EX – 10.2

 

CERTIFICATE OF DESIGNATION

 

OF

 

SERIES B PREFERRED STOCK

 

OF

 

DDI CORP.

 

DDi Corp., a Delaware corporation (the “Corporation”), certifies that, pursuant
to authority conferred upon the Board of Directors of the Corporation (the
“Board of Directors”) by the Amended and Restated Certificate of Incorporation
of the Corporation, and pursuant to the provisions of Section 151 of the General
Corporation Law of the State of Delaware (the “DGCL”), the Board of Directors,
at a meeting duly held on March 29, 2004, adopted the following resolution,
which resolution remains in full force and effect on the date hereof.

 

RESOLVED, that there are hereby established two series of authorized preferred
stock, $0.001 par value per share, which shall be designated as (i) ”Series B-1
Preferred Stock,” and which shall consist of 147,679 shares and (ii) ”Series B-2
Preferred Stock,” and which shall consist of 1,139,238 shares. As used herein,
the term “Series B Preferred Stock” shall refer to the Series B-1 Preferred
Stock and the Series B-2 Preferred Stock collectively. The rights of the Series
B-1 Preferred Stock and the Series B-2 Preferred Stock shall rank equally and
shall be identical in all respects, with the exception of the provisions of
Section 18 hereof, which shall apply only to the Series B-2 Preferred Stock.
Both such series shall have the following powers, preferences and relative,
participating, optional and other special rights, and qualifications,
limitations and restrictions thereof as follows (with the exception of Section
18 hereof, which shall apply only to the Series B-2 Preferred Stock):

 

1. Dividends.

 

(a) Each share of Series B Preferred Stock shall be entitled to receive, in
preference to the holders of Junior Securities (as defined herein), cumulative
annual dividends at the rate of 6.0% per annum on the Stated Value thereof.
Subject to the rights of the Series A Preferred Stock with respect to DDi Europe
Value (as defined in the certificate of designation for the Corporation’s Series
A Preferred Stock (the “Series A Certificate of Designation”), such dividends
shall be due and payable quarterly in arrears on the last day of March, June,
September and December of each year (each, a “Dividend Payment Date”); provided,
however, that the initial Dividend Payment Date shall be March 31, 2005, on
which date the first four quarterly accrued dividends shall be due and payable.
Dividends shall accrue daily on each share of Series B Preferred Stock from the
Issuance Date (as defined herein), whether or not earned or declared, until such
share of Series B Preferred Stock has been converted or redeemed as herein
provided. In the event the Corporation defaults on its obligations to pay
dividends on any Dividend Payment Date, then (i) such dividends shall be
cumulative and shall compound quarterly until the date of payment of such
dividends and (ii) other than in the case of dividends not paid or

--------------------------------------------------------------------------------

delivered to Series B-2 Holders as a result of the restrictions in Section 18,
the dividend rate shall be deemed to be 8.0% per annum beginning from the
immediately preceding Dividend Payment Date on which the Corporation paid
dividends or the Issuance Date in the event dividends are not paid on the
initial Dividend Payment Date; provided, however, that at such time as the
Corporation shall pay all of such unpaid dividends, the dividend rate shall
return to 6.0% per annum. The dividends so payable will be paid to the person in
whose name the applicable shares of Series B Preferred Stock (or one or more
predecessor shares) are registered on the records of the Corporation regarding
registration and transfers of the Series B Preferred Stock (the “Preferred Stock
Register”).

 

(b) The dividends are payable in cash to the person in whose name the applicable
share(s) of Series B Preferred Stock is duly registered on the Preferred Stock
Register (the “Holder,” and together with all other holders of the Series B
Preferred Stock, the “Holders”) on the tenth Business Day prior to the
applicable Dividend Payment Date and at the address last appearing on the
Preferred Stock Register as designated in writing by the Holder thereof from
time to time; provided, however, that, in lieu of paying such dividends in cash,
the Corporation may, subject to a delay in delivery to the holders of Series B-2
Preferred Stock pursuant to Section 18, at its option, in part or in full, pay
dividends on the shares of Series B Preferred Stock on any Dividend Payment Date
following receipt of the Approval (as defined herein) in shares of the
Corporation’s common stock, par value $0.001 per share (the “Common Stock”) that
are fully paid and non-assessable and that have been registered for sale by the
Holders pursuant to the Registration Statement (as defined below) (the
“Registered Common Stock”) issued in electronic format (i.e., DWAC); provided,
however, that shares of Common Stock shall not be considered “Registered Common
Stock” for purposes of this Certificate of Designation at any time during which
a Cash Payment Condition (as defined below) is occurring or occurred during the
25 Business Days preceding the applicable Dividend Payment Date. For purposes of
calculating the number of shares of Registered Common Stock to be paid in
respect of any such dividend, the value of such shares shall be ninety-five
percent (95%) of the arithmetic average of the Weighted Average Price (as
defined below) of the Common Stock over the 20 Trading Days (as defined below)
prior to the applicable Dividend Payment Date. The Corporation shall deliver at
the time of payment a written notice to the recipient of any such shares of the
Registered Common Stock setting forth its calculation, as approved by the
Corporation’s Board of Directors, which shall be binding upon all parties absent
error.

 

(c) If the Corporation shall elect to pay any part of a dividend in shares of
Registered Common Stock as described in Section 1(b), and as a condition
thereto, the Corporation will provide irrevocable notice 25 Trading Days prior
to the applicable Dividend Payment Date by facsimile, followed within
twenty-four (24) hours by notice via overnight courier, to the Holder setting
forth the Corporation’s election to do so (a “Dividend Notice”). If a Cash
Payment Condition shall have occurred after such Dividend Notice was received by
the Holder, the Corporation immediately shall notify the Holder of the
occurrence of such Cash Payment Condition and notwithstanding a Dividend Notice
to the contrary, the Corporation shall pay such dividend in cash. However, if
the applicable Holder waives such Cash Payment Condition as set forth in Section
4, the Corporation shall be bound, with respect to that Holder, to its original
election to pay such dividend in shares of Registered Common Stock.

 

2

--------------------------------------------------------------------------------

(d) Except as specifically provided herein, an election by the Corporation to
pay dividends, in part or in full, in cash on any Dividend Payment Date shall
not preclude the Corporation from electing any other available alternative in
respect of all or any portion of any subsequent dividend.

 

2. Preferred Rank. The shares of Series B Preferred Stock shall rank senior to
all shares of Common Stock of the Corporation in respect of dividend rights and
preferences as to distributions and payments upon the liquidation, dissolution
and winding up (whether voluntary or involuntary) of the Corporation. The shares
of Series B Preferred Stock shall rank senior to all other shares of preferred
stock of the Corporation in respect of dividend rights and preferences as to
distributions and payments upon the liquidation, dissolution and winding up
(whether voluntary or involuntary) of the Corporation, subject to (i) the right
of the holders of the Corporation’s Series A Preferred Stock to receive payments
of dividends out of the DDi Europe Value (as defined in the Certificate of
Designation for the Series A Preferred Stock (the “Series A Certificate of
Designation”)), and (ii) to the right of the holders of the Series A Preferred
Stock to receive, upon any liquidation, dissolution or winding up of the
Corporation (whether voluntary or involuntary), payments solely out of any of
the DDi Europe Value, and, each case, in accordance with and subject to the
limitations set forth in the Series A Certificate of Designation. Each such
security to which the Series B Preferred Stock ranks senior is referred to
herein as a “Junior Security.”

 

3. Transfers. The shares of Series B Preferred Stock have been issued subject to
investment representations of the original purchaser of such shares and may be
transferred or exchanged only in compliance with the Securities Act and
applicable state securities laws. Prior to due presentment for transfer of any
share of Series B Preferred Stock, the Corporation may treat the Holder as the
owner thereof for the purpose of receiving payments as herein provided and all
other purposes, and the Corporation shall not be affected by notice to the
contrary.

 

4. Definitions. For purposes of this Certificate of Designation, the following
definitions shall apply:

 

“Business Day” shall mean any day that is not a Saturday or Sunday, and that is
a day on which the New York Stock Exchange, the American Stock Exchange, the
Nasdaq National Market and the Nasdaq SmallCap Market are open for business.

 

“Cash Payment Condition” means any of the following:

 

(A) the effectiveness of the Registration Statement has been suspended,
including if a stop order has been issued, by the Securities and Exchange
Commission (the “SEC”);

 

(B) the Corporation has failed to timely deliver the shares of Common Stock
issuable upon conversion of any shares of Series B Preferred Stock;

 

(C) the Corporation has initiated, or there is continuing, a “Suspension”
pursuant to the Purchase Agreement for the Series B Preferred Stock, dated March
29, 2004, by and among the Corporation and the Purchasers (the “Purchasers”) set
forth on the signature page thereto (the “Purchase Agreement”);

 

3

--------------------------------------------------------------------------------

(D) the Common Stock is not listed on the New York Stock Exchange, the American
Stock Exchange, the Nasdaq National Market or the Nasdaq SmallCap Market, has
been delisted, has not traded on one or more of the foregoing for a period of 10
consecutive Business Days, or delisting has been threatened in writing by any of
the foregoing, as a result of the Corporation’s failure to meet the applicable
minimum requirements for listing;

 

(E) if, after the Corporation has made its election to make a dividend or
redemption payment in shares of Registered Common Stock, there is a public
announcement of an intention by the Corporation to effect a Change of Control
(as defined herein); or

 

(F) any of the Events of Default set forth in Section 5B(a)(iii), (iv), (v) or
(vi) shall then have occurred and be continuing, notwithstanding any remaining
right of the Corporation to cure such Event of Default;

 

provided, however, that each of the foregoing conditions may be waived by a
Holder of Series B Preferred Stock, solely with respect to the shares of Common
Stock of the Corporation which it is entitled to receive with respect to such
Series B Preferred Stock pursuant to the applicable provision of this
Certificate of Designation, and in the case of any such waiver, the Corporation
shall make the related payment in the form of shares of Registered Common Stock.

