**Exhibit 4.4**

 

Certificate Of Designation of

Series B Convertible Preferred Stock of Naturade, Inc., as Amendedthrough May 15, 2003

 

**Dated December 20,2001**

 

**As amended on May 15,2003**.

 

NATURADE,INC., a Delaware corporation (the “Corporation”), pursuant to Section 151of the General Corporation Law of the State of Delaware, does hereby make thisCertificate of Designation and does hereby state and certify that pursuant tothe authority expressly vested in the Board of Directors of the Corporation bythe Certificate of Incorporation of the Corporation, the Board duly adopted thefollowing resolutions:

 

WHEREAS, theBoard of Directors of the Corporation is authorized, within the limitations andrestrictions stated in the Certificate of Incorporation, to fix by resolutionor resolutions the designation of each series of Preferred Stock, par value$.0001 per share (the “Preferred Stock”), and the rights, preferences,privileges and restrictions thereof, including, without limiting the generalityof the foregoing, such provisions as may be desired concerning voting,dividends, conversion, dissolution or the distribution of assets, and suchother subjects or matters as may be fixed by resolution or resolutions of theBoard of Directors under the Delaware General Corporation Law; and

 

WHEREAS, it isthe desire of the Board of Directors of the Corporation, pursuant to itsauthority as aforesaid, to authorize and fix the terms of a series of PreferredStock and the number of shares constituting the series;

 

NOW, THEREFORE,BE IT RESOLVED, that a series of Preferred Stock is hereby created andauthorized to be issued in the number and series, and on the terms and with theprovisions, set forth below:

 

A.            Designation of Series and Numberof Shares.  The designation of theseries of Preferred Stock authorized by this resolution shall be“Series B  Convertible PreferredStock” (the “Series B Preferred Stock”). The total number of shares of Series B Preferred Stock authorizedhereby shall be 48,000,000.

 

B.            Voting.

 

1.             Each holder of shares ofSeries B Preferred Stock shall be entitled to notice of any and allmeetings of the holders of the Common Stock and notice of any actions taken bythe holders of the Common Stock by written consent and shall be entitled tovote on all matters (including the election of directors by the holders ofCommon Stock) presented to the holders of Common Stock on which such holdersvote, voting together with the holders of the Common Stock as a single class,and shall be entitled to the number of votes equal to the largest number offull shares of Common Stock into which the shares of Series B PreferredStock could be converted at the record date for the determination of thestockholders entitled to vote on such

 

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matters or, if no record date isestablished, at the date such vote is taken or any written consent ofstockholders is solicited.

 

2.             In addition to the voting rightsconferred pursuant to Section B(1) above, the Corporation shall not, bymerger or otherwise, without obtaining the prior written consent or affirmativevote of the holders of at least a majority of the shares of Series BPreferred Stock then outstanding, voting together as a single class and givenby written consent in lieu of a meeting or by votes at a special meeting calledfor such purpose (for which written notice shall have been given to all holdersof Series B Preferred Stock in the manner provided in the By-laws of theCorporation) (i) amend, alter or repeal any provision of the By-laws ofthe Corporation if such amendment, alteration or repeal would adversely affectthe holders of the Series B Preferred Stock; (ii) create, authorizeor issue any class of stock ranking senior to, or on a parity with, theSeries B Preferred Stock (including additional shares of Series BPreferred Stock) with respect to dividends or upon liquidation, dissolution,winding up or otherwise, or increase the authorized number of shares of anysuch class or series, or reclassify any authorized stock of the Corporationinto any such senior or parity shares or create, authorize or issue anyobligation or security convertible into or evidencing the right to purchase anysuch senior or parity shares or alter, amend or repeal any of the terms of anyof the foregoing; (iii) merge, consolidate, sell, assign, transfer, lease,convey or otherwise dispose of all or substantially all of the assets, propertyor business of the Corporation in one or more related transactions;(iv) amend (by merger or otherwise) the Certificate of Incorporation ofthe Corporation; (v) issue or sell any Additional Shares of Common Stock (asdefined below) or Excluded Securities (as defined below) or debt or equitysecurities convertible into or evidencing the right to purchase any shares ofCommon Stock, (vi) acquire, or permit any subsidiary to acquire, any interestin any company or business (whether by a purchase of assets, purchase of stock,merger or otherwise), or enter into any joint venture or other businesscombination; (vii) create, incur, assume or suffer to exist, or permit anysubsidiary to create, incur, assume or suffer to exist, Indebtedness (asdefined below); and (viii) liquidate, dissolve or wind up the Corporation.

 

3.             In addition to the voting rights ofthe Series B Preferred Stock pursuant to Section B(1) above, at anymeeting held for the purpose of electing directors (or in a written consent inlieu thereof), the presence in person or by proxy (or the written consent) ofthe holders of a majority of the shares of Series B Preferred Stock thenoutstanding shall constitute a quorum of the Series B Preferred Stock for theelection of two directors who shall be elected solely by the holders of theSeries B Preferred Stock.  Avacancy in any directorship elected by the holders of the Series BPreferred Stock as provided in this Section B(3) shall be filled only bythe vote or written consent of the holders of the Series B PreferredStock.  If the original purchasers ofthe Series B Preferred Stock and their Affiliates and their Associates (asdefined below) hold, in the aggregate, less than 50% of the shares ofSeries B Preferred Stock issued on the Original Issuance Date, then thisSection B(3) shall terminate.

