Exhibit 4.1


 


CERTIFICATE OF
DESIGNATIONS, PREFERENCES

AND RIGHTS OF THE SERIES B CONVERTIBLE PREFERRED STOCK

OF

COMMERCE ONE, INC.


 


Commerce One, Inc. (the “Company”), a corporation organized and
existing under the General Corporation Law of the State of Delaware (the “DGCL”), does hereby certify that, pursuant
to authority conferred upon the Board of Directors of the Company by the
Certificate of Incorporation, as amended, of the Company, and pursuant to
Section 151 of the DGCL, the Board of Directors of the Company at a meeting
duly held, adopted resolutions (i) authorizing a series of the Company’s
previously authorized preferred stock, par value $0.0001 per share, and (ii)
providing for the designations, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof, of One Hundred Thousand (100,000) shares of Series B Convertible
Preferred Stock of the Company, as follows:


 


RESOLVED, that the
Company is authorized to issue 100,000 shares of Series B Convertible Preferred
Stock (the “Preferred Shares”),
par value $0.0001 per share, which shall have the following powers,
designations, preferences and other special rights:


 


(1)                                  Dividends.  The holders of the Preferred Shares shall be
entitled to receive dividends (“Dividends”)
payable on the Stated Value on such Preferred Share at a rate equal to the
Dividend Rate (as defined below), which shall be cumulative, accrue daily from
the Issuance Date (as defined below) and be due and payable beginning on July
1, 2003 (the “First Dividend Date”)
and on the first day of each Calendar Period (as defined below) after the First
Dividend Date (each, including the First Dividend Date, a “Dividend Date”).  If a Dividend Date is not a Business Day, then the Dividend shall
be due and payable on the Business Day immediately following such Dividend
Date.  Dividends due for the period
commencing on the Issuance Date and ending with the Dividend payable on July 1,
2005 (the “Initial Dividend Period”)
shall be payable by inclusion of the Dividend in the Stated Value (each such
dividend inclusion being referred to herein as an “Accrued Dividend Payment”); provided that if paying such
Dividend as an Accrued Dividend payment would require the Company to issue a
number shares of Common Stock upon conversion of the Preferred Shares that
would be in excess of the Exchange Cap (as defined below), then any such
Dividend shall be paid in cash (each such cash dividend being referred to
herein as a “Cash Dividend Payment”).  Dividends for the period subsequent to the
Initial Dividend Period shall be payable as a Cash Dividend Payment, or, at the
option of the Company, as an Accrued Dividend Payment, provided that the
Dividends which accrued during any period shall be payable in stock only if the
Company provides written notice to each holder of Preferred Shares at least ten
(10) Business Days prior to the Dividend Date. 
Notwithstanding the foregoing, the Company shall be required to make Cash
Dividend Payments if (a) any event constituting a Triggering Event (as defined
in Section 3(b)), or an event that with the passage of time and without being
cured would constitute a Triggering Event, has occurred and is continuing on
the Dividend Date or any date which is within 10 Business Days prior to the
Dividend Date, unless otherwise consented to in writing by the holder of
Preferred Shares entitled to receive such Dividend or (b) the Registration
Statement (as defined in the Registration Rights Agreement (as defined below))
is not effective and available for the resale of all of the Registrable
Securities (as defined in the Registration Rights Agreement), on the Dividend
Date


 

















 


or each date which is
within 10 Business Days prior to the Dividend Date.  Any accrued and unpaid Cash Dividend Payments which are not paid
within five (5) Business Days of such accrued and unpaid Dividends’ Dividend
Date shall bear interest at the rate of 14.0% per annum from such Dividend Date
until the same is paid in full (the “Default
Interest”).


 


(2)                                  Conversion
of Preferred Shares.  Preferred
Shares shall be convertible into shares of the Company’s Common Stock, par
value $0.0001 per share (the “Common Stock”),
on the terms and conditions set forth in this Section 2.


 


(a)                                  Certain
Defined Terms.  For purposes of this
Certificate of Designations, the following terms shall have the following
meanings:


 


(i)                                     “Additional Amount” means, on a per
Preferred Share basis, the product of (x) the result of the following formula:
(the Dividend Rate)(N/365)and (y) the Stated Value.


 


(ii)                                  “Approved Stock Plan” means any employee
benefit plan which has been approved by the Board of Directors of the Company,
pursuant to which the Company’s securities may be issued to employees,
officers, directors or consultants for services provided to the Company.


 


(iii)                               “Bloomberg” means Bloomberg Financial
Markets.


 


(iv)                              “Business Day” means any day other than
Saturday, Sunday or other day on which commercial banks in The City of New York
are authorized or required by law to remain closed.


 


(v)                                 “Calendar Period” means each of the
following periods:  the period beginning
on and including January 1 and ending on and including June 30; the period
beginning on and including July 1 and ending on and including December 31.


 


(vi)                              “Calendar
Quarter” means each of the following periods:  the period beginning on and including
January 1 and ending on and including March 31; the period beginning on and
including April 1 and ending on and including June 30; the period beginning on
and including July 1 and ending on and including September 30; and the period
beginning on and including October 1 and ending on and including December 31.


 


(vii)                           “Closing Bid Price” means, for any security
as of any date, the last closing bid price for such security on the Principal
Market as reported by Bloomberg, or if the Principal Market begins to operate
on an extended hours basis, and does not designate the closing trade price,
then the last trade price at 4:00:00 p.m., New York City Time, as reported by
Bloomberg, or if the foregoing do not apply, the last closing trade price of
such security in the over-the-counter market on the electronic bulletin board
for such security as reported by


 


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Bloomberg, or, if no last
closing trade price is reported for such security by Bloomberg, the last
closing ask price of such security as reported by Bloomberg, or, if no last
closing ask price is reported for such security by Bloomberg, the average of
the highest bid price and the lowest ask price of any market makers for such
security as reported in the “pink sheets” by Pink Sheets LLC (formerly the
National Quotation Bureau, Inc.).  If
the Closing Bid Price cannot be calculated for such security on such date on
any of the foregoing bases, the Closing Bid Price of such security on such date
shall be the fair market value as determined in good faith by the Company and
not reasonably objected to by the holders of not less than a majority of the
Preferred Shares then outstanding.  If
the Company and the holders of Preferred Shares are unable to agree upon the
fair market value of the Common Stock, then such dispute shall be resolved
pursuant to Section 2(d)(iii) below. 
All such determinations shall be appropriately adjusted for any stock
dividend, stock split or other similar transaction during such period.


