Exhibit
4.5


 


 


Certificate
of Designation


 


of


 


Series A
Redeemable Preferred Stock


 


and


 


Series A-1
Convertible Preferred Stock


 


of


 


Innovative
Micro Technology, Inc.


 





















 


Certificate
of Designation


 


of


 


Series A
Redeemable Preferred Stock


 


and


 


Series A-1
Convertible Preferred Stock


 


of


 


Innovative
Micro Technology, Inc.


 


Innovative Micro Technology,
Inc., a Delaware corporation (the “Corporation”), pursuant to Section 151
of the General Corporation Law of the State of Delaware, does hereby make this
Certificate of Designation and does hereby state and certify that pursuant to
the authority expressly vested in the Board of Directors of the Corporation
(the “Board”) by the Certificate of Incorporation of the Corporation, the Board
duly adopted the following resolutions:


 


WHEREAS, the Board is
authorized, within the limitations and restrictions stated in the Certificate
of Incorporation, to fix by resolution or 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 generality of the foregoing, such provisions as may be
desired concerning voting, dividends, conversion, dissolution or the
distribution of assets, and such other subjects or matters as may be fixed by
resolution or resolutions of the Board of Directors under the Delaware General
Corporation Law; and


 


WHEREAS, the Board, pursuant
to its authority as aforesaid, has determined that it is in the best interest
of the Corporation and its stockholders to authorize and fix the terms of two
series of Preferred Stock and the number of shares constituting the series;


 


NOW, THEREFORE, BE IT
RESOLVED, that two series of Preferred Stock are hereby created and authorized
to be issued in the number and series, and on the terms and with the
provisions, set forth below.


 


ARTICLE I


Series A
Redeemable Preferred Stock


 


A.                                   Designation of
Series and Number of Shares.  1,000,000 shares of the Corporation’s
authorized Preferred Stock are hereby designated “Series A Redeemable
Preferred Stock” and authorized for issuance with the rights, preferences,
privileges and limitations set forth below.


 


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B.                                     Voting.


 


1.                                       General.  The holders of Series A Redeemable
Preferred Stock (the “Series A Holders”) shall have no voting rights with
respect to their shares of Series A Redeemable Preferred Stock (the “Series A
Shares”), except as set forth in Section F below and as otherwise may be required
by law.


 


2.                                       Series A
Directors.  So long as
Series A Shares remain outstanding, at any meeting held for the purpose of
electing directors (or in a written consent in lieu thereof), the presence in
person or by proxy (or the written consent) of the Series A Holders
holding at least a majority of the Series A Shares then outstanding shall
constitute a quorum of the Series A Redeemable Preferred Stock for the
election of two (2) directors who shall be elected solely by the Series A
Holders (the “Series A Directors”). 
So long as Series A Shares remain outstanding, a vacancy in the
directorships elected by the Series A Holders as provided in this Section I.B.2
shall be filled only by the vote or written consent of the Series A
Holders.  Notwithstanding anything to the
contrary in the Certificate of Incorporation or Bylaws of the Corporation, so
long as Series A Shares remain outstanding, the Series A Holders
shall have sole authority to nominate the candidates for election as
Series A Directors, provided such candidate must be qualified to serve
under any applicable law, regulation or rule applicable to the
Corporation.  The Corporation shall
reimburse the Series A Directors for reasonable expenses incurred in attending
meetings of directors.  Notwithstanding
the foregoing, in the event of the consummation of a redemption of the
Series A Shares as contemplated under Section I.E below such that no
Series A Shares remain outstanding, the Series A Holders immediately
shall cease to have the right to elect such directors and the directorships
formerly elected by the Series A Holders shall thereupon become a general
directorship elected by all the stockholders voting together as a single class
at any meeting held for the purpose of electing directors (or in a written
consent in lieu thereof).


 


C.                                     Dividends.


 


1.                                       Mandatory
Dividend. Until the fourth anniversary of the Original
Issuance Date, the Series A Shares shall bear mandatory, cumulative
dividends per share at the rate of 4.665% of the Series A Original Issuance
Price (as defined in Article III below) per annum, to be paid each year in
cash on or before December 31 of such year out of Available Funds and
Assets, and to be paid on a pro rata basis based on the actual number of days
elapsed for any partial year (the “Mandatory Dividend”).  If the Mandatory Dividend is not paid by December 31
of any year in which the Mandatory Dividend is payable, or if the Series A
Shares are redeemed in any such year prior to December 31 of such year and
the Mandatory Dividend had not yet been paid for such year at the time of such
redemption, in each such case the Mandatory Dividend amount for such year shall
accumulate and be added to the Series A Redemption Price as set forth
below.


 


2.                                       Preferred
Dividends.  Beginning
on the fourth anniversary of the Original Issuance Date, the Series A
Shares shall bear dividends per share at the rate of 4.665% of the
Series A Original Issuance Price (as defined in Article III below)
per annum (the “Preferred Dividend”), out of Available Funds and Assets, when,
as and if declared by the Board of Directors of the Corporation (the “Board”).  No dividend or distribution shall be declared
with


 


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respect to the Series A-1
Convertible Preferred Stock or the Common Stock in any year unless full
provision has been made to pay the Preferred Dividend with respect to the
Series A Shares.