 

C.            Liquidation.  In the event the Corporation shall beLiquidated (as defined below) whether voluntarily or involuntarily, after thereshall have been paid or set aside for the holders of any shares of PreferredStock which are senior in rights of liquidation to the Series B PreferredStock the full preferential amounts to which such holders are entitled underthe terms of such Preferred Stock, the holders of Series B Preferred Stockshall be entitled to receive, prior to and in preference to any distribution tothe holders of Common Stock and holders of any

 

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Preferred Stock junior to theSeries B Preferred Stock, an amount per share equal to the applicable Per ShareLiquidation Amount (as defined below) payable with respect to the shares ofSeries B Preferred Stock.  As usedherein, the amount of the “Per Share Liquidation Amount” for a share of SeriesB Preferred Stock shall be determined as follows:  (1) if the share of Series B Preferred Stock is an OriginalIssuance Share (as defined below), then the Per Share Liquidation Amount forsuch share shall equal the Original Issuance Price (as defined below)(asadjusted for any stock splits, stock dividends, reorganizations or the likeafter the Original Issuance Date (as defined below)) plus the amount of allaccrued but unpaid dividends on the Series B Preferred Stock accumulatedon such share of Series B Preferred Stock from the Original Issuance Datethrough the date of distribution (whether or not such dividends shall havetheretofore been declared by the Board of Directors of the Corporation), and(2) if the share of Series B Preferred Stock is not an Original Issuance Share,then the Per Share Liquidation Amount for such share shall equal the price atwhich such share was issued on its Issuance Date (as defined below) (asadjusted for any stock splits, stock dividends, reorganizations or the likeafter its Issuance Date) plus the amount of all accrued but unpaid dividends onthe Series B Preferred Stock accumulated on such share of Series BPreferred Stock from its Issuance Date through the date of the distribution(whether or not such dividends shall have theretofore been declared by theBoard of Directors of the Corporation). If the Corporation is Liquidated and the Available Funds and Assetsshall be insufficient to permit the payment to all holders of the Series BPreferred Stock of their full preferential amount described in this Section C,then all of the remaining Available Funds and Assets shall be distributed amongthe holders of the then outstanding shares of Series B Preferred Stock pro rata,according to the number of outstanding shares of Series B Preferred Stock thenheld by each holder thereof.  TheCorporation shall be deemed to have been “Liquidated” upon the occurrence of(i) any liquidation, dissolution or winding up of the Corporation; (ii)any sale by the Corporation of all or substantially all its assets; or (iii)the acquisition of the Corporation by another entity by means of a merger,consolidation or reorganization of the Corporation resulting in the exchange ofthe outstanding shares of the Corporation for securities issued, or caused tobe issued, by the acquiring corporation or its subsidiary where less than 50%of the successor corporation’s voting rights, immediately after thetransaction, are held by the persons who held the Corporation’s voting rightsimmediately prior to the transaction. Other than as set forth in clauses (ii) and (iii) above, no sale ofassets, merger, consolidation or reorganization shall be considered aLiquidation.

 

D.            Dividends.  Preferential dividends on each share ofSeries B Preferred Stock shall be cumulative and accrue (whether or not thereare profits or capital or surplus available therefor) at the rate of tenpercent (10%) per annum on the Accrued Value thereof (computed on a semi-annualbasis based upon a 360-day year of twelve 30-day months and pro rated asnecessary in the event that dividends shall be paid on other than a semi-annualbasis) from the Issuance Date of such share. The term “Accrued Value” shall mean, with respect to each share of SeriesB Preferred Stock, the sum of (i) $0.1477, plus (ii) all cash dividends thathave been accrued and that have not been paid (as adjusted for any stocksplits, stock dividends, recapitalizations or the like).

 

E.             Omitted.

 

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F.             OptionalConversion.

 

1.             Each holder of any shares of SeriesB Preferred Stock shall have the right, at such holder’s option, at any time orfrom time to time, to convert any of such shares into Common Stock, on thebasis hereinafter provided.  Each shareof Series B Preferred Stock may be converted into such number (which may be afraction) of fully paid and non-assessable shares of Common Stock as is equalto the sum of (i) the quotient obtained by dividing (A) the Original IssuancePrice (as defined in Section I below) by (B) the Series B Conversion Price (asdefined in Section I below) (the “Series B Conversion Ratio”) PLUS (ii) anyAntidilution Shares (as defined in Section I below).  Upon conversion of a share of Series B Preferred Stockpursuant to this Section F, all accrued but unpaid dividends with respect tosuch share of Series B Preferred Stock will be canceled.

