Preferred
Stock then outstanding shall have the right thereafter to convert such shares
only into the shares of stock and other securities, cash and property receivable
upon or deemed to be held by holders of Common Stock following such
reclassification or share exchange, and the Holders of the Preferred Stock shall
be entitled upon such event to receive such amount of securities, cash or
property as a holder of the number of shares of the Common Stock of the Company
into which such shares of Preferred Stock could have been converted immediately
prior to such reclassification or share exchange would have been entitled. This
provision shall similarly apply to successive reclassifications or share
exchanges.
(ix) If (a) the Company shall declare a dividend (or any other
distribution) on its Common Stock, (b) the Company shall declare a special
nonrecurring cash dividend on or a redemption of its Common Stock, (c) the
Company shall authorize the granting to all holders of the Common Stock rights
or warrants to subscribe for or purchase any shares of capital stock of any
class or of any rights, (d) the approval of any stockholders of the Company
shall be required in connection with any reclassification of the Common Stock of
the Company, any consolidation or merger to which the Company is a party, any
sale or transfer of all or substantially all of the assets of the Company, of
any compulsory share of exchange whereby the Common Stock is converted into
other securities, cash or property, or (e) the Company shall authorize the
voluntary or involuntary dissolution, liquidation or winding up of the affairs
of the Company; then the Company shall cause to be filed at each office or
agency maintained for the purpose of conversion of Preferred Stock, and shall
cause to be mailed to the Holders at their last addresses as they shall
-9-
appear upon the stock books of the Company, at least 20 calendar days prior
to the applicable record or effective date hereinafter specified, a notice
stating (x) the date on which a record is to be taken for the purpose of such
dividend, distribution, redemption, rights or warrants, or if a record is not
to be taken, the date as of which the holders of Common Stock of record to be
entitled to such dividend, distributions, redemption, rights or warrants are
to be determined or (y) the date on which such reclassification,
consolidation, merger, sale, transfer or share exchange is expected to become
effective or close, and the date as of which it is expected that holders of
Common Stock of record shall be entitled to exchange their shares of Common
Stock for securities, cash or other property deliverable upon such
reclassification, consolidation, merger, sale, transfer or share exchange;
PROVIDED, HOWEVER, that the failure to mail such notice or any defect therein
or in the mailing thereof shall not affect the validity of the corporate
action required to be specified in such notice. Holders are entitled to
convert shares of Preferred Stock during the 20-day period commencing the
date of such notice to the effective date of the event triggering such notice.
(d) The Company covenants that it will at all times reserve and keep
available out of its authorized and unissued Common Stock solely for the purpose
of issuance upon conversion of Preferred Stock, each as herein provided, free
from preemptive rights or any other actual contingent purchase rights of persons
other than the Holders, not less than such number of shares of Common Stock as
shall (subject to any additional requirements of the Company as to reservation
of such shares set forth in the Purchase Agreement) be issuable (taking into
account the adjustments and restrictions of Section 5(a) and Section 5(c)) upon
the conversion of all outstanding shares of Preferred Stock. The Company
covenants that all shares of Common Stock that shall be so issuable shall, upon
issue, be duly and validly authorized, issued and fully paid, nonassessable and
freely tradeable, subject to the legend requirements of Section 3.1 (b) of the
Purchase Agreement.
(e) Upon a conversion hereunder the Company shall not be required to
issue stock certificates representing fractions of shares of Common Stock, but
may if otherwise permitted, make a cash payment in respect of any final fraction
of a share based on the Per Share Market Value at such time. If the Company
elects not, or is unable, to make such a cash payment, the Holder of a share of
Preferred Stock shall be entitled to receive, in lieu of the final fraction of a
share, one whole share of Common Stock.
(f) The issuance of certificates for shares of Common Stock on
conversion of Preferred Stock shall be made without charge to the Holders
thereof for any documentary stamp or similar taxes that may be payable in
respect of the issue or delivery of such certificate, provided that the Company
shall not be required to pay any tax that may be payable in respect of any
transfer involved in the issuance and delivery of any such certificate upon
conversion in a name other than that of the Holder of such shares of Preferred
Stock so converted and the Company shall not be required to issue or deliver
such certificates unless or until the person or persons requesting the issuance
thereof shall have paid to the Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been paid.