 

“Closing Price” shall mean the price of one share of Common Stock determined as
follows:

 

(A) If the Common Stock is listed on the Nasdaq National Market or the Nasdaq
SmallCap Market, the last closing bid price on such market, as reported by
Bloomberg, L.P. on the date of valuation (or, if such market begins to operate
on an extended hours basis and does not designate the closing bid price, then
the last bid price of such security prior to 4:00 p.m. New York time (or such
other time as such market publicly announces is the official close of trading)
as reported by Bloomberg);

 

(B) If the Common Stock is listed on a national securities exchange (for the
avoidance of doubt, other than described in (A) above), the last reported
closing bid price on such exchange on the date of valuation (or, if there is no
last reported closing bid price on that date, the most recent previous closing
bid price);

 

(C) If neither (A) nor (B) apply, but the Common Stock is quoted in the
over-the-counter market on the pink sheets or bulletin board, the closing bid
price on the date of valuation; and

 

(D) If none of clause (A), (B) or (C) above applies, the market value as
determined by a nationally recognized investment banking firm or other

 

4

--------------------------------------------------------------------------------

nationally recognized financial advisor retained in good faith by the Board of
Directors of the Corporation for such purpose, taking into consideration among
other factors, the earnings history, book value and prospects for the
Corporation, and the prices at which shares or Common Stock recently have been
traded. Such determination shall be conclusive and binding on all persons absent
error.

 

“Conversion Price” shall initially mean $11.85 per share, subject to adjustment
from time to time ratably for any events set forth in Section 7 hereof.

 

“Conversion Rate” shall mean the number of shares of Common Stock issuable upon
conversion of each share of Series B Preferred Stock determined by the
application of the following formula, where D equals the accrued but unpaid
dividends (whether or not earned or declared) plus, upon the written request of
the applicable Holder, any unpaid Series B Additional Amounts (as defined below)
for each share of Series B Preferred Stock as of the Holder Conversion Date (as
defined in Section 6):

 

Stated Value + D

Conversion Price

 

“Effectiveness Date” shall mean the date on which the Registration Statement (as
defined below) is declared effective by the SEC.

 

“Exchange Act” shall mean the Securities Exchange Act of 1934, as amended.

 

“Issuance Date” shall mean the initial date of issuance of the Series B
Preferred Stock.

 

“Person” means and includes an individual, a partnership, a joint venture, a
corporation, a company, a trust, an unincorporated organization and a government
or any department or agency thereof.

 

“Principal Market” means the Nasdaq National Market or if the Common Stock is
not traded on the Nasdaq National Market, then the principal securities exchange
or trading market for the Common Stock.

 

“Registration Statement” shall mean the registration statement or registration
statements filed by the Corporation with the SEC, as required by the Purchase
Agreement, to register the shares of Common Stock issuable upon conversion or
redemption of the Series B Preferred Stock and in respect of the Corporation’s
option to pay dividends in shares of Common Stock.

 

“Securities Act” shall mean the Securities Act of 1933, as amended.

 

“Series B Additional Amounts” means any additional payments owed by the
Corporation to a Holder with respect to a share of Series B Preferred Stock,
pursuant to Sections 5, 6(c) or 6(d) below.

 

5

--------------------------------------------------------------------------------

“Series B Redemption Price” shall mean an amount per share equal to the Stated
Value of the Series B Preferred Stock plus all accrued but unpaid dividends on
such shares, and upon the written request of the Holder, any unpaid Series B
Additional Amounts through the applicable redemption date provided in Section 5
below. In the event of a redemption under Section 5B(a) arising from an Event of
Default, the Series B Redemption Price shall be 108.0% of the amount that would
otherwise then constitute the Series B Redemption Price.

 

“Stated Value” of any share of Series B Preferred Stock shall mean $47.40.

 

“Trading Day” shall mean a day on which the Common Stock of the Corporation is
traded on a national securities exchange, an automated quotation system, or an
over-the-counter market.

 

“Weighted Average Price” means, for any security as of any date, the dollar
volume-weighted average price for such security on the Principal Market during
the period beginning at 9:30 a.m., New York time (or such other time as the
Principal Market publicly announces is the official open of trading), and ending
at 4:00 p.m. New York time (or such other time as the Principal Market publicly
announces is the official close of trading) as reported by Bloomberg through its
“Volume at Price” functions, or, if the foregoing does not apply, the dollar
volume-weighted average price of such security in the over-the-counter market on
the electronic bulletin board for such security during the period beginning at
9:30 a.m., New York time (or such other time as the Principal Market publicly
announces is the official open of trading), and ending at 4:00 p.m., New York
time (or such other time as the Principal Market publicly announces is the
official close of trading) as reported by Bloomberg, or, if no dollar
volume-weighted average price is reported for such security by Bloomberg for
such hours, the average of the bid prices of each of the market makers for such
security as reported in the “pink sheets” by the National Quotation Bureau, Inc.
If the Weighted Average Price cannot be calculated for such security on such
date on any of the foregoing bases, the Weighted Average Price of such security
on such date shall be the fair market value as mutually determined by the
Corporation and the holders of a majority of the Series B Preferred Stock then
outstanding. All such determinations to be appropriately adjusted for any stock
dividend, stock split or other similar transaction during such period.

 

5. Redemption. Subject to the rights of the Series A Preferred Stock with
respect to DDi Europe Value, the shares of Series B Preferred Stock shall be
subject to redemption in accordance with the provisions of this Section 5.

 

5A. Mandatory Redemption. The Corporation shall redeem in full the Series B
Preferred Stock on the five year anniversary of the Issuance Date (the
“Mandatory Redemption Date”). The Corporation shall effect such redemption by
paying in cash the Series B Redemption Price to the Holders; provided, however,
that, after the Approval has been obtained, in lieu of paying the Series B
Redemption Price in cash, the Corporation may, so long as a Cash Payment
Condition is not then occurring and has not occurred during the 25 Business Days
prior to the Mandatory Redemption Date, at its option, in accordance with
Section 5E, and subject to a delay in delivery to Holders of the Series B-2
Preferred Stock pursuant to Section 18, pay the Series B Redemption Price, in
part or in full, in shares of Registered Common Stock issued in electronic
format (i.e., DWAC). If the Corporation shall elect to pay any part of a
redemption in

 

6

--------------------------------------------------------------------------------

shares of Registered Common Stock as described herein and as a condition
thereto, the Corporation will provide irrevocable notice 25 Trading Days prior
to the Mandatory Redemption Date by facsimile, followed within twenty-four (24)
hours by notice via overnight courier, to each Holder setting forth the
Corporation’s election to do so (a “Mandatory Redemption Notice”), which shall
include (i) the Mandatory Redemption Date, (ii) the place or places where stock
certificates representing the Series B Preferred Stock are to be surrendered
pursuant to Section 5F for payment of the redemption price, which may be the
Corporation’s principal offices, (iii) the Series B Redemption Price and the
calculation of such price, and (iv) the amount, if any, of the Series B
Redemption Price that the Corporation will pay in Registered Common Stock. The
Corporation shall pay the applicable redemption price within three (3) Business
Days after the Mandatory Redemption Date. Notwithstanding anything to the
contrary in the foregoing, after a Mandatory Redemption Notice has been given
pursuant to this Section 5A, each Holder shall retain the right to elect to
convert its shares of Series B Preferred Stock in lieu of such redemption, in
whole or in part into shares of Common Stock pursuant to Section 6 below, prior
to the Mandatory Redemption Date.

 

5B. Optional Redemption By Holder.