 

2.             The holder of any shares ofSeries B Preferred Stock may exercise the conversion right pursuant toSection F.1 above as to any part thereof by delivering to the Corporationduring regular business hours, at the office of the Corporation or any transferagent of the Corporation for the Series B Preferred Stock as may bedesignated by the Corporation, the certificate or certificates for the sharesto be converted, duly endorsed or assigned in blank or to the Corporation (ifrequired by it), accompanied by written notice stating that the holder electsto convert such shares and stating the name or names (with address) in whichthe certificate or certificates for the shares of Common Stock are to beissued.  Conversions shall be deemed tohave been effected on the date when such delivery is made (the “ConversionDate”) and the person entitled to receive the Common Stock issuable upon suchconversion shall be deemed for all purposes as the record holder of such CommonStock as of such date.  As promptly aspracticable thereafter the Corporation shall issue and deliver to or upon thewritten order of such holder, to the place designated by such holder, acertificate to which such holder is entitled and a check or cash in respect ofany fractional interest in a share of Common Stock as provided in Section F.3below.  The person in whose name thecertificate or certificates for Common Stock are to be issued shall be deemedto have become a Common Stock holder of record on the Conversion Date.  Upon conversion of only a portion of thenumber of shares covered by a certificate representing shares of Series BPreferred Stock surrendered for conversion, the Corporation shall issue anddeliver to or upon the written order of the holder of the certificate sosurrendered for conversion, at the expense of the Corporation, a newcertificate covering the number of shares of Series B Preferred Stockrepresenting the unconverted portion of the certificate so surrendered, whichnew certificate shall entitle the holder thereof to dividends on the shares ofSeries B Preferred Stock represented thereby to the same extent as if theportion of the certificate theretofore covering such unconverted shares had notbeen surrendered for conversion.

 

3.             No fractional shares of CommonStock or scrip shall be issued upon conversion of shares of Series BPreferred Stock.  Instead of anyfractional shares of Common Stock which would otherwise be issuable uponconversion of Series B Preferred Stock, the Corporation shall pay a cashadjustment in respect of such fractional interest in an amount equal to thethen current market price (as determined in accordance with Section F(4)(f)below) of a share of Common Stock multiplied by such fractional interest.  Fractional interests shall not be entitledto dividends, and the holders of fractional interests shall not be entitled toany rights as stockholders of the Corporation in respect of such fractionalinterest.  For purposes of calculating

 

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the number of shares of CommonStock to be issued on conversion of Series B Preferred Stock, or for purposesof calculating voting or dividend rights based on the number of shares issuableon conversion of Series B Preferred Stock, all fractional shares of CommonStock of a holder resulting from, or that would result from, the conversion ofSeries B Preferred Stock, shall be aggregated and combined into thelargest resulting whole number, so that the total number of shares of CommonStock for which any holder receives settlement in cash as fractional shares, orwhich the holder is not entitled to vote or receive dividends upon asfractional shares, will be less than one.

 

4.             The Series B Conversion Price shallbe subject to adjustment at any time and from time to time as follows:

 

a.             If the Corporation shall at anytime or from time to time after the Original Issuance Date issue any AdditionalShares of Common Stock  withoutconsideration or for a consideration per share less than the Series BConversion Price in effect immediately prior to such issuance, theSeries B Conversion Price in effect immediately prior to such issuanceshall forthwith (except as otherwise provided in this Section F(4)(a)) beadjusted to a price determined by multiplying such Series B ConversionPrice by a fraction, the numerator of which shall be the number of shares ofCommon Stock outstanding immediately prior to such issuance (including sharesof Common Stock deemed to be issued pursuant to Section F(4)(a)(iv)(A) or(B)) plus the number of shares of Common Stock that the aggregate considerationreceived by the Corporation for such issuance would purchase at suchSeries B Conversion Price; and the denominator of which shall be thenumber of shares of Common Stock outstanding immediately prior to such issuance(including shares of Common Stock deemed to be issued pursuant toSection F(4)(a)(iv)(A) or (B)) plus the number of shares of suchAdditional Shares of Common Stock.

 

For thepurposes of any adjustment of the Series B Conversion Price pursuant tothis Section F(4)(a), the following provisions shall be applicable:

 

(i)            Inthe case of the issuance of Common Stock for cash, the consideration shall bedeemed to be the amount of cash paid therefor after deducting therefrom anydiscounts and commissions, but not legal fees or other expenses of the Company,paid or incurred by the Corporation for any underwriting or otherwise inconnection with the issuance and sale thereof;

 

(ii)           Inthe case of the issuance of Common Stock for a consideration in whole or inpart other than cash, the consideration other than cash shall be deemed to bethe fair market value thereof as determined in good faith by the Board ofDirectors of the Corporation; provided, however, that the aggregate fair marketvalue of such non-cash and cash consideration shall not exceed the currentmarket price of the shares of Common Stock being issued;

 

(iii)          Inthe case of the issuance of Common Stock without consideration, theconsideration shall be deemed to be $.0001 per share; and

 

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(iv)          Inthe case of the issuance of (x) options to purchase or rights to subscribefor Common Stock, (y) securities by their terms convertible into orexchangeable for Common Stock or (z) options to purchase or rights tosubscribe for such convertible or exchangeable securities:

 

(A)          theaggregate maximum number of shares of Common Stock deliverable upon exercise ofsuch options to purchase or rights to subscribe for Common Stock shall bedeemed to have been issued at the time such options or rights were issued andfor a consideration equal to the consideration (determined in the mannerprovided in subdivisions (i), (ii) and (iii) above), if any, received by theCorporation upon the issuance of such options or rights plus the minimumpurchase price provided in such options or rights for the Common Stock covered thereby;