 


(viii)                        “Conversion Amount” means the sum of (1) the
Additional Amount and (2) the Stated Value.


 


(ix)                                “Conversion Price” means as of any
Conversion Date or other date of determination, $2.3268, subject to adjustment
as provided herein.


 


(x)                                   “Convertible Securities” means any stock or
securities (other than Options) directly or indirectly convertible into or
exchangeable or exercisable for Common Stock.


 


(xi)                                “Dividend Rate” means (i) for the period
beginning on the Issuance Date and ending on June 30, 2005, a rate of 8% per
annum; (ii) for each Calendar Quarter thereafter, an additional 1% per Calendar
Quarter, until the maximum Dividend Rate equals 14% per annum.


 


(xii)                             “Issuance Date” means the first date on
which Preferred Shares are issued pursuant to the Securities Purchase
Agreement.


 


(xiii)                          “N” means the number of days from, but
excluding, the last Dividend Date with respect to which dividends have been
paid by the Company on the applicable Preferred Share, or the Issuance Date if
no Dividend Date has occurred, through and including the Conversion Date or
other date of determination for such Preferred Share, as the case may be, for
which such determination is being made.


 


(xiv)                         “Options” means any rights, warrants or
options to subscribe for or purchase Common Stock or Convertible Securities.


 


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


 


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


 


(xvii)                      “Registration Rights Agreement” means that
certain registration rights agreement between the Company and the initial
holders of the Preferred Shares relating to the filing of a registration
statement covering the resale of the shares of Common Stock issuable upon
conversion of the Preferred Shares and exercise of the Warrants, as such
agreement may be amended from time to time as provided in such agreement.


 


(xviii)                   “Securities Purchase Agreement” means that
certain securities purchase agreement between the Company and the initial
holders of the Preferred Shares, as such agreement may be amended from time to
time as provided in such agreement.


 


(xix)                           “Stated Value” means $100 plus the aggregate
amount of all Accrued Dividend Payments.


 


(xx)                              “Warrants” means the warrants to purchase
shares of Common Stock issued by the Company pursuant to the Securities
Purchase Agreement.


 


(b)                                 Holder’s
Conversion Right; Mandatory Redemption or Conversion.  Subject to the provisions of Section 5 and
Section 12, at any time or times on or after the Issuance Date, any holder of
Preferred Shares shall be entitled to convert any whole or fractional number of
Preferred Shares into fully paid and nonassessable shares of Common Stock in
accordance with Section 2(d) at the Conversion Rate (as defined below).  The Company shall not issue any fraction of
a share of Common Stock upon any conversion. 
All shares of Common Stock (including fractions thereof) issuable upon conversion
of more than one Preferred Share by a holder thereof shall be aggregated for
purposes of determining whether the conversion would result in the issuance of
a fraction of a share of Common Stock. 
No fractional shares shall be issued, instead the Company shall pay to a
holder an amount in cash equal to the product of the fractional share and the
Conversion Price.


 


(c)                                  Conversion.  The number of shares of Common Stock
issuable upon conversion of each Preferred Share pursuant to Section 2(b) shall
be determined according to the following formula (the “Conversion Rate”):


 


Conversion Amount

Conversion Price


 


(d)                                 Mechanics
of Conversion.  The conversion of
Preferred Shares shall be conducted in the following manner:


 


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(i)                                     Holder’s
Delivery Requirements.  To convert
Preferred Shares into shares of Common Stock on any date (the “Conversion Date”), the holder thereof shall
(A) transmit by facsimile (or otherwise deliver), for receipt on or prior to
11:59 p.m., New York City Time, on such date, and also send by overnight
courier a copy of an executed notice of conversion in the form attached hereto
as Exhibit I (the “Conversion Notice”)
to the Company and the Company’s designated transfer agent (the “Transfer Agent”) and (B) if required by
Section 2(d)(vii), surrender to a common carrier for delivery to the Company as
soon as practicable following such date the original certificates representing
the Preferred Shares being converted (or an indemnification undertaking with
respect to such shares in the case of their loss, theft or destruction) (the “Preferred Stock Certificates”).


 


(ii)                                  Company’s
Response.  Upon receipt by the
Company of a copy of a Conversion Notice, the Company shall (I) as soon as
practicable, but in any event within two (2) Business Days, send, via
facsimile, a confirmation of receipt of such Conversion Notice to such holder
and the Transfer Agent, which confirmation shall constitute an instruction to
the Transfer Agent to process such Conversion Notice in accordance with the
terms herein and (II) on or before the third (3rd) Business Day following the
date of receipt by the Company of the facsimile copy of such Conversion Notice
(the “Share Delivery Date”), (A)
issue and deliver to the address as specified in the Conversion Notice, a
certificate, registered in the name of the holder or its designee, for the
number of shares of Common Stock to which the holder shall be entitled, or (B)
if the Transfer Agent is participating in the Depository Trust Company (“DTC”) Fast Automated Securities Transfer
program, and so long as the certificates therefor do not require a legend
(pursuant to the terms of the Securities Purchase Agreement) and the holder
thereof is not then required to return such certificate for the placement of a
legend thereon (pursuant to the Securities Purchase Agreement), the Company
shall cause the Transfer Agent to promptly electronically transmit the Common
Stock issuable upon conversion to the holder by crediting the account of the
holder or its nominee with DTC through its Deposit Withdrawal Agent Commission
system.  If the number of Preferred
Shares represented by the Preferred Stock Certificate(s) submitted for
conversion, as may be required pursuant to Section 2(d)(vii), is greater than
the number of Preferred Shares being converted, then the Company shall, as soon
as practicable and in no event later than five (5) Business Days after receipt
of the Preferred Stock Certificate(s) (the “Preferred
Stock Delivery Date”) and at its own expense, issue and deliver to
the holder a new Preferred Stock Certificate representing the number of
Preferred Shares not converted.