 

(a) On each of the dates that are 18 months, 24 months and 30 months from the
Issuance Date (each, an “Optional Redemption Date”), the Corporation shall
redeem up to 428973 in the aggregate (subject to adjustment in the event of any
stock split, reverse stock split or any similar transaction affecting the Series
B Preferred Stock) by paying in cash the Series B Redemption Price to each
Holder who requests, in whole or in part, to include its shares of Series B
Preferred Stock in such redemption as provided by Section 5B(d) below; provided,
however, that after the Approval has been obtained, in lieu of paying the Series
B Redemption Price in cash, the Corporation may, so long as a Cash Payments
Condition is not then occurring and has not occurred during the 25 Business Days
prior to the applicable Optional Redemption Date, at its option, in accordance
with Section 5E, subject to a delay in delivery to Holders of the Series B-2
Preferred Stock pursuant to Section 18, pay the Series B Redemption Price, in
part or in full, in shares of Registered Common Stock issued in electronic book
entry only format (i.e., DWAC). Each Holder also shall have the option to
require the Corporation to redeem all or part of its shares of Series B
Preferred Stock at the Series B Redemption Price, solely in cash, if any of the
following “Events of Default” shall have occurred:

 

(i) the Common Stock ceases for more than ten (10) consecutive Business Days to
be traded on the New York Stock Exchange, the American Stock Exchange, the
Nasdaq National Market or the Nasdaq SmallCap Market;

 

(ii) while the Registration Statement is required to be maintained effective
pursuant to the terms of the Purchase Agreement, except for days during any
period in which the Corporation is permitted thereunder to suspend such
effectiveness, the effectiveness of the Registration Statement lapses for any
reason (including, without limitation, the issuance of a stop order) or is
unavailable to the holder of the Series B Preferred Stock for sale of all of the
Registrable Securities (as defined in the Purchase Agreement) in accordance with
the terms of the Purchase Agreement, and such lapse or unavailability continues
for a period of five (5) consecutive Trading Days or for more than an aggregate
of ten (10) Trading Days in any 365-day period;

 

7

--------------------------------------------------------------------------------

(iii) the Corporation shall have failed to authorize a sufficient number of
shares of Common Stock necessary to effect the conversion of the Series B
Preferred Stock;

 

(iv) the Corporation breaches a representation, warranty or covenant of the
Purchase Agreement or this Certificate of Designation, which breach has a
Material Adverse Effect (as defined in the Purchase Agreement) on the
Corporation or a material adverse impact on the rights of a Holder including,
without limitation, the failure of the Corporation to pay dividends on or to
convert the Series B Preferred Stock, and such breach is not cured within ten
(10) Business Days of the delivery to the Corporation of notice of such breach;

 

(v) the Corporation or any of its subsidiaries pursuant to or within the meaning
of Title 11, U.S. Code, or any similar Federal or state law for the relief of
debtors, (A) commences a voluntary case, (B) consents to the entry of an order
for relief against it in an involuntary case, (C) consents to the appointment of
a receiver, trustee, assignee, liquidator or similar official, (D) makes a
general assignment for the benefit of its creditors or (E) admits in writing
that it is generally unable to pay its debts as they become due; or

 

(vi) any money judgment (including any arbitration award reduced to a judgment),
writ or warrant of attachment, or similar process in excess of $10,000,000 in
the aggregate shall be entered against the Corporation, any of its subsidiaries
or any of their respective properties or other assets, and which shall remain
unpaid, unvacated, unbonded or unstayed for a period of sixty (60) days.

 

(b) In order to have the Corporation redeem under this Section 5B any shares of
Series B Preferred Stock, in whole or in part, the applicable Holder, in the
case of an Optional Redemption Date, shall give written notice to the
Corporation at least 30 Business Days prior to the applicable Optional
Redemption Date in the form of Exhibit 1 hereto (the “Redemption Notice”) by
facsimile (with the original of such notice forwarded via overnight courier) to
the Corporation to the effect that such Holder elects to have redeemed the
number of shares of Series B Preferred Stock specified therein, for the Series B
Redemption Price. Within five Business Days after receipt of the Redemption
Notice relating to an Optional Redemption Date, the Corporation shall deliver
irrevocable written notice advising the applicable Holder via facsimile,
followed within twenty-four (24) hours by notice via overnight courier, whether
the Corporation has elected to pay the applicable Series B Redemption Price in
Registered Common Stock; provided, however, that such Holder will retain the
right to exercise the conversion rights set forth in Section 6, in whole or in
part, in lieu of such redemption, prior to the applicable Optional Redemption
Date.

 

(c) The Corporation shall pay the Series B Redemption Price no later than (i) in
the case of a redemption at the option of the Holder upon an Event of Default,
the fifth Business Day after receipt by the Corporation of a notice from such
Holder of the occurrence of such Event of Default and the election of such
holder to have shares of Series B Preferred Stock redeemed by the Corporation to
such Holder, and (ii) in the case of a redemption on an Optional Redemption
Date, such Optional Redemption Date. If more than one Holder submits shares of
Series B Preferred Stock for redemption simultaneously and the Corporation is
unable to redeem all shares of Series B Preferred Stock submitted for such
redemption, the Corporation shall redeem an amount from each Holder equal to
each Holder’s pro rata amount (based on the

 

8

--------------------------------------------------------------------------------

number of shares of Series B Preferred Stock held by each Holder relative to the
number of shares of Series B Preferred Stock outstanding) of all shares of
Series B Preferred Stock being redeemed. Notwithstanding anything to the
contrary contained herein, if the Corporation shall have failed to timely redeem
the Series B Preferred Stock in accordance with the provisions of this Section
5B, the Holder may revoke such redemption notice by delivering written notice to
the Corporation, and the Corporation promptly shall return such Holder’s stock
certificate(s) submitted for redemption and indicate such return on its books
and records.

 

(d) On each Optional Redemption Date, each Holder, together with its affiliates
and transferees and their affiliates (each, an “Affiliated Group”) shall have
the right to have redeemed no more than one third of the shares of Series B
Preferred Stock initially issued to the members of such Affiliated Group on the
Issuance Date. In connection with any transfer of Shares, the transferor and
transferee may agree in writing as to any allocation of the redemption rights
that are applicable to such transferred Shares. The Corporation shall make any
adjustments to the number of shares as shall be redeemed from each Holder on
each Optional Redemption Date as shall be necessary to effect the provisions of
this Section 5B(c).

 

(e) For the avoidance of doubt, a Holder’s determination to exercise its
redemption right with respect to any Optional Redemption Date shall not bind it
to exercise or not exercise such right with respect to any subsequent Optional
Redemption Date. The Corporation’s election to pay the Series B Redemption Price
in shares of Registered Common Stock shall not bind it to do so or not to do so
with respect to any subsequent Optional Repayment Date.

 

5C. Redemption at the Option of the Corporation.

 

(a) In the event that the Closing Price of the Common Stock is greater than 175%
of the Conversion Price (the “Threshold Price”) for thirty (30) consecutive
Trading Days, beginning at any time ninety (90) days after the Effectiveness
Date, the Corporation may, at its option, redeem all of the Series B Preferred
Stock by paying in cash the Series B Redemption Price no later than 30 Business
Days following the first Trading Day on which the Closing Price is less than the
Threshold Price; provided, however, that, after the Approval has been obtained,
in lieu of paying the Series B Redemption Price in cash, the Corporation may,
subject to a delay in delivery to Holders of the Series B-2 Preferred Stock
pursuant to Section 18, so long as a Cash Payment Condition is not then
occurring and has not occurred during the 25 Business Days prior to the
applicable Corporation Optional Redemption Date described below, at its option,
pay the Series B Redemption Price in accordance with Section 5E, in part or in
full, in shares of Registered Common Stock.

 

(b) Notice of the Corporation’s intention to redeem the Series B Preferred Stock
under this Section 5C shall, as a condition thereto, be given at least 25
Business Days prior to the date of redemption (the “Corporation Optional
Redemption Date”) by facsimile, followed within twenty-four (24) hours by notice
via overnight courier, to the Holders. Each such notice shall be irrevocable and
shall state: (i) the Corporation Optional Redemption Date; (ii) the place or
places where the stock certificates representing the Series B Preferred Stock
are to be surrendered pursuant to Section 5F for payment of the redemption
price, which may be the Corporation’s principal offices; (iii) the Series B
Redemption Price and the

 

9

--------------------------------------------------------------------------------

calculation of such price; and (iv) the amount, if any, of the Series B
Redemption Price that the Corporation will pay in shares of Registered Common
Stock (the “Corporation Redemption Notice”). On the Corporation Optional
Redemption Date, the Corporation shall pay the applicable Series B Redemption
Price. Any shares of Registered Common Stock issued upon redemption shall be
issued in electronic book entry only format (i.e., DWAC). Notwithstanding
anything to the contrary in the foregoing, after a Corporation Redemption Notice
has been given pursuant to this subsection (b), each Holder shall retain the
right to elect to convert its shares of Series B Preferred Stock, in whole or in
part, into shares of Registered Common Stock pursuant to Section 6 below, in
lieu of such redemption by delivering the applicable Conversion Notice prior to
the Corporation Optional Redemption Date.

 

5D. Redemption on Change of Control.

 

(a) Change of Control. Each of the following events shall constitute a “Change
of Control”:

 

(i) the consolidation, merger or other business combination (including, without
limitation, a reorganization or recapitalization) of the Corporation with or
into another Person (other than (A) a consolidation, merger or other business
combination (including, without limitation, reorganization or recapitalization)
in which holders of the Corporation’s voting power immediately prior to the
transaction continue after the transaction to hold, directly or indirectly, at
least sixty percent (60%) of the voting power of the capital stock of the
surviving entity or entities, or (B) pursuant to a migratory merger effected
solely for the purpose of changing the jurisdiction of incorporation of the
Corporation);

 

(ii) the sale or transfer of all or substantially all of the Corporation’s
assets; or

 

(iii) the closing of the transfer (whether by merger, consolidation or
otherwise), in one transaction or a series of related transactions, to a Person
or group of affiliated Persons (other than an underwriter of the Corporation’s
securities), of the Corporation’s securities, if after such closing, such Person
or group of affiliated Persons would hold forty percent (40%) or more of the
outstanding voting stock of the Corporation (or the surviving or acquiring
entity).