 


D.                                    Liquidation.  In the event of any Liquidating Transaction,
the Series A Holders shall be entitled to receive, prior and in preference
to any distribution to the holders of Common Stock and the Series A-1
Convertible Preferred Stock, the following sum:


 


(i)                                     an amount per
share equal to the Series A Original Issuance Price, plus


 


(ii)                                  all accumulated
unpaid Mandatory Dividend amounts; plus


 


(iii)                               the amount of
any unpaid additional dividends that have been declared with respect to the
Series A Redeemable Preferred Stock, including without limitation any Preferred
Dividends.


 


E.                                      Redemption.


 


1.                                       Redemption at
Option of Corporation. At any time, and from time to time, the
Corporation may by resolution of the Board redeem all or a part of the
Series A Shares, out of Available Funds and Assets.  Upon notice to the Series A Holders of such
redemption, the Series A Shares so redeemed shall be cancelled and the
certificates therefor shall represent only the right of each Series A
Holder to receive, on surrender of such certificate, payment of the following
sum (the “Series A Redemption Price”):


 


(i)                                     an amount per
share equal to the Series A Original Issuance Price; plus


 


(ii)                                  all accumulated
unpaid Mandatory Dividend amounts; plus


 


(iii)                               the amount of
any unpaid additional dividends that have been declared with respect to the
Series A Redeemable Preferred Stock, including without limitation any Preferred
Dividends.


 


If the Corporation redeems
part of the Series A Shares pursuant to this Section I.E(1), each
Series A Holder shall receive, in addition to the payment of the
Series A Redemption Price for the cancelled shares, a new certificate
evidencing the holder’s remaining Series A Shares.


 


2.                                       Redemption at
Option of Series A Holders.  At any time after the fourth anniversary of
the Original Issuance Date, the Series A Holders may, by an affirmative
vote of the Series A Holders holding at least a majority of the
then-outstanding Series A Shares, elect to cause the Corporation to redeem
all of the Series A Shares.  In so
electing, the Series A Holders shall also elect to receive as payment in
full for the Series A Shares the consideration set forth in either subsection (a)
or subsection (b) below:


 


(a)                                  Cash Redemption.  If elected by the Series A Holders
holding at least a majority of the then-outstanding Series A Shares, each
such Series A Holder shall receive the Series A Redemption Price for
each share surrendered to the Corporation.


 


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(b)                                 Conversion.  If elected by the Series A Holders
holding at least a majority of the then-outstanding Series A Shares, each
Series A Holder shall receive in exchange for his Series A Shares
surrendered to the Corporation a note evidencing indebtedness of the
Corporation (an “Exchange Note”) in a principal amount equal to (i) the number
of Series A Shares held by the Series A Holder, multiplied by (ii)
the Series A Redemption Price.  The
Exchange Notes shall bear interest at the rate of 9% per annum, shall be
secured by all assets of the Corporation, be senior to any debt incurred
subsequent to the issuance of the Exchange Notes and shall mature on the one-year
anniversary of their date of issuance.


 


Immediately after the Corporation
receives a valid notice of the election by the Series A Holders to redeem
the Series A Shares in accordance with this Section I.E(2), all
outstanding Series A Shares shall be cancelled and the certificates
therefor shall evidence only the right to receive the payment described in Section I.E(2)(a)
above or the Exchange Note described in Section I.E(2)(b) above (as
elected by the Series A Holders holding at least a majority of the then-outstanding
Series A Shares) upon the surrender of such certificates.


 


If the funds of the
Corporation legally available for redemption of Series A Shares on any
date for redemption pursuant to this Section I.E(2) are insufficient to
redeem the total number of Series A Shares to be redeemed on such date,
those funds that are legally available will be used to redeem the maximum
possible number of such shares ratably among the Series A Holders based
upon their holdings of Series A Shares to be redeemed.  The Series A Shares not redeemed on a
particular date for redemption hereunder shall remain outstanding and entitled
to all of the rights and preferences provided herein.  To the extent the Corporation has Available
Funds, such funds will as promptly as practicable be used to redeem the balance
of the Series A Shares that the Corporation has become obliged to redeem
on any date for redemption hereunder but which it has not redeemed.


 


3.                                       Automatic
Redemption. Upon the closing of a Qualified Public Offering (as
defined in Article III below), all then-outstanding Series A Shares
shall be automatically redeemed at a price per share equal to the Series A
Redemption Price.  At the time of such
closing, all of the then-outstanding Series A Shares shall be cancelled,
and the certificates therefor shall evidence only the right to receive upon
surrender the Series A Redemption Price.


 


F.                                      Protective
Provisions.  So long as
any Series A Shares remain outstanding, the Corporation shall not, by
merger, consolidation or otherwise, without obtaining the prior written consent
or affirmative vote of the Series A Holders holding at least a majority of
the Series A Shares then outstanding, voting together as a single class
and given by written consent in lieu of a meeting or by votes at a special
meeting called for such purpose (for which written notice shall have been given
to all Series A Holders in the manner provided in the Bylaws of the
Corporation), do any of the following:


 


1.                                       Consummate a
Liquidating Transaction, enter in to an agreement to consummate a Liquidating
Transaction, or dissolve, liquidate or wind up the Corporation.