(g) Shares of Preferred Stock converted into Common Stock shall be
canceled. The Company may not reissue any shares of Preferred Stock.
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(h) Any and all notices or other communications or deliveries to be
provided by the Holders of the Preferred Stock hereunder, including, without
limitation, any Conversion Notice, shall be in writing and delivered personally,
by facsimile or sent by a nationally recognized overnight courier service,
addressed to the attention of the Chief Executive Officer of the Company at the
facsimile telephone number or address of the principal place of business of the
Company as set forth in the Purchase Agreement. Any and all notices or other
communications or deliveries to be provided by the Company hereunder shall be in
writing and delivered personally, by facsimile or sent by a nationally
recognized overnight courier service, addressed to each Holder at the facsimile
telephone number or address of such Holder appearing on the books of the
Company, or if no such facsimile telephone number or address appears, at the
principal place of business of the Holder. Any notice or other communication or
deliveries hereunder shall be deemed given and effective on the earliest of (i)
the date of transmission, if such notice or communication is delivered via
facsimile at the facsimile telephone number specified in this Section prior to
8:00 p.m. (Minnetonka time), (ii) the date after the date of transmission, if
such notice or communication is delivered via facsimile at the facsimile
telephone number specified in this Section later than 8:00 p.m. (Minnetonka
time) on any date and earlier than 11:59 p.m. (Minnetonka time) on such date,
(iii) upon receipt, if sent by a nationally recognized overnight courier
service, or (iv) upon actual receipt by the party to whom such notice is
required to be given.
Section 6. REDEMPTION UPON TRIGGERING EVENTS.
(a) Upon the occurrence of a Triggering Event, each Holder shall (in
addition to all other rights it may have hereunder or under applicable law), has
the right, exercisable at the sole option of such Holder, to require the Company
to redeem all or a portion of the Preferred Stock then held by such Holder for a
redemption price, in cash, equal to the sum of (i) the Mandatory Redemption
Amount plus (ii) the product of (A) the number of Underlying Shares issued in
respect of conversions hereunder and then held by the Holder and (B) the Per
Share Market Value on the date such redemption is demanded or the date the
redemption price hereunder is paid in full, whichever is greater. If the
Company fails to pay the redemption price hereunder in full pursuant to this
Section within seven (7) days after the date of a demand therefor, the Company
will pay interest thereon at a rate of 18% per annum, accruing daily from such
seventh day until the redemption price, plus all such interest thereon, is paid
in full. For purposes of this Section, a share of Preferred Stock is
outstanding until such date as the Holder shall have received Underlying Shares
upon a conversion (or attempted conversion) thereof.