 

No sooner than 20 Trading Days nor later than 10 Trading Days prior to the
consummation of a Change of Control, the Corporation shall deliver written
notice thereof via facsimile and overnight courier to the Holder (a “Change of
Control Notice”). Notwithstanding the foregoing, the Corporation shall publicly
announce the Change of Control prior to the delivery of the Change of Control
Notice. In addition, notwithstanding its receipt of a Change of Control Notice
in lieu of such redemption, each Holder shall retain the right to convert its
shares pursuant to Section 6 below by delivering its Conversion Notice prior to
the consummation of such Change of Control.

 

(b) New Security. Prior to the consummation of any (i) sale of all or
substantially all of the Corporation’s assets to an acquiring Person or (ii)
other Change of Control following which the Corporation is not a surviving
entity, the Corporation will secure from the Person purchasing such assets or
the successor resulting from such Change of Control

 

10

--------------------------------------------------------------------------------

(in each case, the “Acquiring Entity”) a written agreement (in form and
substance satisfactory to the holders of a majority of the Series B Preferred
Stock then outstanding) to deliver to each holder of Series B Preferred Stock in
exchange for such shares, a security of the Acquiring Entity evidenced by a
written instrument substantially similar in form and substance to the Series B
Preferred Stock (including, without limitation, having a stated value and
liquidation preference equal to the Stated Value and the liquidation preference
of the Series B Preferred Stock held by such holder) and satisfactory to the
holders of a majority of the Series B Preferred Stock then outstanding. Prior to
the consummation of any other Change of Control, the Corporation shall make
appropriate provision (in form and substance satisfactory to the holders of a
majority of the Series B Preferred Stock then outstanding) to ensure that each
of the holders of the Series B Preferred Stock will thereafter have the right to
acquire and receive in lieu of or in addition to (as the case may be) the shares
of Common Stock immediately theretofore acquirable and receivable upon the
conversion of such holder’s Series B Preferred Stock (without regard to any
limitations on conversion) such shares of stock, securities or assets that would
have been issued or payable in such Change of Control with respect to or in
exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the conversion of such holder’s Series B
Preferred Stock as of the date of such Change of Control (without taking into
account any limitations or restrictions on the convertibility of the Series B
Preferred Stock).

 

(c) Holder Redemption Right. At any time during the period beginning after the
Holder’s receipt of a Change of Control Notice and ending on the date of the
consummation of such Change of Control, the Holder may require the Corporation
to redeem, in whole or in part, such Holder’s shares of Series B Preferred Stock
by delivering written notice thereof to the Corporation. The shares of Series B
Preferred Stock subject to redemption pursuant to this Section 5D shall be
redeemed by the Corporation in cash at a price equal to (i) 101% of the Stated
Value of the Series B Preferred Stock, plus (ii) accrued and unpaid dividends
thereon and, upon the written request of the applicable Holder, any unpaid
Series B Additional Amounts (the “Change of Control Redemption Price”).

 

(d) Termination of Change of Control. If any proposed Change of Control does not
occur, all requests for redemption in connection therewith shall be
automatically rescinded. In addition, if there has been a material change in the
terms or the timing of the transaction constituting such Change of Control, any
Holder may rescind such holder’s request for redemption by giving written notice
of such rescission to the Corporation.

 

5E. Value of Registered Common Stock on Redemption; Notifications. (a) For
purposes of calculating the number of shares of Registered Common Stock to be
distributed to the Holders under this Section 5 in payment of the applicable
redemption price, to the extent permitted hereunder, the value of such shares
shall be the lower of (i) the then applicable Conversion Price or (ii)
ninety-five percent (95%) of the arithmetic average of the Weighted Average
Price of the Common Stock over the 20 Trading Days prior to the applicable
redemption date. If a Cash Payment Condition shall have occurred after the
Corporation provides a Holder with notice of its intent to issue shares of
Registered Common Stock in connection with any redemption, the Corporation
immediately shall notify such Holder of the occurrence of such Cash Payment
Condition, and notwithstanding an irrevocable notice to the contrary, the
Corporation shall effect the payment of such redemption in cash, unless the
applicable Holder waives such Cash Payment Condition as set forth in Section 4.
If the

 

11

--------------------------------------------------------------------------------

applicable Holder waives such Cash Payment Condition, the Corporation shall be
bound, with respect to that Holder, to its original election to redeem the
shares of Series B Preferred Stock in shares of Registered Common Stock.

 

(b) In connection with any redemption, the Corporation shall deliver a written
notice to the recipient of any Registered Common Stock setting forth its
calculation of the applicable redemption price, as approved by the Corporation’s
Board of Directors, which shall be binding upon all parties, absent error.

 

5F. Effect of Redemption. Each certificate representing shares of Series B
Preferred Stock redeemed by the Corporation pursuant to this Section 5 shall, on
the applicable redemption date be canceled and retired by the Corporation. Upon
payment of the applicable redemption price or the issuance of the shares of
Registered Common Stock issuable in lieu of cash payment of such redemption
price, the shares of Series B Preferred Stock formerly represented thereby shall
be deemed to be canceled and shall no longer be considered to be issued and
outstanding for any purpose, including without limitation, for purposes of
accumulating dividends thereon. If fewer than all of the shares represented by a
Holder’s certificate or certificates are to be redeemed, the Corporation shall,
at its own expense, issue and deliver to such Holder, and indicate the existence
on its books and records of, a new certificate or certificates representing the
unredeemed shares. Such Holder shall deliver, as promptly as is practicable, to
the Corporation the certificate or certificates representing redeemed shares of
Series B Preferred Stock via overnight courier, or notify the Corporation that
such certificate(s) has been lost, stolen or destroyed, as set forth in Section
16.

 

5G. Remedies for Failure to Redeem. If the Corporation for any reason fails to
redeem any of the shares of the Series B Preferred Stock as required pursuant to
this Section 5 on or prior to the applicable redemption date, then,
notwithstanding anything to the contrary contained herein and in addition to any
other remedies herein provided to the Holders:

 

(a) (i) the number of directors then constituting the Board of Directors shall
be increased by one; and (ii) any Holder or Holders of the Series B Preferred
Stock, holding in the aggregate at least a majority in interest of the then
outstanding Series B Preferred Stock, shall have the right to demand a
stockholders’ meeting and, at such meeting the Holders of the then outstanding
Series B Preferred Stock voting as a single class, shall have the right to elect
such additional director to the Board of Directors by affirmative vote of at
least a majority in interest of the Holders of the then outstanding Series B
Preferred Stock. The right to such directorship as provided in this paragraph
shall terminate, and such director’s term in office shall immediately end, on
such date as the Corporation shall remedy in full the failure to effect the
redemption that resulted in the creation of such directorship. Such meeting of
stockholders shall be held within thirty (30) days of a demand by at least a
majority in interest of the Holders of the then outstanding Series B Preferred
Stock, and the Corporation shall take all actions necessary or appropriate under
the Exchange Act and the DGCL to ensure that the Board of Directors, for so long
as the Holders of the Series B Preferred Stock have the rights provided by this
Section 5G(a), reflects the composition of this Section 5G following such
meeting; (b) the Series B Redemption Price for such shares shall be the Series B
Redemption Price that would be payable in the case of a redemption under Section
5B(a) arising from an Event of Default, and (c) in addition to any dividends
required to be paid pursuant to Section 1, the unpaid portion of the Series B
Redemption Price shall accrue interest at the rate of 8.0% per annum, payable
monthly in cash to the applicable Holder.

 

12

--------------------------------------------------------------------------------

5H. Maximum Shares Available for Redemption. (a) Under no circumstances shall
the Corporation issue more than 10,000,000 shares of Common Stock upon any
redemption pursuant to this Section 5 (as adjusted for stock splits, reverse
stock splits, stock dividends and similar transactions); (the “Maximum
Redemption Shares”); provided, however, that the Corporation may issue more than
the Maximum Redemption Shares in order to satisfy its obligations relating to a
notice previously issued to a Holder of its intent to issue shares of Registered
Common Stock upon a redemption, and provided that the Corporation shall use its
best efforts to prevent any such issuance of more than the Maximum Redemption
Shares from occurring. Once the Corporation determines that the Maximum
Redemption Shares have been issued hereunder in connection with any redemption,
all further redemptions shall be in cash.

 

(b) Notwithstanding the provisions of paragraph (a) above, a majority of the
holders of the Series B Preferred Stock then outstanding may, voting as a single
class, waive the limitation of paragraph (a) above with respect to one or more
redemptions.

 

6. Conversion at the Option of the Holder. The Holder shall have the following
conversion rights:

 

(a) Holder’s Right to Convert. Subject to a delay in delivery to Holders of the
Series B-2 Preferred Stock pursuant to Section 18, shares of Series B Preferred
Stock shall be convertible at any time, in whole or in part, at the option of
the Holder thereof, into fully paid, validly issued and nonassessable shares of
Common Stock in accordance with the terms herein for such number of shares of
Common Stock as determined by the application of the Conversion Rate.