 


2.                                       Purchase or
acquire another company or entity, whether by way of acquiring a majority of
the outstanding stock of such entity, purchasing the assets of such entity, or
otherwise.


 


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3.                                       Amend the
Corporation’s Certificate of Incorporation or Bylaws.


 


4.                                       Change or amend
the rights, preferences or privileges of the Series A Redeemable Preferred
Stock.


 


5.                                       Cease to
conduct or carry on the business of the Corporation or make a material change
to the basic nature of its principal business activities.


 


6.                                       Increase,
decrease or cancel the authorized capital shares of the Corporation or any
subsidiary of the Corporation, or allot, purchase or redeem any shares or
securities convertible into or carrying a right of subscription in respect of
shares or any warrants or grant or issue any options, rights or warrants,
except for the redemption of Series A Redeemable Preferred Stock in
accordance with this Certificate of Designation and the repurchase of unvested
stock in connection with the termination of a service provider’s relationship
with the Corporation pursuant to the terms of, and at the price provided for in,
a written agreement that is in effect on the filing date of this Certificate of
Designation, or that has been approved by the Board and at least two of the
Series A and Series A-1 Directors, between such individual and the
Corporation that provides for such repurchase.


 


7.                                       Create any new
class or series of stock with rights, preferences or privileges superior to or pari passu with the Series A Redeemable Preferred
Stock.


 


8.                                       Change the
number of authorized directors, unless such change is approved by the Board,
including at least two of the Series A and Series A-1 Directors.


 


9.                                       Borrow in
excess of $500,000 in aggregate principal amount outstanding at any time,
unless approved by the Board, including at least two of the Series A and
Series A-1 Directors.


 


10.                                 Grant a
security interest in, encumber, transfer or otherwise dispose of any of the
Corporation’s or its subsidiaries’ real or intellectual property.


 


11.                                 Declare or pay
a dividend, or effect any type of recapitalization or reclassification of the
Corporation’s capital stock.


 


12.                                 Increase the
number of shares reserved for issuance in the Corporation’s current option
plan, or adopt a new option or stock incentive plan or increase the number of
shares reserved for issuance in such future plan.


 


G.                                     No Reissuance
of Series A Redeemable Preferred Stock.  No Series A Share or Shares acquired by
the Corporation by reason of redemption, purchase, conversion to indebtedness
or otherwise shall be reissued, and upon reacquisition by the Corporation all
such shares shall be cancelled, retired and eliminated from the Series A
Shares that the Corporation shall be authorized to issue.


 


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ARTICLE II


Series A-1
Convertible Preferred Stock


 


A.                                   Designation of
Series and Number of Shares.  1,000,000 shares of the Corporation’s
authorized Preferred Stock are hereby designated “Series A-1 Convertible
Preferred Stock” and authorized for issuance with the rights, preferences,
privileges and limitations set forth below.


 


B.                                     Voting.


 


1.                                       General.  Each of the holders (the “Series A-1
Holders”) of shares of Series A-1 Convertible Preferred Stock (the “Series A-1
Shares”) shall be entitled to notice of any and all meetings of the holders of
the Common Stock and notice of any actions taken by the holders of the Common
Stock by written consent, and shall be entitled to vote on all matters
(excluding the election of directors by the holders of Common Stock) presented
to the holders of Common Stock on which such holders vote, 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 whole number of shares of Common Stock
into which the Series A-1 Holder’s Series A-1 Shares could be
converted at the record date for the determination of the stockholders entitled
to vote on such matters or, if no record date is established, at the date such
vote is taken or any written consent of stockholders is solicited.


 


2.                                       Series A-1
Director.


 


(a)                                  In addition to
the voting rights of the Series A-1 Convertible Preferred Stock pursuant
to Section II.B(1) above, at any meeting held for the purpose of electing
directors (or in a written consent in lieu thereof), the presence in person or
by proxy (or the written consent) of the Series A-1 Holders holding at
least a majority of the Series A-1 Shares then outstanding shall
constitute a quorum of the Series A-1 Convertible Preferred Stock for the
election of one (1) director who shall be elected solely by the Series A-1
Holders (the “Series A-1 Director”). 
A vacancy in the directorship elected by the Series A-1 Holders as
provided in this Section II.B(2) shall be filled only by the vote or
written consent of the Series  A-1 Holders.  Notwithstanding anything to the contrary in
the Certificate of Incorporation or Bylaws of the Corporation, the
Series A-1 Holders shall have sole authority to nominate the candidates
for election as the Series A-1 Director, provided such candidates must be
qualified to serve under any applicable law, regulation or rule applicable to
the Corporation.


 


(b)                                 The Corporation
shall reimburse the Series A-1 Director for reasonable expenses incurred
in attending meetings of directors.