 


(iii)                               Dispute
Resolution.  In the case of a
dispute as to the determination of the Closing Bid Price or the arithmetic
calculation of the Conversion Rate, the Company shall instruct the Transfer
Agent to issue to the holder the number of shares of Common Stock that is not
disputed and shall


 


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transmit an explanation
of the disputed determinations or arithmetic calculations to the holder via
facsimile (the “Dispute Notice”)
within two (2) Business Days of receipt of such holder’s Conversion Notice or
other date of determination.  If such
holder and the Company are unable to agree upon the determination of the
Closing Bid Price or arithmetic calculation of the Conversion Rate within five
(5) Business Days of such Dispute Notice, then the Company shall by the tenth
(10th) Business Day following delivery of the Dispute Notice submit via
facsimile (A) the disputed determination of the Closing Bid Price to an
independent, reputable investment bank selected by the Company and not
reasonably objected to by the holders of at least a majority of the Preferred
Shares then outstanding or (B) the disputed arithmetic calculation of the
Conversion Rate to the Company’s independent, outside accountant.  The Company shall cause the investment bank
or the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the holder of the results no later than
ten (10) Business Days from the time it receives the disputed determinations or
calculations.  Such investment bank’s or
accountant’s determination or calculation, as the case may be, shall be binding
upon all parties absent manifest error. 
All fees and expenses associated with the determinations made by such
investment bank or accountant shall be paid by the party whose calculations
were furthest from the determinations made by such third party.


 


(iv)                              Record
Holder.  The Person or Persons
entitled to receive the shares of Common Stock issuable upon a conversion of
Preferred Shares shall be treated for all purposes as the record holder or
holders of such shares of Common Stock on the Conversion Date.


 


(v)                                 Company’s
Failure to Timely Convert.


 


(A)                              Cash
Damages.  If within five (5)
Business Days after the Company’s receipt of the facsimile copy of a Conversion
Notice the Company shall fail to issue and deliver a certificate to a holder or
credit such holder’s balance account with DTC for the number of shares of
Common Stock to which such holder is entitled upon such holder’s conversion of
Preferred Shares (excluding shares not delivered as a result of an ongoing
dispute as to the Conversion Rate pursuant to Section 3(d)(iii) or the
limitations on conversion in Sections 5 and 12), then in addition to all other
available remedies which such holder may pursue hereunder and under the
Securities Purchase Agreement (including indemnification pursuant to Section 8
thereof), the Company shall pay additional damages to such holder for each day
after the Share Delivery Date that such conversion is not timely effected in an
amount equal to 0.5% of the product of (I) the sum of the number of shares
of Common Stock not issued to the holder on or prior to the Share Delivery Date
and to which such holder is entitled as set forth in the applicable Conversion


 


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Notice and (II) the
Closing Bid Price of the Common Stock on the Share Delivery Date, in the case
of the failure to deliver Common Stock.


 


(B)                                Void
Conversion Notice.  If for any
reason a holder has not received all of the shares of Common Stock to which
such holder is entitled prior to the tenth (10th) Business Day after the Share
Delivery Date with respect to a conversion of Preferred Shares, then the
holder, upon written notice to the Company, with a copy to the Transfer Agent,
may void its Conversion Notice with respect to, and retain or have returned, as
the case may be, any Preferred Shares that have not been converted pursuant to
such holder’s Conversion Notice; provided that the voiding of a holder’s
Conversion Notice shall not effect the Company’s obligations to make any
payments which have accrued prior to the date of such notice pursuant to
Section 2(d)(v)(A) or otherwise.


 


(vi)                              Pro
Rata Conversion.  Subject to Section
12, in the event the Company receives a Conversion Notice from more than one
holder of Preferred Shares for the same Conversion Date and the Company can
convert some, but not all, of such Preferred Shares, the Company shall convert
from each holder of Preferred Shares electing to have Preferred Shares
converted at such time a pro rata amount of such holder’s Preferred Shares
submitted for conversion based on the number of Preferred Shares submitted for
conversion on such date by such holder relative to the number of Preferred
Shares submitted for conversion on such date.


 


(vii)                           Book-Entry.  Notwithstanding anything to the contrary set
forth herein, upon conversion of Preferred Shares in accordance with the terms
hereof, the holder thereof shall not be required to physically surrender the
certificate representing the Preferred Shares to the Company unless the full or
remaining number of Preferred Shares represented by the certificate are being
converted.  The holder and the Company
shall maintain records showing the number of Preferred Shares so converted and
the dates of such conversions or shall use such other method, reasonably
satisfactory to the holder and the Company, so as not to require physical
surrender of the certificate representing the Preferred Shares upon each such
conversion.  In the event of any dispute
or discrepancy, such records of the Company establishing the number of
Preferred Shares to which the record holder is entitled shall be controlling
and determinative in the absence of manifest error.  Notwithstanding the foregoing, if Preferred Shares represented by
a certificate are converted as aforesaid, the holder may not transfer the
certificate representing the Preferred Shares unless the holder first
physically surrenders the certificate representing the Preferred Shares to the
Company, whereupon the Company will forthwith issue and deliver upon the order
of the holder a new certificate of like tenor, registered as the holder may
request, representing in the aggregate the remaining number of Preferred Shares
represented by such certificate.  The
holder and any assignee, by acceptance of a certificate, 


 


7

















 


acknowledge and agree
that, by reason of the provisions of this paragraph, following conversion of
any Preferred Shares, the number of Preferred Shares represented by such
certificate may be less than the number of Preferred Shares stated on the face
thereof.  Each certificate for Preferred
Shares shall bear the following legend:


 


ANY TRANSFEREE OF THIS
CERTIFICATE SHOULD CAREFULLY REVIEW THE TERMS OF THE COMPANY’S CERTIFICATE OF
DESIGNATIONS RELATING TO THE PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE,
INCLUDING SECTION 2(d)(vii) THEREOF. 
THE NUMBER OF PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE
LESS THAN THE NUMBER OF PREFERRED SHARES STATED ON THE FACE HEREOF PURSUANT TO
SECTION 2(d)(vii) OF THE CERTIFICATE OF DESIGNATIONS RELATING TO THE PREFERRED
SHARES REPRESENTED BY THIS CERTIFICATE.