 

(b) Mechanics of Conversion. In order to convert any shares of Series B
Preferred Stock, in whole or in part, into full shares of Common Stock, the
applicable Holder shall give written notice in the form of Exhibit 2 (the
“Conversion Notice”) by facsimile (with the original of such notice forwarded
via overnight courier) to the Corporation at such office to the effect that such
Holder elects to have converted the number of shares of Series B Preferred Stock
(plus accrued but unpaid dividends thereon) specified therein (such notice and
election shall be irrevocable by the Holder). If fewer than all the shares held
by such Holder are to be converted, the Corporation shall, within three (3)
Business Days of receipt of such Conversion Notice, issue and deliver to or on
the order of the Holder thereof (and indicate the existence on its books and
records), at the expense of the Corporation, a new certificate or certificates
representing the unconverted shares, to the same extent as if the certificate
theretofore representing such unconverted shares had been surrendered on
conversion. The effective date of conversion (the “Holder Conversion Date”)
shall be deemed to be the date on which the Corporation receives by facsimile
the Conversion Notice.

 

(c) Delivery of Common Stock. The Corporation shall issue and deliver on or
prior to the third Business Day (the “Required Delivery Date”) after receipt by
the Corporation of such Conversion Notice by facsimile, such shares of Common
Stock in electronic format (i.e., DWAC), together with a certificate, certified
by an appropriate officer of the

 

13

--------------------------------------------------------------------------------

Corporation, setting forth the calculation of the Conversion Rate. The person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder of such shares
of Common Stock on the Holder Conversion Date. Upon any failure to deliver such
shares upon conversion at the time required by this subsection, such Holder may
(i) elect that the Corporation shall pay to the Holder of the applicable shares
of Series B Preferred Stock to be converted an amount equal to 1.5% of the
Stated Value of the shares to be converted per month, or any prorated portion
thereof for partial months, until such conversion is duly effected or (ii) elect
to exercise its rights under paragraph (d) below. Notwithstanding anything to
the contrary contained herein, if the Corporation shall have failed to timely
convert the Series B Preferred Stock in accordance with the provisions of this
6, the Holder may revoke such Conversion Notice by delivering written notice to
the Corporation, and the Corporation promptly shall return such Holder’s stock
certificate(s) submitted for conversion. Each Holder that elects to convert its
Series B Preferred Stock will submit to the Corporation, within 30 days of the
Holder Conversion Date, such shares of Series B Preferred Stock to be converted.

 

(d) Buy-in Right. If the Corporation fails to deliver to the Holder such
certificate or certificates pursuant to Section 6(c) by the Required Delivery
Date, and if after such Required Delivery Date the Holder purchases (in an open
market transaction or otherwise) Common Stock to deliver in satisfaction of a
sale by such Holder of the Common Stock which the Holder was entitled to receive
upon the conversion relating to such Required Delivery Date (a “Buy-In”), then
upon delivery of the notice described below, and in lieu of the remedies
provided in the third to last sentence of the preceding Section 6(c), the
Corporation shall pay in cash to the Holder the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of shares
of Common Stock that such Holder was entitled to receive from the conversion at
issue multiplied by (2) the price at which the sell order giving rise to such
purchase obligation was executed. For example, if the Holder purchases Common
Stock having a total purchase price of $11,000 to cover a Buy-In with respect to
an attempted conversion of shares of Series B Preferred Stock with respect to
which the aggregate sale price giving rise to such purchase obligation is
$10,000, the Corporation shall be required to pay the Holder $1,000. The Holder
shall provide the Corporation written notice indicating the amounts payable to
the Holder in respect of the Buy-In, together with applicable confirmations and
other evidence reasonably requested by the Corporation.

 

(e) Effect of Conversion. Each certificate representing shares of Series B
Preferred Stock surrendered to the Corporation for conversion pursuant to this
Section 6 shall, on the Holder Conversion Date and subject to issuance of the
shares of Common Stock issuable upon conversion thereof, be canceled and retired
by the Corporation. Upon issuance of the shares of Common Stock issuable upon
conversion of the Series B Preferred Stock pursuant to this Section 6, the
shares of Series B Preferred Stock formerly represented thereby shall be deemed
to be canceled and shall no longer be considered to be issued and outstanding
for any purpose, including without limitation, for purposes of accumulating
dividends thereon.

 

(f) Conversion Limitation. Notwithstanding any provision of this Certificate of
Designation, in order to comply with the rules of the Nasdaq Stock Market
relating to shareholder approval of a transaction by an issuer other than in a
public offering, the Series B

 

14

--------------------------------------------------------------------------------

Preferred Stock is not convertible into the number of shares of Common Stock
that, in the aggregate, would result in the issuance of more than 19.9% of the
shares of Common Stock outstanding immediately prior to the execution of the
Purchase Agreement (the “Conversion Limitation”) until the Corporation obtains
shareholder approval of the Corporation’s option to pay dividends, redeem the
Series B Preferred Stock, or both with shares of Registered Common Stock or
issue shares of Registered Common Stock upon conversion of the Series B
Preferred Stock following a downward adjustment in the Conversion Price. The
Corporation agrees to seek the Approval at its next special or annual meeting of
stockholders, which meeting shall occur no later than June 30, 2004, or if the
Approval is not so obtained, then the Corporation shall seek the Approval at
each subsequent annual meeting of stockholders, until the Approval is obtained.
In the case of any conversion into a number of shares equal to or less than the
Conversion Limitation, the conversion shall be applied on a pro rata basis among
the registered Holders of the Series B Preferred Stock, such that each Holder
shall be entitled to that portion of the maximum number of shares that may be
issued pursuant to this paragraph (the “Maximum Share Amount”) equal to the
product of (a) the fraction determined by dividing the number of shares of
Series B Preferred Stock then held by such Holder as of such date by the
aggregate number of such shares held by all Holders as of such date and (b) the
difference between the Maximum Share Amount and the number of shares of Common
Stock issued in the aggregate among all Holders of Series B Preferred Stock
pursuant to any conversions or redemptions of, or dividends on, Series B
Preferred Stock, prior to such date.

 

(g) Absolute Obligation. Subject to the provisions of this Section 6, the
Corporation’s obligation to effect conversions pursuant to this Section 6 is
absolute and unconditional, irrespective of any action or inaction by any Holder
of Series B Preferred Stock, or any violation or alleged violation of law by
such Holder.

 

7. Share Issuances; Adjustments; Reorganizations.

 

(a) Adjustment for Splits and Combinations. (i) In the event the Corporation at
any time or from time to time after the Issuance Date makes, or fixes a record
date for the effectuation of a split or subdivision of the outstanding shares of
Common Stock without payment of any consideration, or to effect a dividend of
Common Stock to the holders of Common Stock, then as of such record date (or the
date of such split or subdivision, dividend or distribution if no record date is
fixed), the Conversion Price of the Series B Preferred Stock shall be
appropriately decreased so that the number of shares of Common Stock issuable on
conversion of each share of Series B Preferred Stock shall be increased in
proportion to such increase of the aggregate shares of Common Stock outstanding.

 

(ii) If the number of shares of Common Stock outstanding at any time after the
Issuance Date is decreased by a combination of the outstanding shares of Common
Stock, then, following the record date of such combination (or the date of such
combination if no record date is fixed), the Conversion Price of the Series B
Preferred Stock shall be appropriately increased so that the number of shares of
Common Stock issuable on conversion of each share of Series B Preferred Stock
shall be decreased in proportion to such decrease in outstanding shares.

 

(b) Adjustment for Dividends and Distributions. In the event the Corporation at
any time or from time to time after the Issuance Date makes, or fixes a record

 

15

--------------------------------------------------------------------------------

date for the determination of holders of Common Stock entitled to receive, a
dividend or other distribution payable in securities, cash or other assets of
the Corporation (other than shares of Common Stock) or any of its subsidiaries,
including in connection with a spin-off, then and in each such event, provision
shall be made so that the Holders shall receive, upon conversion of their shares
of Series B Preferred Stock pursuant to Section 6 hereof, in addition to the
number of shares of Common Stock receivable thereupon, the amount of such
securities, cash or other assets of the Corporation or such subsidiary to which
a Holder on the relevant record or payment date, as applicable, of the number of
shares of Common Stock so receivable upon conversion would have been entitled,
plus any dividends or other distributions which would have been received with
respect to such securities had such Holder thereafter, during the period from
the date of such event to and including the Holder Conversion Date, retained
such securities, subject to all other adjustments called for during such period
under this Section 7 with respect to the rights of the Holders. For purposes of
this Section 7(b), the number of shares of Common Stock so receivable upon
conversion by the Holder shall be deemed to be that number which the Holder
would have received upon conversion of the Series B Preferred Stock if the
Holder Conversion Date had been the day preceding the date upon which the
Corporation announced the making of such dividend or other distribution.