 

(B)           theaggregate maximum number of shares of Common Stock deliverable upon conversionof or in exchange for any such convertible or exchangeable securities or uponthe exercise of options to purchase or rights to subscribe for such convertibleor exchangeable securities and subsequent conversion or exchange thereof shallbe deemed to have been issued at the time such securities were issued or suchoptions or rights were issued and for a consideration equal to theconsideration received by the Corporation for any such securities and relatedoptions or rights (excluding any cash received on account of accrued interestor accrued dividends), plus the additional consideration, if any, to bereceived by the Corporation upon the conversion or exchange of such securitiesor the exercise of any related options or rights (the consideration in eachcase to be determined in the manner provided in subdivisions (i), (ii) and(iii) above);

 

(C)           onany change in the exercise price of Common Stock deliverable upon exercise ofany such options or rights or conversions of or exchanges for such securities,other than a change resulting from the antidilution provision thereof, theapplicable Series B Conversion Price shall forthwith be readjusted to suchSeries B Conversion Price as would have resulted had the adjustment madeupon the issuance of such options, rights or securities not converted prior tosuch change (or options or rights related to such securities not convertedprior to such change) been made upon the basis of such change; and

 

(D)          onthe expiration of any such options or rights, the termination of any suchrights to convert or exchange or the expiration of any options or rightsrelated to such convertible or exchangeable securities, the Series BConversion Price shall forthwith be readjusted to such Series B ConversionPrice as would have been obtained had the adjustment made upon the issuance ofsuch options, rights or securities been made upon the basis of the issuance ofonly the number of shares of Common Stock actually issued upon exercise of suchoptions or rights, upon the conversion or exchange of such securities or uponthe exercise of the options or rights related to such securities and subsequentconversion or exchange thereof.

 

b.             If, at any time after the OriginalIssuance Date, the number of shares of Common Stock outstanding is increased bya stock dividend payable in shares of

 

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Common Stock or by asubdivision or split-up of shares of Common Stock, then, as of the record datefixed for the determination of holders of Common Stock entitled to receive suchstock dividend, subdivision or split-up, the Series B Conversion Priceshall be appropriately decreased and the number of shares of Common Stockissuable on conversion of a share of Series B Preferred Stock shall beappropriately increased, in each case, in proportion to such increase inoutstanding shares.

 

c.             If, at any time after the OriginalIssuance Date, the number of shares of Common Stock outstanding is decreased bya combination of the outstanding shares of Common Stock, then, as of the recorddate for such combination, the Series B Conversion Price shall beappropriately increased and the number of shares of Common Stock issuable on conversionof each share of Series B Preferred Stock shall be appropriatelydecreased, in each, in proportion to such decrease in outstanding shares.

 

d.             In case, at any time after theOriginal Issuance Date, of any capital reorganization, or any reclassificationof the stock of the Corporation (other than a change in par value or from parvalue to no par value or from no par value to par value or as a result of astock dividend or subdivision, split-up or combination of shares), or theconsolidation or merger of the Corporation with or into another person, otherthan a Liquidation (as defined in Section C above) and other than aconsolidation or merger in which the Corporation is the continuing corporationand which does not result in any change in the Common Stock, each share ofSeries B Preferred Stock after such reorganization, reclassification,consolidation, merger, exchange or sale or other disposition shall beconvertible into the kind and number of shares of stock or other securities ofthe Corporation or of the corporation resulting from such consolidation orsurviving such merger or to which such properties and assets or stock shallhave been sold or otherwise disposed to which the holder of the number ofshares of Common Stock deliverable upon conversion of such shares ofSeries B Preferred Stock would have been entitled upon suchreorganization, reclassification, consolidation, merger, exchange or sales orother disposition had they been converted into Common Stock immediately priorto the time of such reorganization, reclassification, consolidation, merger,exchange or sale or other disposition. The provisions of this Section F(4)(d) shall similarly apply tosuccessive reorganizations, reclassifications, consolidations, mergers,exchanges or sales or other dispositions. In the event that any of the transactions described in thisSection F(4)(d) constitutes a transaction pursuant to which theCorporation shall be Liquidated (as defined in Section C above), theprovisions of Section C above shall be applied instead of the provisionsof this Section F(4)(d).

 

e.             All calculations under this SectionF(4) shall be made to the nearest one tenth (1/10) of a share, as the case maybe.

 

f.              For the purpose of any computationpursuant to Section F(3) above or this Section F(4), the current market priceat any date of one share of Common Stock shall be determined as follows:

 

(i)                                     If traded on asecurities exchange, the value shall be deemed to be the average of the closingprices of the securities on such exchange over the 20-day period ending threedays prior to the date of determination;

 

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(ii)                                  If actively tradedover-the-counter, the value shall be deemed to be the average of the closingbid prices over the 20-day period ending three days prior to the date ofdetermination; or

 

(iii)                               If there is no activepublic market, then in good faith by the Board of Directors of the Corporation,or if such determination cannot be made, by a nationally-recognized independentinvestment banking firm selected mutually by the holders of at least a majorityby voting power of the Series B Preferred Stock then outstanding and theCorporation (or, if such selection cannot be made, by a nationally recognizedindependent investment banking firm selected by the American ArbitrationAssociation in accordance with its rules).