 


C.                                     Dividends.  The Series A-1 Convertible Preferred
Stock shall be entitled to receive dividends in parity with the Common Stock
when, as and if declared by the Board on the Common Stock, out of Available
Funds and Assets.  When any such dividend
is declared or paid, each Series A-1 Holder shall be deemed to hold a
number of shares of Common Stock equal to the largest number of whole shares of
Common Stock into which the Series A-1 Holder’s Series A-1 Shares
could be converted on the record date for the declaration of the dividend.


 


D.                                    Liquidation.  In the event of any Liquidating Transaction,
after payment in full of any liquidation preference to the Series A
Holders, then all of the remaining Available Funds and


 


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Assets shall be distributed
in parity among the Series A-1 Holders and the holders of the Common Stock
on a pro rata basis, with each Series A-1 Holder deemed to hold a number
of shares equal to the largest number of whole shares of Common Stock into
which the holder’s Series A-1 Shares could be converted at the effective
date of the Liquidating Transaction.


 


E.                                      Optional
Conversion.


 


1.                                       Each
Series A-1 Holder has the right, at such Series A-1 Holder’s option,
at any time and from time to time, to convert any of such Series A-1
Holder’s Series A-1 Shares into Common Stock, on the basis hereinafter
provided.  Each Series A-1 Share
shall be converted into the number of fully paid, non-assessable shares of
Common Stock that is equal to the Series A-1 Conversion Ratio, as
determined pursuant to Section II.E(4) below.


 


2.                                       A Series A-1
Holder may exercise the conversion right described in Section II.E(1) by
delivering to the Corporation during regular business hours, at the office of
the Corporation or to any transfer agent designated by the Corporation for the
Series A-1 Convertible Preferred Stock, the certificate or certificates
for the shares to be converted, duly endorsed or assigned in blank or to the
Corporation (if required by it), accompanied by written notice stating that the
Series A-1 Holder elects to convert the Series A-1 Shares, stating
the number of shares to be converted if less than the full number represented
by the surrendered certificate, and stating the name or names (with address) in
which the certificate or certificates for the shares of Common Stock are to be
issued.  Conversions shall be effective
on the date when such delivery is made (the “Conversion Date”), and the person
entitled to receive the Common Stock issuable upon such conversion shall be
deemed for all purposes the record holder of the number shares of Common Stock
then issuable, as of the Conversion Date. 
As promptly as practicable thereafter, and in any event within twenty
business days, the Corporation shall issue and deliver to the holder (or to the
place designated in writing by the holder), a certificate or certificates in
appropriate form and executed as provided under Section 158 of the
Delaware General Corporation Law, evidencing the shares of Common Stock to
which the holder is entitled and a check or cash in the amount of any
fractional interest in a share of Common Stock as provided in Section II.E(3)
below.  Upon conversion of only a portion
of the Series A-1 Shares covered by a certificate, the Corporation shall
issue and deliver to or upon the written order of the holder of the certificate
so surrendered for conversion, at the expense of the Corporation, a new
certificate covering the number of Series A-1 Shares representing the
unconverted portion of the certificate so surrendered.


 


3.                                       No fractional
shares of Common Stock or scrip shall be issued upon conversion of
Series A-1 Convertible Preferred Stock. 
Instead of any fractional shares of Common Stock that would otherwise be
issuable upon conversion of Series A-1 Convertible Preferred Stock, after
issuing the largest whole number of shares of Common Stock issuable in any
conversion, the Corporation shall pay a cash adjustment in place of the
fractional interest in an amount equal to the then current market price per
share (determined in accordance with Section II.E(4)(f) below) multiplied
by such fractional interest.  Fractional
interests shall not be entitled to dividends, and a holder of a fractional
interest shall not be entitled to any rights as a stockholder of the
Corporation in respect of a fractional interest.


 


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4.                                       The initial “Series A-1
Conversion Ratio” shall be 5.6667, and shall be subject to adjustment at any
time and from time to time as follows:


 


(a)                                  If the
Corporation shall issue, after the Original Issuance Date, Additional Shares of
Common Stock without consideration or for consideration per share less than the
Trigger Price, then the Series A-1 Conversion Ratio shall (unless
otherwise provided in this Section II.E(4)) automatically be adjusted to a
number determined by multiplying the Series A-1 Conversion Ratio in effect
immediately prior to the issuance by a fraction, the numerator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
issuance (including shares of Common Stock deemed to be issued pursuant to Section II.E(4)(a)(iv)(A)
or (B)) plus the number of shares of Additional Shares of Common Stock actually
issued, and the denominator of which shall be the number of shares of Common
Stock outstanding immediately prior to the issuance (including shares of Common
Stock deemed to be issued pursuant to Section II.E(4)(a)(iv)(A) or (B))
plus the number of shares of Common Stock that the aggregate consideration
received by the Corporation for the issuance would purchase at a price per
share equal to the Trigger Price in effect immediately prior to the issuance
(the “Adjustment Fraction”).  The initial
“Trigger Price” shall be $3.00, and the Trigger Price at any time after the
Original Issuance Date shall be $17 divided by the Conversion Ratio then in
effect.