 

(c) Adjustment for Reclassification, Exchange and Substitution. In the event
that at any time or from time to time after the Issuance Date, the Common Stock
issuable upon the conversion of the Series B Preferred Stock is changed into the
same or a different number of shares of any class or classes of stock, whether
by recapitalization, reclassification or otherwise (other than a subdivision or
combination of shares or stock dividend or reorganization provided for elsewhere
in this Section 7 or a merger, consolidation or other business transaction
provided for in Section 5), then and in each such event each Holder shall
thereafter have the right upon conversion to receive, the kind and amount of
shares of stock and other securities, cash and property receivable upon such
recapitalization, reclassification or other change, by holders of the number of
shares of Common Stock which the Holder of shares of Series B Preferred Stock
would have received had it converted such shares immediately prior to such
recapitalization, reclassification or other change, at the Conversion Price then
in effect (the kind, amount and price of such stock and other securities to be
subject to adjustments as herein provided). Prior to the consummation of any
recapitalization, reclassification or other change contemplated hereby, the
Corporation will make appropriate provision (in form and substance satisfactory
to the Holders of a majority of the Series B Preferred Stock then outstanding)
to ensure that each of the Holders of the Series B Preferred Stock will
thereafter have the right to acquire and receive in lieu of or in addition to
(as the case may be) the shares of Common Stock otherwise acquirable and
receivable upon the conversion of such Holder’s Series B Preferred Stock, such
shares of stock, securities or assets that would have been issued or payable in
such recapitalization, reclassification or other change with respect to or in
exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the conversion of such Holder’s Series B
Preferred Stock had such recapitalization, reclassification or other change not
taken place (without taking into account any limitations or restrictions on the
timing or amount of conversions). In the event of such recapitalization,
reclassification or other change, the formulae set forth herein for conversion
and redemption shall be equitably adjusted to reflect such change in number of
shares or, if shares of a new class of stock are issued, to reflect the market
price of the class or classes of stock (applying the same factors used in
determining the Conversion Price for shares of Common Stock) issued in
connection with the above described events.

 

16

--------------------------------------------------------------------------------

(d) Reorganization. If at any time or from time to time after the Issuance Date
there is a capital reorganization of the Common Stock (other than a
recapitalization, subdivision, combination, reclassification or exchange of
shares provided for elsewhere in this Section 7) then, as a part of such
reorganization, provisions shall be made so that the Holders shall thereafter be
entitled to receive, subject to a delay in delivery to Holders of the Series B-2
Preferred Stock pursuant to Section 18, upon conversion of its shares of Series
B Preferred Stock the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock deliverable upon
conversion would have been entitled to receive had the holder of shares of
Series B Preferred Stock converted such shares immediately prior to such capital
reorganization, at the Conversion Price then in effect. In any such case,
appropriate adjustments shall be made in the application of the provisions of
this Section 7 with respect to the rights of the Holders after such capital
reorganization to the extent that the provisions of this Section 7 shall be
applicable after that event and be as equivalent as may be practicable,
including, by way of illustration and not limitation, by equitably adjusting the
formulae set forth herein for conversion and redemption to reflect the market
price of the securities or property (applying the same factors used in
determining the Conversion Price for shares of Common Stock) issued in
connection with the above described events.

 

(e) Certain Events. If any event occurs of the type contemplated by the
provisions of this Section 7 but not expressly provided for by such provisions,
then the Corporation’s Board of Directors will, subject to a delay in delivery
to Holders of the Series B-2 Preferred Stock pursuant to Section 18, make an
appropriate adjustment in the Conversion Price so as to protect the rights of
the holders of the Series B Preferred Stock; provided, however, that no such
adjustment will increase the Conversion Price as otherwise determined pursuant
to this Section 7.

 

(f) Adjustments for Certain Dilutive Issuances. The Conversion Price of the
Series B Preferred Stock shall be subject to adjustment from time to time as
follows:

 

(i) If the Corporation shall issue or sell, after the Issuance Date any
Additional Stock (as defined below) without consideration or for a consideration
per share (the “Purchase Price”) less than the Conversion Price of the Series B
Preferred Stock on the date of its agreement to issue such Additional Stock (the
“Additional Stock Issuance Date”), the Conversion Price shall (except as
otherwise provided in this Paragraph 7) be reduced, concurrently with such
issuance, to a price (calculated to the nearest cent) determined by multiplying
the Conversion Price in effect immediately prior to such issuance or sale (the
“Applicable Price”) by a fraction, (x) the numerator of which shall be the sum
of (A) the product of (I) the number of shares of Common Stock Deemed
Outstanding immediately prior to such issuance or sale and (II) the Applicable
Price plus (B) the aggregate consideration received by the Corporation for the
total number of shares of Additional Stock so issued or sold, and (y) the
denominator of which shall be the product of the (A) the Applicable Price and
(B) the number of shares of Common Stock Deemed Outstanding immediately after
such issuance.

 

17

--------------------------------------------------------------------------------

(ii) No adjustment of the Conversion Price shall be made in an amount less than
one cent per share, provided that any adjustments that are not required to be
made by reason of this sentence shall be carried forward and shall be either
taken into account in any subsequent adjustment made prior to three (3) years
from the date of the event giving rise to the adjustment being carried forward,
or shall be made at the end of three (3) years from the date of the event giving
rise to the adjustment being carried forward. Except to the limited extent
provided for in Sections 7(f)(v)(3), no adjustment of such Conversion Price
pursuant to this Section shall have the effect of increasing the Conversion
Price above the Conversion Price in effect immediately prior to such adjustment.

 

(iii) In the case of the issuance of Additional Stock for cash, the
consideration shall be deemed to be the amount of cash paid therefor before
deducting any reasonable discounts, commissions or other expenses allowed, paid
or incurred by the Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.

 

(iv) In the case of the issuance of Additional Stock for other than cash, the
consideration other than cash shall be deemed to be the fair value thereof as
determined by the independent members of the Board of Directors irrespective of
any accounting treatment.

 

(v) In the case of the issuance (whether before, on or after the applicable
Additional Share Issuance Date) of options to purchase or rights to subscribe
for Common Stock, securities by their terms convertible into or exchangeable for
Common Stock or options to purchase or rights to subscribe for such convertible
or exchangeable securities (including (A) any rights, options or warrants issued
to holders of Common Stock or (B) any securities or other rights issued by
subsidiaries of the Corporation that are exercisable for, or convertible into,
Common Stock), the following provisions shall apply for all purposes of this
Section 7(f):

 

(1) The aggregate maximum number of shares of Common Stock deliverable upon
exercise (assuming the satisfaction of any conditions to exercisability,
including, without limitation, the passage of time, but without taking into
account potential antidilution adjustments (to the extent then exercisable) of
such options to purchase or rights to subscribe for Common Stock shall be deemed
to have been issued at the time such options or rights were issued and for a
consideration equal to the consideration (determined in the manner provided in
Sections 7(f)(iii) and 7(f)(iv)), if any, received by the Corporation upon the
issuance of such options or rights plus the minimum exercise price provided in
such options or rights (without taking into account potential antidilution
adjustments) for the Common Stock covered thereby.

 

(2) The aggregate maximum number of shares of Common Stock deliverable upon
conversion of, or in exchange (assuming the satisfaction of any conditions to
convertibility or exchangeability, including, without limitation, the passage of
time, but without taking into account potential antidilution adjustments (to the
extent then convertible or exchangeable) for any such convertible or
exchangeable securities or upon the exercise of options to purchase or rights to
subscribe for such convertible or exchangeable securities and subsequent
conversion or exchange thereof shall be deemed to have been issued at the time
such securities were issued or such options or rights were issued and for a
consideration equal to the consideration, if any, received by the Corporation
for any such securities and related options or

 

18

--------------------------------------------------------------------------------

rights (excluding any cash received on account of accrued interest or accrued
dividends), plus the minimum additional consideration, if any, to be received by
the Corporation (without taking into account potential antidilution adjustments)
upon the conversion or exchange of such securities or the exercise of any
related options or rights (the consideration in each case to be determined in
the manner provided in Sections 7(f)(iii) and 7(f)(iv)).

 

(3) In the event of any change in the number of shares of Common Stock
deliverable or in the consideration payable to the Corporation upon exercise of
such options or rights or upon conversion of or in exchange for such convertible
or exchangeable securities, including, but not limited to, a change resulting
from the antidilution provisions thereof or terms otherwise providing for the
adjustment of the applicable conversion or exercise price, the Conversion Price
of the Series B Preferred Stock, to the extent in any way affected by or
computed using such options, rights or securities, shall be recomputed to
reflect such change, but no further adjustment shall be made for the actual
issuance of Common Stock or any payment of such consideration upon the exercise
of any such options or rights or the conversion or exchange of such securities.

 

(vi) “Additional Stock” shall mean any shares of Common Stock issued (or deemed
to have been issued pursuant to Section 7(f)(v) by the Corporation after the
applicable Additional Stock Issue Date other than:

 

(1) the issuance of shares of securities pursuant to a split or subdivision of
the outstanding shares of Common Stock or the determination of holders of Common
Stock entitled to receive a dividend or other distribution payable in additional
shares of Common Stock or other securities or rights convertible into, or
entitling the holder thereof to receive directly or indirectly, additional
shares of Common Stock (hereinafter referred to as “Common Stock Equivalents”)
without payment of any consideration by such holder for the additional shares of
Common Stock or the Common Stock Equivalents (including the additional shares of
Common Stock issuable upon conversion or exercise thereof);

 

(2) the issuance of shares of Common Stock or options therefor to employees or
directors of the Corporation or any of its direct or indirect subsidiaries
directly or pursuant to a stock option or other equity based compensation plan,
as approved by the Board of Directors;

 

(3) the issuance of shares of Common Stock (A) in a bona fide, firmly
underwritten public offering under the Securities Act raising aggregate proceeds
of at least $30.0 million or (B) upon exercise of warrants or rights granted to
underwriters in connection with such a public offering;

 

(4) the issuance of shares of Common Stock pursuant to the conversion or
exercise of convertible or exercisable securities outstanding as of the date
hereof, or issued pursuant to the Purchase Agreement;

 

19

--------------------------------------------------------------------------------

(5) the issuance of shares of Common Stock in connection with a bona fide
business acquisition by the Corporation, whether by merger, consolidation, sale
of assets, sale or exchange of stock or otherwise, each as approved by the Board
of Directors;

 

(6) the issuance or sale of stock, warrants or other securities or rights to
persons or entities with which the Corporation has a strategic business
relationship (as determined by a majority of the independent directors on the
Board of Directors), provided such issuances are for other than primarily equity
financing purposes; or

 

(7) the issuance of shares of Common Stock as payment of any dividend or
redemption payment on the Series B Preferred Stock.