 

5.             In any case in which the provisionsof Section F(4) shall require that an adjustment shall become effectiveimmediately after a record date for an event, the Corporation may defer untilthe occurrence of such event (A) issuing to the holder of any shares ofSeries B Preferred Stock converted after such record date and before theoccurrence of such event the additional shares of capital stock issuable uponsuch conversion by reason of the adjustment required by such event over andabove the shares of capital stock issuable upon such conversion before givingeffect to such adjustment and (B) paying to such holder any amount in cashin lieu of a fractional share of capital stock pursuant to Section F(3)above; provided, however, that the Corporation shall deliver to such holder adue bill or other appropriate instrument evidencing such holder’s right toreceive such additional shares, and such cash, upon the occurrence of the eventrequiring such adjustment.

 

6.             Whenever the Series BConversion Price shall be adjusted as provided in Section F(4) above, theCorporation shall forthwith file, at the office of the Corporation or anytransfer agent designated by the Corporation for the Series B PreferredStock, a statement, signed by its chief financial officer, showing in detailthe facts requiring such adjustment and the adjusted Series B ConversionPrice.  The Corporation shall also causea copy of such statement to be sent by first-class certified mail, returnreceipt requested, postage prepaid, to each holder of shares of Series BPreferred Stock at his or its address appearing on the Corporation’srecords.  Where appropriate, such copymay be given in advance and may be included as part of a notice required to bemailed under the provisions of Section F(7).

 

7.             In the event the Corporation shallpropose to take any action of the types described in Sections F(4)(a), (b), (c)or (d), or to commence a transaction in which the Corporation shall beLiquidated, the Corporation shall give notice to each holder of shares ofSeries B Preferred Stock in the manner set forth in thisSection F(7), which notice shall specify the record date, if any, withrespect to any such action and the date on which such action is to takeplace.  Such notice shall also set forthsuch facts with respect thereto as shall be reasonably necessary to indicatethe effect of such action (to the extent such effect may be known at the dateof such notice) on the Series B Conversion Price then in effect and thenumber, kind or class of shares or other securities or property which shall bedeliverable or purchasable upon the occurrence of such action or deliverableupon conversion of shares of Series B Preferred Stock.  In the case of any action which wouldrequire the fixing of a record date, such notice shall be

 

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given at least 20 days prior tothe date so fixed, and in case of all other action, such notice shall be givenat least 30 days prior to the taking of such proposed action.  Failure to give such notice, or any defecttherein, shall not affect the legality or validity of any such action.

 

8.             The Corporation shall pay alldocumentary, stamp or other transactional taxes attributable to the issuance ordelivery of shares of capital stock of the Corporation upon conversion of anyshares of Series B Preferred Stock.

 

9.             The Corporation shall reserve, freefrom preemptive rights, out of its authorized but unissued shares of CommonStock solely for the purpose of effecting the conversion of the shares ofSeries B Preferred Stock sufficient shares to provide for the conversionof all outstanding shares of Series B Preferred Stock.

 

10.           All shares of Common Stock which maybe issued in connection with the conversion provisions set forth herein will,upon issuance by the Corporation, be validly issued, fully paid andnonassessable, with no personal liability attaching to the ownership thereof,and free from all taxes, liens or charges with respect thereto.

 

11.           The Corporation will not, byamendment of the Certificate of Incorporation or through any reorganization,transfer of assets, consolidation, merger, dissolution, issue or sale ofsecurities or any other voluntary action, avoid or seek to avoid the observanceor performance of any of the terms to be observed or performed hereunder by theCorporation, but will at all times in good faith assist in the carrying out ofall the provisions of this Section F and in the taking of all such actionas may be necessary or appropriate in order to protect the conversion rights ofthe holders of the Series B Preferred Stock against impairment.

 

G.            Redemption.

 

1.             Mandatory Redemption. On theseventh anniversary of its Issuance Date (the “Mandatory Redemption Date”), theCorporation shall redeem each outstanding share of Series B PreferredStock for a redemption price equal to the applicable Per Share Redemption Price(as defined below) payable with respect to such share of Series B PreferredStock.  As used herein, the amount ofthe “Per Share Redemption Price” for a share of Series B Preferred Stock shallbe determined as follows:  (1) if theshare of Series B Preferred Stock is an Original Issuance Share, then the PerShare Redemption Price for such share shall equal the Original Issuance Price(as adjusted for any stock splits, stock dividends, reorganizations or the likeafter the date hereof) plus the amount of all accrued but unpaid dividends onthe Series B Preferred Stock accumulated on such share of Series BPreferred Stock from the Original Issuance Date through the date that suchshare of Series B Preferred Stock shall be redeemed by the Corporation (whetheror not such dividends shall have theretofore been declared by the Board ofDirectors of the Corporation), and (2) if the share of Series B Preferred Stockis not an Original Issuance Share, then the Per Share Redemption Price for suchshare shall equal the price at which such share was issued on its Issuance Date(as adjusted for any stock splits, stock dividends, reorganizations or the likeafter its Issuance Date) plus the amount of all accrued but unpaid dividends onthe Series B Preferred Stock accumulated on such share of Series BPreferred Stock from its Issuance Date through the date that such share ofSeries B Preferred Stock shall be redeemed by the Corporation (whether or notsuch dividends shall have