 


In any adjustment of the
Series A-1 Ratio pursuant to this Section II.E(4)(a), the following
provisions shall apply:


 


(i)                                     If Common Stock
is issued for cash, the consideration shall be deemed to be the amount of cash
paid for the Common Stock after deducting therefrom any discounts and
commissions, but not legal fees or other expenses of the Corporation, paid or
incurred by the Corporation for any underwriting or otherwise in connection
with the issuance and sale thereof.


 


(ii)                                  If Common Stock
is issued for consideration in whole or in part other than cash, the
consideration other than cash shall be deemed to be the fair market value
thereof as determined in good faith by the Board.


 


(iii)                               If Common Stock
is issued without consideration, the consideration shall be deemed to be
$0.0001 per share.


 


(iv)                              If the
Corporation issues (x) options to purchase or rights to subscribe for
Common Stock, (y) securities by their terms convertible into or
exchangeable for Common Stock or (z) options to purchase or rights to
subscribe for such convertible or exchangeable securities:


 


(A)                              the aggregate
maximum number of shares of Common Stock deliverable upon exercise 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, if any, received by the


 


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Corporation upon the issuance of such options or
rights plus the minimum purchase price provided in such options or rights for
the Common Stock covered thereby (the consideration to be determined in each
case in the manner provided in subdivisions (i), (ii) and (iii) above);


 


(B)                                the aggregate
maximum number of shares of Common Stock deliverable upon conversion of or in
exchange 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 received by the Corporation for any such securities and related
options or rights (excluding any cash received on account of accrued interest
or accrued dividends), plus the additional consideration, if any, to be
received by the Corporation upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration to be
determined in each case in the manner provided in subdivisions (i), (ii) and
(iii) above);


 


(C)                                on any change
in the exercise price deliverable upon exercise of any such options or rights
or conversions of or exchanges for such securities, other than a change
resulting from an antidilution provision thereof, the applicable Series A-1
Conversion Ratio shall automatically be readjusted to such Series A-1
Conversion Ratio as would have resulted had the change in exercise price been
made at the time of issuance of such options, rights or securities not
converted prior to such change (or options or rights related to such securities
not converted prior to such change); and


 


(D)                               Upon the
expiration of any such options or rights, or the termination of any such rights
to convert or exchange or the expiration of any options or rights related to
such convertible or exchangeable securities, the Series A-1 Conversion
Ratio, to the extent in any way affected by or computed using such options,
rights or securities or options or rights related to such securities, shall be
recomputed to reflect the issuance of only the number of shares of Common Stock
(and convertible or exchangeable securities which remain in effect) actually
issued upon the exercise of such options or rights, upon the conversion or
exchange of such securities or upon the exercise of the options or rights
related to such securities.


 


(b)                                 If, at any time
after the Original Issuance Date, the number of shares of Common Stock outstanding
is increased by a stock dividend payable in shares of


 


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Common Stock or by a
subdivision or split-up of shares of Common Stock without a similar stock
dividend, subdivision or split-up of the Series A-1 Convertible Preferred
Stock, then, as of the record date fixed for the determination of holders of
Common Stock entitled to receive the stock dividend, subdivision or split-up,
the Series A-1 Conversion Ratio shall be increased in proportion to such
increase in outstanding shares.


 


(c)                                  If, at any time
after the Original Issuance Date, the number of shares of Common Stock
outstanding is decreased by a combination of the outstanding shares of Common
Stock without a similar combination of the Series A-1 Convertible
Preferred Stock, then, as of the record date for such combination, the
Series A-1 Conversion Ratio shall be decreased in proportion to such
decrease in outstanding shares.


 


(d)                                 If, at any time
after the Original Issuance Date, the Common Stock issuable upon the conversion
of the Series A-1 Convertible Preferred Stock is changed into the same or
a different number of shares of any class or classes of stock, whether by
recapitalization, reclassification, reorganization, merger, consolidation, sale
of assets or other change (other than by a Liquidating Event or a stock
dividend or distribution provided for elsewhere in this Section II.E(4)),
then in any such event each Series A-1 Holder shall have the right
thereafter to convert such holder’s Series A-1 Shares into the kind and
amount of stock and other securities and property receivable upon such
recapitalization, reclassification, reorganization, merger, consolidation, sale
of assets, or other change by a holder of the number of shares of Common Stock
into which such Series A-1 Shares could have been converted immediately
prior to such recapitalization, reclassification, reorganization, merger,
consolidation, sale of assets or other change, all subject to further
adjustment as provided herein or with respect to such other securities or
property by the terms thereof.


 


(e)                                  All
calculations under this Section II.E(4) shall be made to the nearest one
tenth (1/10) of a share or one hundredth (1/100) of a cent, as the case may be.