 

(vii) “Common Stock Deemed Outstanding” means, at any given time, the number of
shares of Common Stock actually outstanding at such time, plus the number of
shares of Common Stock deemed to be outstanding pursuant to Sections 7(f)(v)
hereof regardless of whether the options or convertible securities are actually
exercisable at such time, but excluding any shares of Common Stock owned or held
by or for the account of the Company or issuable upon conversion of the Series B
Preferred Stock.

 

(g) Schedule of Computations. The Corporation shall provide written notice to
the Holders of all adjustments pursuant to this Section 7 shall be notified
within three (3) Business Days of the occurrence thereof and such notice shall
be accompanied by a schedule setting forth a detailed calculation of such
adjustments (the “Schedule of Computations”). If so requested by a Holder, the
Corporation shall provide to such Holder within ten (10) Business Days of its
request therefor a certificate of concurrence to the Schedule of Computations by
the independent certified public accountants of the Corporation.

 

8. Restrictions. So long as 20% of the shares of the authorized Series B
Preferred Stock remain outstanding, the Corporation shall not (whether by
amendment, merger, consolidation or otherwise), without the approval, by vote or
written consent, of the holders of a majority of the Series B Preferred Stock
then outstanding, voting as a single class:

 

(a) incur or permit any of its subsidiaries to incur indebtedness (including,
for purposes of this paragraph, outstanding borrowings, loans, bonds, promissory
notes, debt securities and similar obligations, preferred stock issued by a
subsidiary of the Corporation to any Person other than the Corporation and
preferred stock issued in accordance with paragraph (b) below, but not including
liabilities and obligations incurred in the ordinary course of business or
obligations with respect to capital leases, letters of credit and the Series A
Preferred Stock, the Series B Preferred Stock and any preferred stock of the
Corporation which is a Junior Security) in excess of the greater of (i) in the
aggregate, $80,000,000, or (ii) an aggregate amount (on a consolidated basis)
equal to the product of (A) three (3) multiplied by (B) the Corporation’s
earnings (on a consolidated basis) before interest, taxes, depreciation and
amortization (“EBITDA”) for the period of the most recent four consecutive
fiscal quarters ending prior to the date on which the Corporation or any such
subsidiary would incur such indebtedness;

 

20

--------------------------------------------------------------------------------

(b) authorize or issue, or obligate itself to issue, any equity security
(including any other security convertible into or exercisable for any such
equity security) having a preference over, or being on parity with, the Series B
Preferred Stock with respect to dividends, liquidation or redemption (it being
understood that any equity security having any preference to the Series B
Preferred Stock with respect to specific assets of the Corporation or its
subsidiaries, shall be deemed to have a preference over the Series B Preferred
Stock); or

 

(c) issue any equity securities prior to the Effectiveness Date, other than: (i)
shares of Common Stock issuable pursuant to the terms hereof; and (ii) equity
securities issued pursuant to the Corporation’s stock option or similar
equity-based compensation plan for employee and directors;

 

(d) pay any dividends on any Junior Security in cash or any other assets
(provided that this clause shall not be construed to limit the Corporation’s
obligations to pay dividends with respect to the Series A Preferred Stock);

 

(e) repurchase any Junior Security (other than with respect to the Series A
Preferred Stock), except to the extent there is a contractual commitment to do
so with respect to an officer or employee of the Corporation or its direct or
indirect subsidiaries upon the termination of such individual’s employment;

 

(f) take any action under the DGCL to adjust its capital or establish any
special reserve so as to limit the Corporation’s ability to pay dividends to the
Holders of the Series B Preferred Stock (or amend, modify or repeal any
provision of this Certificate of Designation);

 

(g) effect any reclassification or recapitalization of the Series B Preferred
Stock; or

 

(h) issue or sell any options or convertible securities after the Issuance Date
that are convertible into or exchangeable or exercisable for shares of Common
Stock at a price which varies or may vary with the market price of Common Stock,
including by way of one or more resets to a fixed price, or at a price which
upon the passage of time or the occurrence of certain events is automatically
reduced or is adjusted to a price which is based on some formulation of the then
current market price of the Common Stock.

 

9. Fractional Shares. No fractional shares of Common Stock or scrip representing
fractional shares of Common Stock shall be issuable hereunder. The number of
shares of Common Stock that are issuable upon any conversion shall be rounded up
or down to the nearest whole share.

 

10. Reservation of Stock. The Corporation shall at all times reserve and keep
available out of its authorized but unissued shares of Common Stock such number
of shares of Common Stock as shall be necessary for the purpose of effecting the
conversion of shares of Series B Preferred Stock and for the payment of any
dividends in shares of Registered Common Stock, which shares shall be free of
preemptive rights, for the purpose of enabling the Corporation to satisfy any
obligation to issue shares of its Common Stock, or other securities, upon
conversion of all shares of Series B Preferred Stock pursuant hereto.

 

21

--------------------------------------------------------------------------------

11. Taxes. The Corporation shall pay any and all documentary, stamp or similar
taxes attributable to the issuance and delivery of Common Stock or other
securities upon conversion of the Series B Preferred Stock. However, the
Corporation shall not be required to pay any tax which may be payable in respect
to any transfer involved in the issue and delivery of shares of Common Stock
upon conversion in a name other than that in which the shares of the Series B
Preferred Stock so converted were registered, and no such issue or delivery
shall be made unless and until the person requesting such issue or delivery has
paid to the Corporation the amount of any such tax, or has established, to the
satisfaction of the Corporation, that such tax has been paid. The Corporation
shall not be required to pay any income tax upon the issuance of Common Stock in
lieu of cash payment of dividends or redemption payments.

 

12. Voting Rights. Subject to the provisions of Section 18, the Holder of each
share of Series B Preferred Stock shall have the right to one vote for each
share of Common Stock into which such Series B Preferred Stock could be
converted on the Issuance Date (subject to adjustment as provided in Section
7(a)), and with respect to such vote, such Holder shall have full voting rights
and powers equal to the voting rights and powers of holders of Common Stock, and
shall be entitled, notwithstanding any provision hereof, to notice of any
stockholders’ meeting, and shall be entitled to vote, together with the holders
of Common Stock, with respect to any question upon which the holders of Common
Stock have the right to vote. The Series B Preferred Stock shall have no right
to vote with respect to the Approval.

 

13. Liquidation, Dissolution, Winding-Up.

 

(a) Subject to the rights of the Series A Preferred Stock with respect to DDi
Europe Value, the Holders of Series B Preferred Stock, in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the
Corporation, shall be entitled to receive in cash out of the assets of the
Corporation, whether from capital or from earnings available for distribution to
its stockholders (the “Preferred Funds”), before any amount shall be paid to the
holders of any Common Stock or any Junior Securities, an amount per share of
Series B Preferred Stock equal to the Stated Value plus accrued and unpaid
dividends and, upon the written request of the applicable Holder, any unpaid
Series B Additional Amounts (the “Liquidation Value”); provided that, if the
Preferred Funds are insufficient to pay the full amount due to the Holders, then
each Holder shall receive a ratable percentage of the Preferred Funds in
accordance with the respective amounts that would be payable in full to such
holder as a liquidation preference.

 

(b) The purchase or redemption by the Corporation of stock of any class, in any
manner permitted by law, shall not, for the purposes hereof, be regarded as a
liquidation, dissolution or winding up of the Corporation. As used herein, a
Change of Control pursuant to Section 5D(a)(i) or (ii) shall be deemed a
liquidation of the Corporation.

 

(c) No Holder shall be entitled to receive any amounts with respect thereto upon
any liquidation, dissolution or winding up of the Corporation other than the
amounts provided for herein.

 

22

--------------------------------------------------------------------------------

14. No Reissuance of Series B Preferred Stock. No shares of Series B Preferred
Stock acquired by the Corporation by reason of redemption, purchase, conversion
or otherwise shall be reissued, and all such Series B Preferred Stock shall be
retired.

 

15. No Impairment. The Corporation shall not intentionally take any action which
would impair the rights and privileges of the Series B Preferred Stock set forth
herein or the rights of the Holders thereof.

 

16. Replacement Certificate. In the event that any Holder notifies the
Corporation that a stock certificate evidencing shares of Series B Preferred
Stock has been lost, stolen, destroyed or mutilated, the Corporation shall issue
a replacement stock certificate evidencing the Series B Preferred Stock
identical in tenor and date (or if such certificate is being issued for shares
not covered in a redemption or conversion, in the applicable tenor and date) to
the original stock certificate evidencing the Series B Preferred Stock, provided
that the Holder executes and delivers to the Corporation an affidavit of lost
stock certificate and an agreement reasonably satisfactory to the Corporation to
indemnify the Corporation from any loss incurred by it in connection with such
Series B Preferred Stock stock certificate; provided, however, the Corporation
shall not be obligated to re-issue replacement stock certificates if the Holder
contemporaneously requests the Corporation to convert or redeem the full number
of shares evidenced by such lost, stolen, destroyed or mutilated certificate.