 


(viii)                        Conversion at the Company’s
Election.  From and after the second
anniversary of the Issuance Date (the “Conversion
Election Date”), the Company shall have the right, in its sole
discretion, to require that not less than all of the outstanding Preferred
Shares be converted (the “Company’s
Conversion Election”) at the applicable Conversion Rate; provided
that the Conditions to Conversion at the Company’s Election (as set forth below)
are satisfied as of the Company’s Election Conversion Date or waived by holders
of a majority of the Preferred Shares then outstanding.  The Company shall exercise its right to
Company’s Conversion Election by providing each holder of Preferred Shares
written notice (“Company’s Conversion
Election Notice”) by facsimile and overnight courier on the
Conversion Election Date.  The date on
which each of such holders of the Preferred Shares receives the Company’s
Conversion Election Notice is referred to herein as the “Company’s Conversion Election Notice Date.”  The Company’s Conversion Election Notice
shall indicate the date selected by the Company for conversion (the “Company’s Election Conversion Date”), which
date shall be not less than 20 Business Days or more than 60 Business Days
after the Company’s Conversion Election Notice Date.  Subject to the satisfaction of all the conditions of this Section
2(d)(viii), on the Company’s Election Conversion Date each holder of Preferred
Shares selected for conversion will be deemed to have submitted a Conversion
Notice in accordance with Section 2(d)(i) for all of such holder’s Preferred
Shares.  “Conditions to Conversion At The Company’s Election” means the
following conditions:  (i) on each day
during the period beginning on the date which is 90 days prior to the date of
the Company’s Conversion Election Notice Date and ending on and including the
Company’s Election Conversion Date, either (x) the Registration Statement filed
pursuant to the Registration Rights Agreement shall be effective and available
for the resale of all of the Registrable Securities in accordance with the
terms of the 


 


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Registration
Rights Agreement and there shall not have been any Grace Periods during such
period or (y) all shares of Common Stock issuable upon conversion of the
Preferred Shares and exercise of the Warrants shall be eligible for sale
without restriction and without the need for registration under any applicable
federal or state securities laws; (ii) on each day during the period beginning
on the date which is 90 days prior to the date of the Company’s Conversion
Election Notice Date and ending on and including the Company’s Election
Conversion Date, the Common Stock is designated for quotation on the Nasdaq
National Market, the Nasdaq SmallCap Market or The New York Stock Exchange,
Inc. (the “NYSE”) and shall not
have been suspended from trading on such market or exchange (other than
suspensions of not more than two days and occurring prior to the Company’s
Conversion Election Notice Date due to business announcements by the Company)
nor shall delisting or suspension by such exchange or market been threatened or
pending either (A) in writing by such exchange or market or (B) by falling
below the minimum listing maintenance requirements of such exchange or market;
(iii) during the period beginning on the date which is 90 days prior to the
date of the Company’s Conversion Election Notice Date and ending on and
including the Company’s Election Conversion Date, there shall not have occurred
(A) an event constituting a Triggering Event, (B) after delivery of the
Company’s Conversion Election Notice, an event that with the passage of time
and without being cured would constitute a Triggering Event, or (C) the public
announcement of a pending, proposed or intended Change of Control, unless such
pending, proposed or intended Change of Control has been terminated, abandoned
or consummated and the Company has publicly announced such termination,
abandonment or consummation of such Change of Control; (iv) during the period
beginning on the date which is 90 days prior to the date of the Company’s
Conversion Election Notice Date and ending on and including the Company’s
Election Conversion Date, the Company shall have delivered Conversion Shares
upon conversion of the Preferred Shares and Warrant Shares upon exercise of the
Warrants to the holders on a timely basis as set forth in Section 2(d) hereof
and Sections 2(a) and 2(b) of the Warrants, respectively; provided, however,
that for purposes of this Section 2(d)(viii) only, the Company shall be deemed
to have satisfied the conditions set forth in this clause (iv) if on not more
than two occasions prior to the delivery of the Company’s Conversion Election
Notice the Company has failed to meet the requirements set forth in Section
2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants by no more than
three days; (v) the conversion of such Preferred Shares in accordance with this
Certificate of Designations shall not cause 
a violation of the Exchange Cap; (vi) on each day during the period
beginning on the date which is 90 days prior to the Company’s Conversion
Election Notice Date and ending on and including the Company’s Election
Conversion Date, the Company shall not have failed to timely make any payments
(other than payments of amounts less than $1,000 each) within 5 Business Days
of when such payment is due, whether as dividend or penalty payments, pursuant
to this Certificate of Designations, the Securities Purchase Agreement, the
Registration Rights Agreement or the


 


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Warrants,
including, but not limited to, Dividends, whether as an Accrued Dividend
Payment or a Cash Dividend Payment, Default Interest and cash payments due
under the provisions of the Securities Purchase Agreement, the Registration
Rights Agreement, and the Warrants; (vii) the Company shall have no knowledge
of any fact that would cause both (x) the Registration Statement required
pursuant to the Registration Rights Agreement not to be effective and available
for the resale of at least all of the Registrable Securities in accordance with
the terms of the Registration Rights Agreement and (y) any shares of Common
Stock issuable upon conversion of the Preferred Shares and shares of Common
Stock issuable upon exercise of the Warrants not to be eligible for sale
without restriction pursuant to Rule 144(k) and any applicable state securities
laws; and (viii) the Closing Bid Price of the Common Stock for each of the
twenty (20) consecutive trading days (which twenty (20) day period may begin no
sooner than on or after the Conversion Election Date) immediately prior to the
Company’s Conversion Election Notice is at or above $4.65 (subject to
adjustment for stock splits, stock dividends, recapitalizations, combinations,
reverse stock splits or other similar events). 
Notwithstanding the above, any holder of Preferred Shares may convert
such shares (including Preferred Shares selected for conversion hereunder) into
Common Stock pursuant to Section 2(b) on or prior to the date immediately
preceding the Company’s Election Conversion Date.