 


(f)                                    For the purpose
of any computation pursuant to Section II.E(3) above or this Section II.E(4),
the current market price at any date of one share of Common Stock shall be
determined as follows:


 


(i)                                     If traded on a
national securities exchange or the Nasdaq National Market, the current market
price shall be deemed to be the average of the closing prices of the securities
on such exchange over the period of twenty trading days ending three trading
days prior to the date of determination;


 


(ii)                                  If actively
traded over-the-counter, the value shall be deemed to be the average of the
closing bid prices over the period of twenty trading days ending three trading
days prior to the date of determination; or


 


(iii)                               If there is no
active public market, then in good faith by the Board, or if such determination
cannot be made, by a nationally-recognized independent investment banking firm
selected mutually by the Series A-1 Holders holding at least a majority of
the Series A-1 Shares then outstanding and the Corporation (or, if such
selection cannot be made, by


 


10





















 


a nationally recognized independent investment
banking firm selected by the American Arbitration Association in accordance
with its rules).


 


5.                                       Whenever Section II.E(4)
provides that an adjustment shall be effective immediately after a record date
for an event, the Corporation may defer the following actions until the
occurrence of the event: (A) when Series A-1 Shares are converted as
a result of such event, issuing to the holder of such Series A-1 Shares
any additional shares of capital stock issuable by reason of an adjustment
required by the event over and above the shares of capital stock issuable
before giving effect to the adjustment, or (B) paying to such holder any
amount in cash in lieu of a fractional share of capital stock pursuant to Section II.E(3)
above; provided, however, that in either case the Corporation shall deliver to
such holder a due bill or other appropriate instrument evidencing the holder’s
right to receive such additional shares, and such cash, upon the occurrence of
the event requiring such adjustment.


 


6.                                       Whenever the
Series A-1 Conversion Ratio is adjusted as provided in Section II.E(4)
above, the Corporation shall promptly file, at the office of the Corporation or
any transfer agent designated by the Corporation for the Series A-1
Convertible Preferred Stock, a statement, signed by its chief financial
officer, showing in detail the facts requiring such adjustment and the adjusted
Series A-1 Conversion Ratio.  The
Corporation shall also cause a copy of such statement to be sent by first-class
certified mail, return receipt requested, postage prepaid, to each holder of
shares of Series A-1 Convertible Preferred Stock at his or its address
appearing on the Corporation’s records. 
Where appropriate, such copy may be given in advance and may be included
as part of a notice required to be mailed under the provisions of Section II.E(7).


 


7.                                       If the
Corporation proposes to take any action of the type described in Sections
II.E(4)(a), (b), (c) or (d), or to commence a Liquidating Transaction, the
Corporation shall give notice to each Series A-1 Holder in the manner set
forth in this Section II.E(7), which notice shall specify the record date,
if any, with respect to any such action and the date on which such action is to
take place.  The notice shall also set
forth such facts as are reasonably necessary to indicate the effect of such
action (to the extent such effect may be known at the date of such notice) on
the Series A-1 Conversion Ratio then in effect and the number, kind or
class of shares or other securities or property that shall be deliverable or
purchasable upon the occurrence of such action or deliverable upon conversion
of Series A-1 Shares.  In the case
of any action that would require the fixing of a record date, the notice shall
be given at least 10 days prior to the date so fixed, and in case of all other
action, the notice shall be given at least 30 days prior to the taking of such
proposed action.  Failure to give such
notice, or any defect therein, shall not affect the legality or validity of any
such action.


 


8.                                       The Corporation
shall pay all documentary, stamp or other transactional taxes attributable to
the issuance or delivery of shares of capital stock of the Corporation upon
conversion of any Series A-1 Shares.


 


9.                                       The Corporation
shall reserve, free from preemptive rights, out of its authorized but unissued
shares of Common Stock solely for the purpose of effecting the conversion of
the shares of Series A-1 Convertible Preferred Stock, sufficient shares to
provide for the conversion of all outstanding Series A-1 Shares, including
any additional shares of


 


11





















 


Common Stock that may be
issuable from time to time pursuant to the adjustment provisions of Section II.E(4).


 


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


 


F.                                      Mandatory
Conversion.


 


1.                                       Qualified
Public Offering or Election.  Each outstanding Series A-1 Share shall
automatically be converted into fully paid and nonassessable shares of Common
Stock, at the then applicable Series A-1 Conversion Ratio, immediately
upon the closing of a Qualified Public Offering.  Upon receipt by the Corporation of notice (a “Conversion
Notice”) that the Series A-1 Holders holding at least a majority of the
then-outstanding Series A-1 Shares have elected to convert all or a
portion of their Series A-1 Convertible Preferred Stock, then that number
of Series A-1 Shares of each Series A-1 holder equal to the
percentage of Series A-1 Shares converted by the Series A-1 Holders submitting
the Conversion Notice, shall automatically be converted as well.