 

17. Remedies, Characterizations, Other Obligations, Breaches and Injunctive
Relief. The remedies provided in this Certificate of Designation shall be
cumulative and in addition to all other remedies available under this
Certificate of Designation, at law or in equity (including a decree of specific
performance and/or other injunctive relief). No remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy.
Nothing herein shall limit a holder’s right to pursue actual damages for any
failure by the Corporation to comply with the terms of this Certificate of
Designation. The Corporation covenants to each holder of Series B Preferred
Stock that there shall be no characterization concerning this instrument other
than as expressly provided herein. Amounts set forth or provided for herein with
respect to payments, conversion and the like (and the computation thereof) shall
be the amounts to be received by the holder thereof and shall not, except as
expressly provided herein, be subject to any other obligation of the Corporation
(or the performance thereof). The Corporation acknowledges that a breach by it
of its obligations hereunder will cause irreparable harm to the holders of the
Series B Preferred Stock and that the remedy at law for any such breach may be
inadequate. The Corporation therefore agrees that, in the event of any such
breach or threatened breach, the holders of the Series B Preferred Stock shall
be entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate performance of such provisions,
without the necessity of showing economic loss and without any bond or other
security being required.

 

18. Limitation on Beneficial Ownership.

 

(a) Notwithstanding the provisions of Sections 1, 5, 6 and 7, no Holder of
Series B-2 Preferred Stock shall have the right to receive, and the Corporation
shall not issue to any Holder, any securities as a dividend or distribution, or
upon conversion or redemption of the Series B-2 Preferred Stock, to the extent
that, upon giving effect to such issuance, the

 

23

--------------------------------------------------------------------------------

aggregate number of shares of Common Stock beneficially owned by such Holder and
its affiliates would exceed 4.99% of the total outstanding shares of Common
Stock following such issuance. Any such issuance shall be limited to an amount
of shares as shall not exceed such percentage, and the issuance of the remaining
shares shall be delayed (without compounding, increasing, creating or
accelerating any obligation of the Corporation to the applicable Holder under
this Certificate of Designation), and such shares shall not be considered
outstanding, until (and only until) the conditions set forth at the end of this
Section 18 are satisfied. For purposes of the foregoing, the aggregate number of
shares of Common Stock beneficially owned by the Holder and its affiliates shall
include the number of shares of Common Stock issuable upon conversion of the
Series B-2 Preferred Stock with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (i) conversion of the remaining, nonconverted
shares of Series B-2 Preferred Stock beneficially owned by the Holder and its
affiliates and (ii) exercise or conversion of the unexercised or unconverted
portion of any other securities of the Corporation (including, without
limitation, any warrants or convertible preferred stock) subject to a limitation
on conversion or exercise analogous to the limitation contained herein
beneficially owned by the Holder and its affiliates. Except as set forth in the
preceding sentence, for purposes of this Section 18, beneficial ownership shall
be calculated in accordance with Section 13(d) of the Exchange Act, as amended.
For purposes of this Section 18, in determining the number of outstanding shares
of Common Stock, a Holder may rely on the number of outstanding shares of Common
Stock as reflected in (1) the Corporation’s most recent Form 10-Q or Form 10-K,
as the case may be, (2) a more recent public announcement by the Corporation or
(3) any other notice by the Corporation or its transfer agent setting forth the
number of shares of Common Stock outstanding. Upon the written request of any
Holder, the Corporation shall promptly, but in no event later than one (1)
Business Day following the receipt of such request, confirm in writing to any
such Holder the number of shares Common Stock then outstanding. In any case, the
number of outstanding shares of Common Stock shall be determined after giving
effect to the conversion or exercise of securities of the Corporation, including
the Series B-2 Preferred Stock, by such Holder and its affiliates and the
issuance of any shares of Series B-2 Preferred Stock in payment of dividends
since the date as of which such number of outstanding shares of Common Stock was
reported. Notwithstanding the foregoing, each Holder shall have the sole
obligation to determine whether the restrictions contained in this Section 18
apply to such Holder. If at any time, a Holder is unable to receive shares of
Common Stock as a result of this Section 18, then it shall be entitled to
receive such Common Stock at such subsequent time as it notifies the Corporation
in writing that its receipt of such Common Stock is permitted hereunder. By
written notice to the Corporation, any Holder may (i) waive the provisions of
this Section 18(a) or (ii) adjust the percentage set forth in the first sentence
of this Section 18(a) to 9.99%, in each case, solely with respect to its own
holdings, but any such waiver or adjustment will not be effective until the 61st
day after such notice is delivered to the Corporation.

 

(b) Notwithstanding the provisions of Section 12, no Holder of Series B-2
Preferred Stock shall have the right to vote such Holder’s shares of Series B-2
Preferred Stock, to the extent that, upon giving effect to such voting power,
the aggregate number of shares of Common Stock beneficially owned by such Holder
and its affiliates would exceed 4.99% or 9.99%, as applicable, of the total
outstanding shares of Common Stock.

 

24

--------------------------------------------------------------------------------

(c) Nothing in this Section 18 shall limit the rights of any Holder of Series
B-1 Preferred Stock, including without limitation the right to (i) receive
securities as a dividend or distribution, or upon conversion or redemption of
the Series B-1 Preferred Stock, or (ii) vote any voting securities of the
Corporation held by such Holder.

 

25

--------------------------------------------------------------------------------

IN WITNESS WHEREOF, the Corporation has caused this Certificate of Designation
to be duly executed by an officer thereunto duly authorized this 30th day of
March, 2004.

 

DDI CORP. By:  

/s/ TIMOTHY J. DONNELLY

--------------------------------------------------------------------------------

Name:   Timothy J. Donnelly Title:   Vice President

--------------------------------------------------------------------------------

EXHIBIT 1

 

REDEMPTION NOTICE

 

Reference is made to the Certificate of Designation of Series B Preferred Stock
(the “Certificate of Designation”) of DDi Corp., a Delaware corporation (the
“Corporation”). In accordance with and pursuant to the Certificate of
Designation, the undersigned hereby elects to have the Corporation redeem the
number of shares of Series B Convertible Preferred Stock, par value $0.001 per
share (the “Series B Preferred Stock”) of the Corporation, indicated below by
tendering the stock certificate(s) representing the share(s) of Series B
Preferred Stock specified below as of the date specified below.

 

Date of Redemption:  

 

--------------------------------------------------------------------------------

Number of Series B

Preferred Stock to be redeemed:

 

 

--------------------------------------------------------------------------------

Stock certificate no(s). of Series B

Preferred Stock to be redeemed:

 

 

--------------------------------------------------------------------------------

Please confirm the following information:     Redemption Price:  

 

--------------------------------------------------------------------------------

 

Please issue any check drawn on an account of the Corporation into which the
Series B Preferred Stock are being redeemed, and, if applicable, issue any
shares of Series B Preferred Stock, in the following name and to the following
address:

 

Pay to:  

 

--------------------------------------------------------------------------------

Facsimile Number:  

 

--------------------------------------------------------------------------------

Authorization:  

 

--------------------------------------------------------------------------------

    By:  

 

--------------------------------------------------------------------------------

    Title:  

 

--------------------------------------------------------------------------------

   

 

--------------------------------------------------------------------------------

--------------------------------------------------------------------------------

EXHIBIT 2

 

CONVERSION NOTICE

 

Reference is made to the Certificate of Designation of the Series B Preferred
Stock (the “Certificate of Designation”) of DDi Corp., a Delaware corporation
(the “Corporation”). In accordance with and pursuant to the Certificate of
Designation, the undersigned hereby elects to have the Corporation convert the
number of shares of Series B Convertible Preferred Stock, par value $0.001 per
share (the “Series B Preferred Stock”), of the Corporation, indicated below into
shares of Common Stock, par value $0.001 per share (the “Common Stock”), of the
Corporation, by tendering the stock certificate(s) representing the share(s) of
Series B Preferred Stock specified below as of the date specified below.

 

Date of Conversion:  

 

--------------------------------------------------------------------------------

Number of Series B

Preferred Stock to be redeemed:

 

 

--------------------------------------------------------------------------------

Stock certificate no(s). of Series B

Preferred Stock to be converted:

 

 

--------------------------------------------------------------------------------

Please confirm the following information:     Conversion Rate:  

 

--------------------------------------------------------------------------------

Shares of Common Stock:  

 

--------------------------------------------------------------------------------

   

 

--------------------------------------------------------------------------------

 

Please issue the Common Stock into which the Series B Preferred Stock are being
converted and, if applicable, any check drawn on an account of the Corporation
in the following name and to the following address:

 

Issue to:  

 

--------------------------------------------------------------------------------

Facsimile Number:  

 

--------------------------------------------------------------------------------

Authorization:  

 

--------------------------------------------------------------------------------

    By:  

 

--------------------------------------------------------------------------------

    Title:  

 

--------------------------------------------------------------------------------

   

 

--------------------------------------------------------------------------------