A "Triggering Event" means any one or more of the following events
(whatever the reason and whether it shall be voluntary or involuntary or
effected by operation of law or pursuant to any judgement, decree or order of
any court, or any order, rule or regulation of any administrative or
governmental body):
(i) the failure of an Underlying Securities Registration
Statement to be declared effective by the Commission on or prior to the 180th
day after the Original Issue Date;
-11-
(ii) if, during the Effectiveness Period, the effectiveness of
the Underlying Securities Registration Statement lapses for five (5) consecutive
Trading Days for any reason, or the Holder shall not be permitted to resell
Registrable Securities under the Underlying Securities Registration Statement
for five (5) consecutive Trading Days;
(iii) the failure of the Common Stock to be listed for trading
on NASDAQ or on a Subsequent Market or the suspension of the Common Stock from
trading on NASDAQ or on a Subsequent Market, in either case, for more than five
(5) Trading Days (which need not be consecutive Trading Days);
(iv) the Company shall fail for any reason to deliver
certificates representing Underlying Shares issuable upon a conversion hereunder
that comply with the provisions hereof prior to the 12th day after the
Conversion Date or the Company shall provide notice to any Holder, including by
way of public announcement, at any time, of its intention not to comply with
requests for conversion of any Preferred Stock in accordance with the terms
hereof;
(v) the Company shall be a party to any Change of Control
Transaction, shall agree to sell (in one or a series of related transactions)
all or substantially all or in excess of 50% of its assets in one or more
transaction (whether or not such sale would constitute a Change of Control
Transaction) or shall redeem more than a de minimis number of shares of Common
Stock or other Junior Securities (other than redemptions of Underlying Shares);
(vi) an Event shall not have been cured to the satisfaction of
the Holder prior to the expiration of thirty (30) days from the Event Date
relating thereto (other than an Event resulting from a failure of an Underlying
Securities Registration Statement to be declared effective by the Commission on
or prior to the Effectiveness Date);
(vii) the Company shall fail for any reason to deliver the
certificate or certificates required pursuant to Section 5(b)(iii) or the cash
pursuant to a Buy-In within ten (10) days after notice is deemed delivered
hereunder; or
(viii) the Company shall fail to have available a sufficient
number of authorized and unreserved shares of Common Stock to issue to such
Holder upon a conversion hereunder.
Section 7. OPTIONAL REDEMPTION.
(a) The Company shall have the right, exercisable at any time upon 30
days' notice (an "OPTIONAL REDEMPTION NOTICE") to the Holders of the Preferred
Stock given at any time after the Optional Redemption Date (as defined in
Section 8) to redeem all or any portion of the shares of Preferred Stock which
have not previously been converted or redeemed, at a price equal to the Optional
Redemption Price (as defined below), PROVIDED, that the Company shall not be
entitled to deliver an Optional Redemption Notice to the Holders if: (i) the
number of shares of Common Stock at the time authorized, unissued and unreserved
for all purposes is insufficient to
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satisfy the Company's conversion obligations of all shares of Preferred Stock
then outstanding, (ii) the Underlying Shares then outstanding are not
registered for resale pursuant to an effective Underlying Securities
Registration Statement and may not be sold without volume restrictions
pursuant to Rule 144 promulgated under the Securities Act, (iii) the Common
Stock is not then listed for trading on NASDAQ or a Subsequent Market, or
(iv) the average of the Per Share Market Values for twenty (20) consecutive
Trading Days immediately preceding the date of the Optional Redemption Notice
is not greater than $15.85. The entire Optional Redemption Price shall be
paid in cash. Holders may convert (and the Company shall honor such
conversions in accordance with the terms hereof) any shares of Preferred
Stock, including shares subject to an Optional Redemption Notice, during the
period from the date thereof through the 30th day after the receipt of an
Optional Redemption Notice.
(b) If any portion of the Optional Redemption Price shall not be paid
by the Company by the 30th day after the delivery of an Optional Redemption
Notice, interest shall accrue thereon at the rate of 18% per annum until the
Optional Redemption Price plus all such interest is paid in full. In addition,
if any portion of the Optional Redemption Price remains unpaid after the date
due, the Holder of the Preferred Stock subject to such redemption may elect, by
written notice to the Company given at any time thereafter, to either (i) demand
conversion of all or any portion of the shares of Preferred Stock for which such
Optional Redemption Price, plus interest thereof, has not been paid in full (the
"UNPAID REDEMPTION SHARES"), in which event the Per Share Market Value for such
shares shall be the lower of the Per Share Market Value calculated on the date
the Optional Redemption Price was originally due and the Per Share Market Value
as of the Holder's written demand for conversion, or (ii) invalidate AB INITIO
such redemption, notwithstanding anything herein contained to the contrary. If
the Holder elects option (i) above, the Company shall within three (3) Trading
Days of its receipt of such election deliver to the Holder the shares of Common
Stock issuable upon conversion of the Unpaid Redemption Shares subject to such
Holder conversion demand and otherwise perform its obligations hereunder with
respect thereto; or, if the Holder elects option (ii) above, the Company shall
promptly, and in any event not later than three (3) Trading Days from receipt of
Holder's notice of such election, return to the Holder all of the Unpaid
Redemption Shares.