 


(e)                                  Taxes.  The Company shall pay any and all
documentary, stamp, transfer and other similar taxes that may be payable with
respect to the issuance and delivery of Common Stock upon the conversion of
Preferred Shares (provided that such taxes shall be limited to United States
federal taxes, state taxes and taxes of the jurisdiction of incorporation of the
Company).


 


(f)                                    Adjustment
of Conversion Price upon Subdivision or Combination of Common Stock.  If the Company at any time subdivides (by
any stock split, stock dividend, recapitalization or otherwise) its outstanding
shares of Common Stock into a greater number of shares, the Conversion Price in
effect immediately prior to such subdivision will be proportionately
reduced.  If the Company at any time
combines (by combination, reverse stock split or otherwise) its outstanding
shares of Common Stock into a smaller number of shares, the Conversion Price in
effect immediately prior to such combination will be proportionately increased.


 


(g)                                 Notices.


 


(A)                              Immediately
upon any adjustment of the Conversion Price pursuant to this Section 2(f), the
Company will give written notice thereof to each holder of Preferred Shares,
setting forth in reasonable detail, and certifying, the calculation of such
adjustment.


 


(B)                                The
Company will give written notice to each holder of Preferred Shares at least
ten (10) Business Days prior to the date on which the Company 


 


10

















 


closes its books or takes
a record (I) with respect to any dividend or distribution upon the Common
Stock, (II) with respect to any pro rata subscription offer to holders of
Common Stock or (III) for determining rights to vote with respect to any
Organic Change (as defined in Section 4(a)), dissolution or liquidation,
provided that such information shall be made known to the public prior to or in
conjunction with such notice being provided to such holder.


 


(C)                                The
Company will also give written notice to each holder of Preferred Shares at
least ten (10) Business Days prior to the date on which any Organic Change,
dissolution or liquidation will take place, provided that such information
shall be made known to the public prior to or in conjunction with such notice
being provided to such holder.


 


(3)                                  Redemption
at Option of Holders.


 


(a)                                  Redemption
Option Upon Triggering Event.  In
addition to all other rights of the holders of Preferred Shares contained
herein, after a Triggering Event (as defined below), each holder of Preferred
Shares shall have the right, at such holder’s option, to require the Company to
redeem all or a portion of such holder’s Preferred Shares at a price per
Preferred Share equal to the greater of (i) 120% of the Conversion Amount and
(ii) the product of (A) the Conversion Rate in effect at such time as such
holder delivers a Notice of Redemption at Option of Buyer (as defined below)
and (B) the Closing Bid Price of the Common Stock on the trading day
immediately preceding such Triggering Event on which the Principal Market is
open for trading or if no Closing Bid Price is reported by the Principal Market
on such trading day, then the most recently reported Closing Bid Price (the “Redemption Price”).


 


(b)                                 “Triggering
Event”.  A “Triggering Event” shall
be deemed to have occurred at such time as any of the following events:


 


(i)                                     the
failure of the applicable Registration Statement to be declared effective by
the Securities Exchange Commission (the “SEC”)
on or prior to the date that is 90 days after the applicable Effectiveness
Deadline (as defined in the Registration Rights Agreement;


 


(ii)                                  while
the Registration Statement is required to be maintained effective pursuant to
the terms of the Registration Rights Agreement, the effectiveness of the
Registration Statement lapses for any reason (including, without limitation,
the issuance of a stop order) or is unavailable to the holder of the Preferred Shares
for sale of all of the Registrable Securities (as defined in the Registration
Rights Agreement) in accordance with the terms of the Registration Rights
Agreement, and such lapse or unavailability continues for a period of ten (10)
consecutive trading days or an aggregate of (30) thirty trading days in any 365
day period (excluding days during an Allowable Grace Period (as defined in the
Registration Rights Agreement));


 


11

















 


(iii)                               the
suspension from trading or failure of the Common Stock to be listed on the
Nasdaq National Market, the Nasdaq SmallCap Market or the NYSE for a period of
seven (7) consecutive trading days or for more than an aggregate of fifteen
(15) trading days in any 365-day period;


 


(iv)                              the
Company’s notice or the Transfer Agent’s notice, at the Company’s direction, to
any holder of Preferred Shares, including by way of public announcement, at any
time, of its intention not to comply with a request for conversion of any
Preferred Shares into shares of Common Stock that is tendered in accordance
with the provisions of this Certificate of Designations;


 


(v)                                 if
for any reason a holder has not received all of the shares of Common Stock to
which such holder is entitled (excluding shares not delivered as the result of
an ongoing dispute as to the Conversion Rate pursuant to Section 2(d)(iii) or
the limitations on conversion in Sections 5 and 12) prior to the tenth (10th)
Business Day after the Share Delivery Date with respect to a conversion of Preferred
Shares (a “Conversion Failure”);
or


 


(vi)                              upon
the Company’s receipt of a Conversion Notice, the conversion of any Preferred
Shares in accordance with this Certificate of Designations shall cause a
violation of the Exchange Cap, provided that any redemption of Preferred Shares
pursuant to this Section 3(b)(vi) shall be limited to the number of Preferred
Shares the conversion of which would violate the Exchange Cap.