 


2.                                       Special
Mandatory Conversion Upon Future Financing.


 


(a)                                  At any time
after the Original Issuance Date, if (i) the Board grants to each
Series A-1 Holder a right to purchase its Pro Rata Share of Qualified
Securities (as each term is defined below) offered by the Corporation in a
transaction or series of transactions primarily for equity financing purposes
(an “Equity
Financing”), (ii) the Corporation has given written notice to each
Series A-1 Holder of its intention, describing the Qualified Securities,
the price and the terms and conditions upon which the Corporation proposes to
issue such Qualified Securities, (iii) the Corporation has provided to each
Series A-1 Holder not less than ten
(10) business days from the
giving of such written notice to agree to purchase its Pro Rata Share of the
Qualified Securities for the price and upon the terms and conditions specified
in the notice by giving written notice to the Corporation and stating therein
the quantity of Qualified Securities to be purchased, and (iv) any such
Series A-1 Holder (or any predecessor, successor or affiliated entity to
such Series A-1 Holder) purchases less than one hundred percent (100%) of
such Series A-1 Holder’s Pro Rata Share of such Qualified Securities in
such Equity Financing (such Series A-1 Holder being referred to herein as
a “Non-Fully
Participating Holder”), then the Converted
Percentage (as defined below) of such Non-Fully Participating Holder’s
Series A-1 Shares shall automatically and without further action on the
part of such Non-Fully Participating Holder be converted, subject to and
effective upon the consummation of such Equity Financing, into that number of
shares of Common Stock that equals the number of shares of Common Stock that
such Non-Fully Participating Holder would have received upon the conversion of
such Series A-1 Shares had such shares been converted to Common Stock at
the Series A-1 Conversion Ratio in effect immediately prior to such Equity
Financing.  Such conversion shall be
effected in accordance with the provisions of Section II.E.


 


(b)                                 “Converted
Percentage” means one minus a fraction, the numerator of which is the
number of Qualified Securities purchased by a Non-Fully Participating Holder


 


12





















 


and the denominator of which
is the number of Qualified Securities that comprise such
Non-Fully-Participating Holder’s Pro Rata Share of the Qualified Securities
offered.


 


(c)                                  “Pro Rata Share”
means a fraction, the numerator of which is the number of Series A-1
Shares by a Series A-1 Holder and the denominator of which is the total
number of Series A-1 Shares then outstanding.


 


(d)                                 “Qualified
Securities” means the number of shares of a class or series of equity
securities (or securities convertible into or exercisable for equity
securities) of the Corporation that is (1) issued subsequent to the Original
Issuance Date and (2) issued for consideration per share (on an
as-converted-to-common-stock basis) of less than $3.00, subject to adjustment
for any stock dividends, combinations or splits with respect to the Common
Stock taking place after the date of filing of this Certificate of Designation.


 


G.                                     Protective
Provisions.


 


So long as any Series A-1
Shares remain outstanding, the Corporation shall not, by merger, consolidation
or otherwise, without obtaining the prior written consent or affirmative vote
of the Series A-1 Holders holding a majority of the Series A-1 Shares
then outstanding, voting together as a single class, on an as-converted basis
and given by written consent in lieu of a meeting or by votes at a special
meeting called for such purpose (for which written notice shall have been given
to all Series A-1 Holders in the manner provided in the Bylaws of the
Corporation), do any of the following:


 


1.                                       Consummate a
Liquidating Transaction, enter in to an agreement to consummate a Liquidating
Transaction, or dissolve, liquidate or wind up the Corporation.


 


2.                                       Purchase or
acquire another company or entity, whether by way of acquiring a majority of
the outstanding stock of such entity, purchasing the assets of such entity, or
otherwise.


 


3.                                       Amend the
Corporation’s Certificate of Incorporation or Bylaws.


 


4.                                       Change or amend
the rights, preferences or privileges of the Series A-1 Convertible
Preferred Stock.


 


5.                                       Cease to
conduct or carry on the business of the Corporation or make a material change
to the basic nature of its principal business activities.


 


6.                                       Increase,
decrease or cancel the authorized capital shares of the Corporation or any
subsidiary of the Corporation, or allot, purchase or redeem any shares or
securities convertible into or carrying a right of subscription in respect of
shares or any warrants or grant or issue any options, rights or warrants,
except for the redemption of Series A Redeemable Preferred Stock in
accordance with this Certificate of Designation and the repurchase of unvested
stock in connection with the termination of a service provider’s relationship
with the Corporation pursuant to the terms of, and at the price provided for
in, a written agreement that is in effect on the filing date of this
Certificate of Designation or that has 


 


13





















 


been approved by the Board
including at least two of the Series A and Series A-1 Directors,
between such individual and the Corporation, that provides for such repurchase.


 


7.                                       Create any new
class or series of stock with rights, preferences or privileges superior to or pari passu with the Series A-1 Convertible Preferred
Stock.


 


8.                                       Change the
number of authorized directors, unless such change is approved by the Board,
including at least two of the Series A and Series A-1 Directors.


 


9.                                       Borrow in
excess of $500,000 in aggregate principal amount outstanding at any time,
unless approved by the Board, including at least two of the Series A and
Series A-1 Directors.


 


10.                                 Grant a
security interest in, encumber, transfer or otherwise dispose of any of the
Corporation’s or its subsidiaries’ real or intellectual property.


 


11.                                 Declare or pay
a dividend, or effect any type of recapitalization or reclassification of the
Corporation’s capital stock.


 


12.                                 Increase the
number of shares reserved for issuance in the Corporation’s current option
plan, or adopt a new option or stock incentive plan or increase the number of
shares reserved for issuance in such future plan.