(c) The "OPTIONAL REDEMPTION PRICE" shall equal the sum of (i) the
product of (A) the number of shares of Preferred Stock to be redeemed and (B)
the product of (1) a) at any time prior to the first anniversary of the Original
Issued Date, 125% or b) at any time thereafter, 156%, of the average Per Share
Market Value for the five (5) Trading Days immediately preceding (x) the date of
the Optional Redemption Notice or (y) the date of payment in full by the Company
of the Optional Redemption Price, whichever is greater, and (2) the Conversion
Ratio calculated on the date of the Optional Redemption Notice, and (ii) all
other amounts, costs, expenses and liquidated damages due in respect of such
shares of Preferred Stock.
Section 8. DEFINITIONS. For the purposes hereof, the following terms
shall have the following meanings:
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"APPLICABLE PERCENTAGE" means (i) 90% if the Conversion Date or any
redemption or repurchase date, if applicable, occurs on or prior to the 360th
day after the Original Issue Date, (ii) 88% if the Conversion Date or any
redemption or repurchase date, if applicable, occurs on or after the 361st and
before the 450th day after the Original Issue Date, (iii) 86% if the Conversion
Date or any redemption or repurchase date, if applicable, is on or after the
451st and before the 540th day after the Original Issue Date, (iv) 84% if the
Conversion Date or any redemption or repurchase date, if applicable, occurs on
or after the 541st and before the 630th day after the Original Issue Date, and
(v) 82% if the Conversion Date or any redemption or repurchase date, if
applicable, is more than 631 days after the Original Issue Date.
"CHANGE OF CONTROL TRANSACTION" means the occurrence of any of (i) an
acquisition after the date hereof by an individual or legal entity or "group"
(as described in Rule 13d-5(b)(1) promulgated under the Exchange Act) of in
excess of 33% of the voting securities of the Company, (ii) a replacement of
more than one-half of the members of the Company's board of directors which is
not approved by those individuals who are members of the board of directors on
the date hereof in one or a series of related transactions, (iii) the merger of
the Company with or into another entity, consolidation or sale of all or
substantially all of the assets of the Company in one or a series of related
transactions, unless following such transaction, the holders of the Company's
securities continue to hold at least 66% of such securities following such
transaction or (iv) the execution by the Company of an agreement to which the
Company is a party or by which it is bound, providing for any of the events set
forth above in (i), (ii) or (iii).
"COMMON STOCK" means the Company's common stock, par value $.01 per
share, and stock of any other class into which such shares may hereafter have
been reclassified or changed.
"CONVERSION RATIO" means, at any time, a fraction, the numerator of
which is Stated Value (including any accrued but unpaid late fees thereon), and
the denominator of which is the Conversion Price at such time.
"JUNIOR SECURITIES" means the Common Stock and all other equity
securities of the Company which are junior in rights and liquidation preference
to the Preferred Stock.
"MANDATORY REDEMPTION AMOUNT" for each share of Preferred Stock means
the sum of (i) the greater of (A) 115% of the Stated Value, and (B) the product
of (a) the Per Share Market Value on the Trading Day immediately preceding (x)
the date of the Triggering Event or the Conversion Date, as the case may be, or
(y) the date of payment in full by the Company of the applicable redemption
price, whichever is greater, and (b) the Conversion Ratio calculated on the
date of the Triggering Event, or the Conversion Date, as the case may be, and
(ii) all other amounts, costs, expenses and liquidated damages due in respect of
such shares of Preferred Stock.
"OPTIONAL REDEMPTION DATE" shall mean the date which is thirty (30)
days following the date the Underlying Shares are registered for resale pursuant
to an effective Underlying Securities Registration Statement.
-14-
"ORIGINAL ISSUE DATE" shall mean the date of the first issuance of any
shares of the Preferred Stock regardless of the number of transfers of any
particular shares of Preferred Stock and regardless of the number of
certificates which may be issued to evidence such Preferred Stock.