 


(c)                                  Mechanics
of Redemption at Option of Buyer. 
Within two (2)  Business Days after
the occurrence of a Triggering Event, the Company shall deliver written notice
thereof via facsimile and overnight courier (“Notice
of Triggering Event”) to each holder of Preferred Shares.  Within ten (10) Business Days after the
earlier of a holder’s receipt of a Notice of Triggering Event and such holder
becoming aware of a Triggering Event, any holder of Preferred Shares then
outstanding may require the Company to redeem up to all of such holder’s
Preferred Shares (subject to pro rata cutback described in Section 3(d)(i)
below) by delivering written notice thereof via facsimile and overnight courier
(“Notice of Redemption at Option of Buyer”)
to the Company, which Notice of Redemption at Option of Buyer shall indicate
the number of Preferred Shares that such holder is electing to redeem (subject
to pro rata cutback described in Section 3(d)(i) below).


 


(d)                                 Payment
of Redemption Price.  Upon the
Company’s receipt of a Notice(s) of Redemption at Option of Buyer from any
holder of Preferred Shares, the Company shall immediately notify each holder of
Preferred Shares by facsimile of the Company’s receipt of such notice(s).  The Company shall deliver on the seventh (7th)
Business Day (the “Redemption Date”)
after the Company’s receipt of the first Notice of Redemption at Option of
Buyer the applicable Redemption Price to all holders that deliver a Notice of
Redemption at Option of Buyer prior to the seventh Business Day after the
Company’s receipt of the first Notice of Redemption at Option of Buyer; provided
that, if required by


 


12

















 


Section 2(d)(vii), a
holder’s Preferred Stock Certificates shall have been delivered to the Transfer
Agent.  If the Company is unable to
redeem all of the Preferred Shares submitted for redemption, the Company shall
(i) redeem a pro rata amount from each holder of Preferred Shares based on the
number of Preferred Shares submitted for redemption by such holder relative to
the total number of Preferred Shares submitted for redemption by all holders of
Preferred Shares and (ii) in addition to any remedy such holder of Preferred
Shares may have under this Certificate of Designations and the Securities
Purchase Agreement, pay to each holder interest at the rate of 1.5% per month
(prorated for partial months) in respect of each unredeemed Preferred Share
until paid in full.  From and after the
applicable Redemption Date, unless there shall have been a default in payment
of the Redemption Price, all rights of the holders of the Preferred Shares
designated for redemption in the Notice of Redemption at Option of Buyer
(except the right to receive the Redemption Price with interest upon surrender
of their certificate or certificates, if required) shall cease with respect to
the shares designated for redemption on such date, and such shares shall not
thereafter be transferred on the books of the Company or be deemed outstanding
for any purpose whatsoever.  The
Preferred Shares not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein.


 


(e) Void
Redemption.  In the event that the
Company does not pay the Redemption Price within the time period set forth in
Section 3(d), at any time thereafter and until the Company pays such unpaid
applicable Redemption Price in full, a holder of Preferred Shares shall have
the option to, in lieu of redemption, require the Company to promptly return to
such holder any or all of the Preferred Shares that were submitted for
redemption by such holder under this Section 3 and for which the applicable
Redemption Price (together with any interest thereon) has not been paid, by
sending written notice thereof to the Company via facsimile (the “Void Optional Redemption Notice”).  Upon the Company’s receipt of such Void
Optional Redemption Notice, (i) the Notice of Redemption at Option of Buyer
shall be null and void with respect to those Preferred Shares subject to the
Void Optional Redemption Notice and (ii) the Company shall immediately return
any Preferred Shares subject to the Void Optional Redemption Notice.


 


(f)                                    Disputes;
Miscellaneous.  In the event of a
dispute as to the determination of the arithmetic calculation of the Redemption
Price, such dispute shall be resolved pursuant to Section 2(d)(iii) above with
the term “Redemption Price” being substituted for the term “Conversion
Rate”.  A holder’s delivery of a Void
Optional Redemption Notice and exercise of its rights following such notice
shall not effect the Company’s obligations to make any payments which have
accrued prior to the date of such notice. 
In the event of a redemption pursuant to this Section 3 of less than all
of the Preferred Shares represented by a particular Preferred Stock
Certificate, the Company shall promptly cause to be issued and delivered to the
holder of such Preferred Shares a Preferred Stock Certificate representing the
remaining Preferred Shares which have not been redeemed, if necessary.


 


13

















 


(4)                                  Other
Rights of Holders.


 


(a)                                  Reorganization,
Reclassification, Consolidation, Merger or Sale.  Any recapitalization, reorganization, reclassification,
consolidation, merger, sale of all or substantially all of the Company’s assets
to another Person or other transaction which is effected in such a way that holders
of Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock is referred to herein as “Organic
Change.” Prior to the consummation of any (i) sale of all or
substantially all of the Company’s assets to an acquiring Person or (ii) other
Organic Change following which the Company is not a surviving entity, the
Company will secure from the Person purchasing such assets or the successor,
or, if applicable, the parent of the successor, resulting from such Organic
Change (in each case, the “Acquiring Entity”)
a written agreement (in form and substance reasonably satisfactory to the
holders of at least a majority of the Preferred Shares then outstanding) to deliver
to each holder of Preferred Shares in exchange for such shares, a security of
the Acquiring Entity evidenced by a written instrument substantially similar in
form and substance to the Preferred Shares, including, without limitation,
having a stated value and senior equity ranking equal to the Stated Value and
senior equity ranking of the Preferred Shares held by such holder, and
reasonably satisfactory to the holders of at least a majority of the Preferred
Shares then outstanding.  Prior to the
consummation of any other Organic Change, the Company shall make appropriate
provision (in form and substance reasonably satisfactory to the holders of at
least a majority of the Preferred Shares then outstanding) to insure that each
of the holders of the Preferred Shares will thereafter have the right to
acquire and receive in lieu of or in addition to (as the case may be) the
shares of Common Stock immediately theretofore acquirable and receivable upon
the conversion of such holder’s Preferred Shares such shares of stock,
securities or assets that would have been issued or payable in such Organic
Change with respect to or in exchange for the number of shares of Common Stock
which would have been acquirable and receivable upon the conversion of such
holder’s Preferred Shares as of the date of such Organic Change (without taking
into account any limitations or restrictions on the convertibility of the
Preferred Shares).  In the event that an
Acquiring Entity is directly or indirectly controlled by a Person whose common
stock or similar equity interest is listed, designated or quoted on a
securities exchange or trading market, the holders of a majority of the
Preferred Shares then outstanding may elect to treat such Person as the
Acquiring Entity for purposes of this Section 4(a)