 


H.                                    No Reissuance
of Series A-1 Convertible Preferred Stock.  No Series A-1 Share or Shares acquired
by the Corporation by reason of conversion, redemption, purchase or otherwise
shall be reissued, and upon reacquisition by the Corporation all such shares
shall be cancelled, retired and eliminated from the shares of Series A-1
Shares that the Corporation shall be authorized to issue.


 


[Remainder of this page
intentionally left blank.]


 


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ARTICLE III


Definitions


 


“Additional Shares of
Common Stock” means all shares of Common Stock issued (or, pursuant to
clauses (A) or (B) of Subparagraph (iv) of Section II.E(4)(a) above,
deemed to be issued) by the Corporation after the Original Issue Date, other
than Excluded Securities.


 


“Available Funds and
Assets” means the funds and assets of the Corporation that may be legally
distributed to the Corporation’s stockholders.


 


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


 


“Conversion Notice”
has the meaning set forth in Section II.F(1).


 


“Converted Percentage”
has the meaning set forth in Section II.F(2)(b).


 


“Equity Financing” has the meaning set forth
in Section II.F(2)(a).


 


“Exchange Note” has
the meaning set forth in Section I(E)(2)(b).


 


“Excluded Securities”
shall mean securities issued:


 


(i)                                     to directors,
employees or consultants of the Corporation or any subsidiary thereof as a form
of compensation in accordance with a plan approved by the Board and
stockholders of the Corporation; provided, that the number of securities issued
under this clause (i) after the Original Issue Date does not exceed 3,000,000
(as adjusted for any stock dividends, combinations or splits with respect to
such shares effected after the date of filing of this Certificate of
Designation) unless approved by at least two of the Series A and
Series A-1 Directors;


 


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


 


(iii)                               to a strategic
(non-financial) investor as part of a collaborative effort to conduct business,
and not primarily for equity financing purposes, in which the Corporation
receives other consideration, including by way of entering into a joint venture
or a distribution or licensing arrangement; provided such effort or transaction
is approved by the Board, including at least two of the Series A and
Series A-1 Directors;


 


(iv)                              as warrants in
connection with any institutional debt financing approved by the Board,
including at least two of the Series A and Series A-1 Directors, or
on exercise of such warrants;


 


(v)                                 upon conversion
of any convertible securities now outstanding, upon conversion of the
Series A-1 Convertible Preferred Stock, or upon


 


15





















 


exercise of any options or
warrants for which an adjustment to the Conversion Ratio has previously
occurred pursuant to Section II.E(4)(a) above; or


 


(vi)                              in any actions
described in Subsections (b), (c) or (d) of Section II.E(4) above.


 


“Issuance Date” means
the date that the Series A Redeemable Preferred Stock and Series A-1
Convertible Preferred Stock were first issued by the Corporation.


 


“Liquidating Transaction”
means either (i) a merger or acquisition of the Corporation in which the
stockholders of the Corporation prior to such transaction do not own (in the
same relative proportions) a majority of the outstanding shares of the
surviving corporation or if the surviving corporation is a wholly owned
subsidiary, then its parent; (ii) a sale, transfer or other disposition of all
or substantially all of the assets of the Corporation, or (iii) any other
winding up or dissolution of the Corporation.


 


“Mandatory Dividend” has the
meaning set forth in Section I.C(1).


 


“Non-Fully Participating Holder” has
the meaning set forth in Section II.F(2)(a).


 


“Original Issuance Date”
means the date of the first issuance of shares of Series A Redeemable
Preferred Stock and Series A-1 Convertible Preferred Stock.


 


“Preferred Dividend”
has the meaning set forth in Section I.C(2).


 


“Pro Rata Share” has
the meaning set forth in Section II.F(2)(c).


 


“Qualified Public
Offering” means the Corporation’s first underwritten public offering of its
shares after the Original Issuance Date, pursuant to registration under the
Securities Act and resulting in gross proceeds of at least $35 million and a
price per share that is equal to at least $6.00 (subject to adjustment for
recapitalizations, splits, reverse splits and the like affecting the Common
Stock).


 


“Qualified Securities”
has the meaning set forth in Section II.F(2)(d).


 


“Series A Holder”
means any holder of Series A Redeemable Preferred Stock.


 


“Series A Original
Issuance Price” means $14.1667 (subject to adjustment for
recapitalizations, splits, reverse splits and the like affecting the
Series A Shares).


 


“Series A Shares”
means shares of Series A Redeemable Preferred Stock.


 


“Series A-1 Holders”
means any holder of Series A-1 Convertible Preferred Stock.


 


“Series A-1
Conversion Ratio” has the meaning set forth in Section II.E.(4).


 


“Series A-1 Shares”
means shares of Series A-1 Convertible Preferred Stock.


 


16





















 


“Trigger Price” has
the meaning set forth in Section II.E.(4)(a).


 


The
next page is the signature page.


 


17





















 


IN WITNESS HEREOF, the
undersigned has caused this Certificate of Designation to be duly executed by
its President this 24th day of January, 2005.


 


	
   

  	
  INNOVATIVE
  MICRO TECHNOLOGY, INC. 

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  /s/
  John Foster

  	
   

  
	
   

  	
  John
  Foster, President

  



 


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