 

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theretofore been declared bythe Board of Directors of the Corporation). From and after the Mandatory Redemption Date of any share, unless thereshall have been a default in payment of the aggregate Per Share RedemptionPrice to be paid for all shares to be redeemed on such Mandatory RedemptionDate, all rights of the holders as to such shares of Series B PreferredStock (the “Redeemable Shares”), except the right to receive the Per ShareRedemption Price immediately upon surrender of their certificate orcertificates, shall cease with respect to such shares, and such shares shallnot thereafter be transferred on the books of this Corporation or be deemed tobe outstanding for any purpose whatsoever. If the funds of this Corporation legally available for redemption of sharesof Series B Preferred Stock on the Redemption Date are insufficient toredeem the total number of Redeemable Shares to be redeemed on such MandatoryRedemption Date, then those funds that are legally available will be used toredeem the maximum possible number of such shares ratably among the holders ofsuch shares to be redeemed based upon the number of shares of Common Stock intowhich their holdings of Series B Preferred Stock are convertible as of theMandatory Redemption Date; provided that so long as the original purchasers ofthe Series B Preferred Stock (in the aggregate with their Affiliates orAssociates) hold 50% or more of the shares originally purchased by them(including shares of Common Stock into which shares of Series B Preferred Stockshall have theretofore been converted), the holders shall not be obligated toredeem less than all of their Redeemable Shares, and may elect to either (i)redeem their Redeemable Shares up the amount purchasable by the Corporation outof funds legally available for such purchase, or (ii) retain all of theirRedeemable Shares, in which case the Redeemable Shares held by such originalpurchasers (or their Affiliates or Associates) shall cease to be RedeemableShares. Until redeemed, Redeemable Shares shall remain outstanding and entitledto all the rights and preferences provided herein.  At any time Redeemable Shares are outstanding, when additionalfunds of the Corporation are legally available for their  redemption, such funds will immediately beused to redeem the remaining outstanding shares of Series B PreferredStock that then constitute Redeemable Shares on a pro rata basis based on thenumber of shares of Common Stock into which each holder’s Redeemable Shares maybe converted.  After the MandatoryRedemption Date, until all outstanding Redeemable Shares have been redeemed,the Corporation may not declare any dividends or make any other distribution toits stockholders.  To the extent fundsare legally available therefor, the Corporation shall pay the Redemption Priceimmediately upon surrender of the certificates for the Redeemable Shares.

 

2.             Early Redemption.  If the Corporation receives a bona fideoffer from a third party to invest equity capital into the Corporation prior toDecember 31, 2004, the Corporation may effect an early redemption of allof the Series B Preferred Stock on the following terms:

 

a.             The Corporation may elect to pursueits rights under this Section G(2) by delivering to the holders ofSeries B Preferred Stock a notice of the proposed equity investmentdescribing all of its terms, attaching a copy of the current proposal orproposals relating to the investment, and setting forth the evidence that theproposed investor has the financial means to complete the investment (the“Early Redemption Notice”);

 

b.             Within thirty (30) days ofreceipt of the notice, the holders of the Series B Preferred Stock maydeliver a Qualified Counter-Offer to the Corporation; a “QualifiedCounter-Offer” is a counter-offer that satisfies the following requirements:(i) the offer is in

 

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writing; (ii) the offer isfor an equity investment with proceeds equal to or exceeding the gross proceedsto the Corporation in the proposed third party investment (but need not exceed$3,500,000); and (iii) the offer either (A) is accomplished throughthe exercise of some or all of the Preferred Stock Warrant or (B) theoffer provides capital on the same or better terms to the Corporation as thoseset forth in the Early Redemption Notice, with the determination of therelative value of such terms to be made by the Corporation in good faith and inconsultation with the holders of the Series B Preferred Stock;

 

c.             If the holders of the Series BPreferred Stock do not deliver a Qualified Counter-Offer on or before thirty(30) days after delivery of the Early Redemption Notice, then each share of theSeries B Preferred Stock shall be cancelled on the closing date of theinvestment described in the Early Redemption Notice (or another equityinvestment by a third party on superior terms to those in the Early RedemptionNotice) and convert into the right to receive on the closing date of theinvestment in immediately available funds, upon surrender to the Corporation ofthe certificate for the share, the applicable Early Redemption Payment Amount(as defined below) payable with respect to such share of Series B PreferredStock.  As used herein, the “EarlyRedemption Payment Amount” for a share of Series B Preferred Stock shall be determinedas follows:  (1) if the share of SeriesB Preferred Stock is an Original Issuance Share, then the Early RedemptionPayment Amount for such share shall equal the sum of “X” and “Y,” plus intereston such sum calculated at 30% per annum from the Original Issuance Date to thedate of redemption, compounded semiannually and calculated on a pro rata basisfor any partial year (and, for these purposes, “X” shall equal the OriginalIssuance Price (as adjusted for any stock splits, stock dividends,recapitalizations or the like after the date hereof) and “Y” shall equal theproduct of $500,000 times the fraction resulting from dividing the number ofWarrant Shares remaining unexercised by the number of Warrant Shares originallypurchasable under the Warrant, divided by the total number of Original IssuanceShares outstanding), and (2) if the share of Series B Preferred Stock is not anOriginal Issuance Share, then the Early Redemption Payment Amount for suchshare shall equal the price at which such share was issued on its Issuance Date(as adjusted for any stock splits, stock dividends, recapitalizations or thelike after its Issuance Date), plus interest on such amount calculated at 30%per annum from the Issuance Date to the date of redemption, compoundedsemianually and calculated on a pro rata basis for any partial year.  Upon an early redemption of theSeries B Preferred Stock pursuant to this Section G(2), all accrued butunpaid dividends with respect to each share of Series B Preferred Stock will becanceled.  The failure by the holders ofSeries B Preferred Stock to make a timely Qualified Counter-Offer shallalso constitute a waiver of all preemptive rights under Section H, unlessthe Corporation fails to close the investment described in the Early RedemptionNotice.