 


(b)                                 Optional
Redemption Upon Change of Control. 
In addition to the  rights of the
holders of Preferred Shares under Section 4(a), upon a Change of Control (as
defined below) of the Company each holder of Preferred Shares shall have the
right, at such holder’s option, to require the Company to redeem all or a
portion of such holder’s Preferred Shares at a price per Preferred Share equal
to the greater of (x) 120% of the Conversion Amount and (y) the product of (A)
the Conversion Rate in effect at such time as such holder delivers a Notice of
Redemption Upon Change of Control (as defined below) and (B) the Closing Bid
Price of the Common Stock on the trading day


 


14

















 


immediately preceding the
public announcement of such Change of Control on which the Principal Market is
open for trading or if no Closing Bid Price is reported by the Principal Market
on such trading day, then the most recently reported Closing Bid Price (“Change of Control Redemption Price”).  No sooner than 30 Business Days nor later
than 10 Business Days prior to the consummation of a Change of Control, but not
prior to the public announcement of such Change of Control, the Company shall
deliver written notice thereof via facsimile and overnight courier (a “Notice of Change of Control”) to each
holder of Preferred Shares.  At any time
during the period beginning after receipt of a Notice of Change of Control (or,
in the event a Notice of Change of Control is not delivered at least 10
Business Days prior to a Change of Control, at any time on or after the date
which is 10 Business Days prior to a Change of Control) and ending on the date
of such Change of Control, any holder of the Preferred Shares then outstanding
may require the Company to redeem all or a portion of the holder’s Preferred
Shares then outstanding by delivering written notice thereof via facsimile and
overnight courier (a “Notice of Redemption
Upon Change of Control”) to the Company, which Notice of Redemption
Upon Change of Control shall indicate (i) the number of Preferred Shares that
such holder is submitting for redemption, and (ii) the applicable Change of
Control Redemption Price, as calculated pursuant to this Section 4(b).  Upon the Company’s receipt of a Notice(s) of
Redemption Upon Change of Control from any holder of Preferred Shares, the
Company shall promptly, but in no event later than two (2) Business Days
following such receipt, notify each holder of Preferred Shares by facsimile of
the Company’s receipt of such Notice(s) of Redemption Upon Change of
Control.  The Company shall deliver the
applicable Change of Control Redemption Price simultaneously with the
consummation of the Change of Control; provided that, if required by Section
2(d)(vii), a holder’s Preferred Stock Certificates shall have been delivered to
the Company.  Payments provided for in
this Section 4(b) shall have priority to payments to other stockholders in
connection with a Change of Control. 
For purposes of this Section 4(b), “Change
of Control” means (i) the consolidation, merger or other business
combination of the Company with or into another Person (other than (A) a
consolidation, merger or other business combination in which holders of the
Company’s voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities, or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company), (ii) the sale or
transfer of all or substantially all of the Company’s assets, or (iii) a purchase,
tender or exchange offer made to and accepted by the holders of more than 50%
of the aggregate voting power of the outstanding Common Stock.


 


(c)                                  Company
Redemption Right.  Notwithstanding
Sections 4(a) and 4(b), at any time from and after the delivery of a Notice of
a Change of Control but not later than the fifth (5th) Business Day
immediately preceding the consummation of such Change of Control, the Company
at its option may deliver a written notice via facsimile and overnight courier
to each holder of the Preferred Shares indicating that the Company is electing
to redeem all, but not less than all, of the Preferred Shares (an “Company 


 


15

















 


Change of Control Redemption Notice”) and
setting forth the date selected by the Company for redemption (the “Company Change of Control Redemption Date”).  The Company Change of Control Redemption
Notice shall be irrevocable; provided, that it may be subject to consummation
of a Change of Control and is therefore revocable is the proposed Change of
Control is terminated.  If the
Conditions to Company Change of Control Redemption (as set forth below) are
satisfied or waived in writing by the holders of a majority of the Preferred
Shares outstanding, then the Company shall have the right to require the
holders of the Preferred Shares to submit for redemption all of the Preferred
Shares in exchange for an amount in cash, payable by wire transfer of
immediately available funds, equal to the Change of Control Redemption Price.  “Conditions
to Company Change of Control Redemption” means the following
conditions: (i) on each day during the period beginning on the date the Company
delivers its Company Change of Control Redemption Notice to each holder of the
Preferred Shares and ending on and including the date immediately preceding the
Company Change of Control Redemption Date, either (x) the Registration
Statement filed pursuant to the Registration Rights Agreement shall be
effective and available for the resale of all of the Registrable Securities in
accordance with the terms of the Registration Rights Agreement and there shall
not have been any Grace Periods during such period or (y) all shares of Common
Stock issuable upon conversion of the Preferred Shares and exercise of the
Warrants shall be eligible for sale without restriction and without the need
for registration under any applicable federal or state securities laws; (ii) on
each day during the period beginning on the date the Company delivers its
Company Change of Control Redemption Notice and ending on and including the
date immediately preceding the Company Change of Control Redemption Date, the
Common Stock is designated for quotation on the Nasdaq National Market, the
Nasdaq SmallCap Market or the NYSE and shall not have been suspended from
trading on such exchange or market (other than suspensions of not more than two
days and occurring prior to the Company Change of Control Redemption Notice
Date due to business announcements by the Company) nor shall delisting or suspension
by such exchange or market been threatened or pending either (A) in writing by
such exchange or market or (B) by falling below the minimum listing maintenance
requirements of such exchange or market; (iii) during the period beginning on
the date which is 90 days prior to the date of the Company’s delivery of its
Company Change of Control Redemption Notice and ending on and including the
Company Change of Control Redemption Date, the Company shall have delivered
Conversion Shares upon conversion of the Preferred Shares and Warrant Shares
upon exercise of the Warrants to the Buyers on a timely basis as set forth in
Section 2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants,
respectively; provided, however, that for purposes of this Section 4(d) only,
the Company shall be deemed to have satisfied the conditions set forth in this
clause (iii) if on not more than two occasions prior to the Company Change of
Control Redemption Notice Date the Company has failed to meet the requirements
set forth in Section 2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants
by no more than three days; (iv) the conversion of any Preferred Shares in
accordance with this Certificate of Designations shall not cause a violation of
the Exchange Cap; (v) during the period beginning on the 90 days prior to the
Company Change of Control Redemption Notice Date and ending on and including
the Company Change of Control Redemption Date, the