"PER SHARE MARKET VALUE" means on any particular date (a) the closing
bid price per share of the Common Stock on such date on the NASDAQ or on such
Subsequent Market on which the Common Stock is then listed or quoted, or if
there is no such price on such date, then the closing bid price on the NASDAQ or
on such Subsequent Market on which the Common Stock is then listed or quoted on
the date nearest preceding such date, or (b) if the Common Stock is not then
listed or quoted on the NASDAQ or on a Subsequent Market, the closing bid price
for a share of Common Stock in the over-the-counter market, as reported by the
National Quotation Bureau Incorporated or similar organization or agency
succeeding to its functions of reporting prices) at the close of business on
such date, or (c) if the Common Stock is not then reported by the National
Quotation Bureau Incorporated (or similar organization or agency succeeding to
its functions of reporting prices), then the average of the "Pink Sheet" quotes
for the relevant conversion period, as determined in good faith by the Holder,
or (d) if the Common Stock is not then publicly traded the fair market value of
a share of Common Stock as determined by an Appraiser selected in good faith by
the Holders of a majority of the shares of the Preferred Stock.
"PERSON" means a corporation, an association, a partnership,
organization, a business, an individual, a government or political subdivision
thereof or a governmental agency.
"PURCHASE AGREEMENT" means the Convertible Preferred Stock Purchase
Agreement, dated as January 13, 1999, between the Company and the original
Holder of the Preferred Stock.
"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights
Agreement, dated as of January 13, 1999, between the Company and the original
Holder of the Preferred Stock.
"TRADING DAY" means (a) a day on which the Common Stock is traded on
the NASDAQ or on such Subsequent Market on which the Common Stock is then listed
or quoted, or (b) if the Common Stock is not listed on NASDAQ or on a Subsequent
Market, a day on which the Common Stock is traded in the over-the-counter
market, as reported by the OTC Bulletin Board, or (c) if the Common Stock is not
quoted on the OTC Bulletin Board, a day on which the Common Stock is quoted in
the over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices); PROVIDED, HOWEVER, that in the event that the Common Stock is
not listed or quoted as set forth in (a), (b) and (c) hereof, then Trading Day
shall mean any day except Saturday, Sunday and any day which shall be a legal
holiday or a day on which banking institutions in the State of New York are
authorized or required by law or other government action to close.
"UNDERLYING SECURITIES REGISTRATION STATEMENT" means a registration
statement that meets the requirement of the Registration Rights Agreement and
registers the resale of all Underlying Shares by the recipient thereof, who
shall be named as a "selling stockholder" thereunder.
-15-
"UNDERLYING SHARES" means, collectively, the shares of Common Stock
into which the Shares are convertible in accordance with the terms hereof.
Section 9. CANCELLATION. If at any time all of the outstanding
Series C Preferred Stock shall cease to be outstanding for any reason, the
provisions of this Certificate of Designation shall become null and void without
any further action on behalf of the board of directors or stockholders of the
Company.
-16-
EXHIBIT A
NOTICE OF CONVERSION
(To be Executed by the Registered Holder
in order to Convert shares of Preferred Stock)
The undersigned hereby elects to convert the number of shares of Series C
Convertible Preferred Stock indicated below, into shares of Common Stock, par
value $.01 per share (the "COMMON STOCK"), of TRO Learning, Inc. (the
"COMPANY") according to the conditions hereof, as of the date written below.
If shares are to be issued in the name of a person other than undersigned,
the undersigned will pay all transfer taxes payable with respect thereto and
is delivering herewith such certificates and opinions as reasonably requested
by the Company in accordance therewith. No fee will be charged to the Holder
for any conversion, except for such transfer taxes, if any.
Conversion calculations: _______________________________________________
Date to Effect Conversion
_______________________________________________
Number of shares of Preferred Stock
to be Converted
_______________________________________________
Number of shares of Common Stock to be Issued
_______________________________________________
Applicable Conversion Price
_______________________________________________
Signature
_______________________________________________
Name
_______________________________________________
Address