 

d.             If the holders of the Series BPreferred Stock do not make a timely Qualified Counter-Proposal, but theCorporation does not close the investment described in the Early RedemptionNotice (or another third party equity investment on terms no more favorable, inthe aggregate, to the investors or less favorable to the Corporation than thoseset forth in the Early Redemption Notice) by the earlier of sixty (60)days after delivery of the Early Redemption Notice or December 31, 2004,then the Corporation may not redeem the Series B Preferred Stock unlessthe Corporation delivers a new Early Redemption Notice for an equity investmentto be completed before December 31, 2004 and the holders of theSeries B Preferred

 

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Stock do not make QualifiedCounter-Proposal within thirty (30) days of the new Early RedemptionNotice.

 

e.             If the holders of the Series BPreferred Stock make a Qualified Counter-Proposal but fail to close the equityinvestment described therein within forty-five (45) days of delivery of theEarly Redemption Notice, and such failure to close is due to a breach by theholders of the Series B Preferred Stock of the terms of the QualifiedCounter-Proposal, then the Corporation may redeem the Series B Preferred Stockat any time thereafter.

 

H.            Preemptive Rights.

 

1.             General.  Except in a transaction covered by the EarlyRedemption procedures set forth in Section G(2), the Corporation shall notissue, sell or exchange, agree to issue, sell or exchange, or reserve or setaside for issuance, sale or exchange any equity securities, including debtsecurities convertible into equity securities, unless in each case theCorporation shall have first made an offer (the “Preemptive Offer”) to sellsuch Stock (the “Offered Securities”) to each holder of Series B PreferredStock by delivery of written notice of such offer stating the Corporationproposes to sell such Offered Securities, the number or amount of the OfferedSecurities proposed to be sold, the proposed purchase price therefor and anyother terms and conditions of such offer. The Preemptive Offer shall by its terms remain open and irrevocable fora period of twenty (20) days from the date it is delivered by the Corporation(the “Preemptive Offer Period”).

 

2.             Offer Mechanics.  Each holder of Series B Preferred Stockshall have the option, exercisable at any time during the Preemptive OfferPeriod by delivering written notice to the Corporation (a “Preemptive OfferAcceptance Notice”), to subscribe for (i) a percentage of the OfferedSecurities equal to the percentage of the Corporation’s issued and outstandingCommon Stock (on a fully converted basis) represented by the holder’sSeries B Preferred Stock (on a fully converted basis) (the “ProportionatePercentage”) and (ii) up to its Proportionate Percentage of the OfferedSecurities not subscribed for by other holders of Series B Preferred Stockas specified in a holder’s Preemptive Offer Acceptance Notice.  Any Offered Securities not subscribed for bya holder shall be deemed to be re-offered to the holders exercising theiroptions specified in clause (ii) of the immediately preceding sentence withrespect to the lesser of (A) the amount specified in their respectivePreemptive Offer Acceptance Notices and (B) an amount equal to their respectiveProportionate Percentages with respect to such deemed offer.  Such deemed offer and acceptance proceduresdescribed in the immediately preceding sentence shall be deemed to be repeateduntil either (x) all of the Offered Securities are accepted by the holders or(y) the maximum amount of securities specified in each Preemptive OfferAcceptance Notice has been satisfied. The Corporation shall notify each holder within five (5) days followingthe expiration of the Preemptive Offer Period of the number or amount ofOffered Securities which such Stockholder has subscribed to purchase.

 

3.             Sales By Corporation.  If Preemptive Offer Acceptance Notices arenot given by the Stockholders for all the Offered Securities, the Corporationmaking such Preemptive Offer shall have 120 days from the expiration of thePreemptive Offer Period to sell all or any part of such Offered Securities asto which Preemptive Offer Acceptances Notices have not been given by theStockholders (the “Refused Securities”) to any other Persons, but

 

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only upon terms and conditionsin all respects, including price, which are no more favorable, in theaggregate, to such other Persons or less favorable to the Corporation than thoseset forth in the Preemptive Offer.  Uponthe closing, which shall include full payment to the Corporation, of the saleto such other Persons of all the Refused Securities, the Stockholders shallpurchase from the Corporation, and the Corporation shall sell to suchStockholders, the Offered Securities with respect to which Preemptive OfferAcceptance Notices were delivered by each Stockholder, at the terms specifiedin the Preemptive Offer.

 

I.              Definitions.

 

“AdditionalShares of Common Stock” means all shares of Common Stock issued (or, pursuantto clauses (A) or (B) of Subparagraph (iv) of Section F(4)(a) above,deemed to be issued) by the Corporation after the Original Issue Date, otherthan Excluded Securities

 

“Affiliate”has the meaning provided therefor in Rule 405 promulgated under the SecuritiesAct of 1933, as such Rule is en effect as of the Original Issuance Date.

 

“AntidilutionShares” shall mean, on any date on which such calculation is required (a“Calculation Date”), the number of shares resulting from (A) the excess over537,242 in the number of shares of Common Stock issued and issuable onconversion of the Convertible Notes (based, as to issuable shares, on theconversion price of the Convertible Notes on such Calculation Date), multipliedby (B) 1.041, then divided by 47,182,301.

 

“Associate”has the meaning provided therefor in Rule 405 promulgated under the SecuritiesAct of 1933, as such Rule is en effect as of the Original Issuance Date.

 

“AvailableFunds and Assets” means the funds and assets of the Corporation that may belegally distributed to the Corporation’s stockholders.

 

“Common Stock”means the common stock, par value $0.0001 per share, of the Corporation.

 

“ConvertibleNotes” means (i) the Convertible Secured Promissory Note dated October 31,2000, payable (with accrued interest) to Howard Shao, in the original principalamount of $100,000, (ii) the Convertible Secured Promissory Note dated November30, 2000, payable (with accrued interest) to Howard Shao, in the original principalamount of $100,000, and (iii) the Convertible Secured Promissory Note datedSeptember 12, 2001, in the principal amount of $50,000, payable to David Weil.

 

“ExcludedSecurities” shall mean securities issued:

 

(i)                                     to directors,employees or consultants of the Corporation or any subsidiary thereof as a formof compensation in accordance with a plan approved by the Board of Directorsand stockholders of the Corporation;

 

(ii)                                  in connection withany merger with, or acquisition of substantially all of the assets of, or acontrolling interest in, any entity;

 

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(iii)                               to a strategic(non-financial) investor as part of a collaborative effort to conduct businessin which the Corporation receives other consideration, including by way ofentering into a joint venture or a distribution or licensing arrangement;

 

(iv)                              as warrants in connectionwith any debt financing, or on exercise of such warrants;

 

(v)                                 upon conversion of anyconvertible securities now outstanding, upon exercise of the Preferred StockWarrant, or upon exercise of any options or warrants for which an adjustment tothe conversion price has previously occurred pursuant to Section F(4)(a)above; or

 

(vi)                              in any actions describedin Subsections (b), (c) or (d) of Section F(4) above.

 

“Indebtedness”means at a particular time, without duplication, (i) any indebtedness forborrowed money or issued in substitution for or exchange of indebtedness forborrowed money, (ii) any indebtedness evidenced by any note, bond, debenture orother debt security, (iii) any indebtedness for the deferred purchase price ofproperty or services with respect to which a Person is liable, contingently orotherwise, as obligor or otherwise (other than trade payables and other currentliabilities incurred in the ordinary course of business), (iv) any commitmentby which a Person assures a creditor against loss (including, withoutlimitation, contingent reimbursement obligations with respect to letters ofcredit), (v) any indebtedness guaranteed in any manner by a Person (including,without limitation, guarantees in the form of an agreement to repurchase orreimburse), (vi) any obligations under capitalized leases with respect to whicha Person is liable, contingently or otherwise, as obligor, guarantor orotherwise, or with respect to which obligations a Person assures a creditoragainst loss, and (vii) any indebtedness secured by any mortgage, pledge,security interest, encumbrance, lien or charge of any kind on a Person’sassets.

 

“IssuanceDate” means, as to any share of Series B Preferred Stock, the date that sharewas first issued by the Corporation.

 

“OriginalIssuance Date” means the date of the first issuance of shares of Series BPreferred Stock.

 

“OriginalIssuance Price” means one thousand, four hundred and seventy-seventen-thousandth dollars ($0.1477).

 

“OriginalIssuance Share” means a share of Series B Preferred Stock that wasoriginally issued on the Original Issuance Date.

 

“Person” meansan individual, a partnership, a corporation, an association, a joint stockcompany, a trust, a joint venture, an unincorporated organization, or agovernmental entity (or any department, agency, or political subdivisionthereof).

 

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“PreferredStock Warrant” means the Series B Preferred Stock Warrant issued to WestgateEquity Partners, L.P. (“Westgate”) pursuant to the Securities PurchaseAgreement between the Corporation, Westgate and Health Holdings &Botanicals, LLC dated as of December 20, 2001.

 

“Series BConversion Price” means the Original Issuance Price, subject to adjustment inaccordance with the terms of Section F(4) above.

 

“WarrantShares” means the shares of Series B Preferred Stock issuable on exercise ofthe Preferred Stock Warrants.

 

 

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