 


16

















 


Company
shall not have failed to timely make any payments (other than payments of
amounts less than $1,000 each) within 5 Business Days of when such payment is
due, whether as dividends or penalty payments, pursuant to this Certificate of
Designations, the Securities Purchase Agreement, the Registration Rights
Agreement or the Warrants; and (vi) the Company shall have no knowledge of any
fact that would cause both (x) the Registration Statement required pursuant to
the Registration Rights Agreement not to be effective and available for the
resale of at least all of the Registrable Securities in accordance with the
terms of the Registration Rights Agreement and (y) any shares of Common Stock
issuable upon conversion of the Preferred Shares and shares of Common Stock
issuable upon exercise of the Warrants not to be eligible for sale without
restriction pursuant to Rule 144(k) and any applicable state securities
laws.  Notwithstanding the above, any
holder of Preferred Shares may convert such shares (including Preferred Shares
selected for redemption) into Common Stock pursuant to Section 2(b) on or prior
to the date immediately preceding the Company Change of Control Redemption
Date.


 


(d)                                 Redemption
At The Company’s Election.  At any
time or times on or after the second anniversary of the Issuance Date, the
Company shall have the right, in its sole discretion, to require that some or
all of the outstanding Preferred Shares be redeemed (“Company Redemption Election”) at a price
per Preferred Share equal to 120% of the Conversion Amount (the “Company Election Redemption Price”);
provided that the Conditions to Company Redemption Election (as set forth
below) are satisfied or waived by holders of no less than a majority of the
Preferred Shares then outstanding; provided, however, that the
Company may not deliver more than two (2) Company’s Redemption Election Notice
hereunder in any twelve (12) month period. 
The Company shall exercise its right to Company’s Redemption Election by
providing each holder of Preferred Shares written notice (“Company’s Redemption Election Notice”) by
facsimile and overnight courier.  The
date on which each of such holders of the Preferred Shares receives the
Company’s Redemption Election Notice is referred to herein as the “Company’s Redemption Election Notice Date.”  If the Company elects to redeem some, but
not all, of such Preferred Shares then outstanding, the Company shall redeem an
amount from each holder of such Preferred Shares equal to the product of (I)
the total number of Preferred Shares which the Company has elected to redeem
multiplied by (II) such holder’s pro rata amount of Preferred Shares (based on
the number of Preferred Shares issued to such holder on the Issuance Date
relative to the total number of Preferred Shares issued to all holders on the Issuance
Date (such relative amount being referred to herein as each such holder’s “Allocation Percentage”)) (such amount with
respect to each holder of such Preferred Shares being referred to herein as its
“Pro Rata Redemption Amount”).  In the event that any initial holder of the
Preferred Shares shall sell or otherwise transfer any of such holder’s
Preferred Shares, the transferee shall be allocated a pro rata portion of such
holder’s Allocation Percentage.  The
Company’s Redemption Election Notice shall indicate (x) the aggregate number of
such Preferred Shares the Company has selected for redemption, (y) the date
selected by the Company for redemption (the “Company’s
Election Redemption Date”), which date shall be not less than 10
Business Days or more than 60 Business Days after the Company’s Redemption
Election Notice Date, and (z) each holder’s Pro Rata Redemption Amount. 


 


17

















 


If the
Company has exercised its right of Company Redemption Election and the Conditions
to Company Redemption Election have been satisfied then the Preferred Shares
selected for redemption shall be redeemed on the Company Election Redemption
Date by payment by or on behalf of the Company to each holder of Preferred
Shares of the Company Election Redemption Price for each Preferred Share
selected for redemption.  If the Company
fails to pay the full Company Election Redemption Price with respect to any
Preferred Shares, then the Company Redemption Election shall be null and void
with respect to such Preferred Shares and the holder of such Preferred Shares
shall be entitled to all the rights of a holder of outstanding Preferred Shares
set forth in this Certificate of Designations. 
“Conditions to Company Redemption
Election” means the following conditions:  (i) on each day during the period beginning on the date the
Company delivers its Company’s Redemption Election Notice to each holder of the
Preferred Shares and ending on and including the date immediately preceding the
Company’s Election Redemption Date, either (x) the Registration Statement filed
pursuant to the Registration Rights Agreement shall be effective and available
for the resale of all of the Registrable Securities in accordance with the
terms of the Registration Rights Agreement and there shall not have been any
Grace Periods during such period or (y) all shares of Common Stock issuable
upon conversion of the Preferred Shares and exercise of the Warrants shall be
eligible for sale without restriction and without the need for registration
under any applicable federal or state securities laws; (ii) on each day during
the period beginning on the date the Company delivers its Company’s Redemption
Election Notice and ending on and including the date immediately preceding the
Company’s Election Redemption Date, the Common Stock is designated for
quotation on the Nasdaq National Market, the Nasdaq SmallCap Market or the NYSE
and shall not have been suspended from trading on such exchange or market
(other than suspensions of not more than two days and occurring prior to the
Company’s Redemption Election Notice Date due to business announcements by the
Company) nor shall delisting or suspension by such exchange or market been
threatened or pending either (A) in writing by such exchange or market or (B)
by falling below the minimum listing maintenance requirements of such exchange
or market; (iii) during the period beginning on the date which is 90 days prior
to the date of the Company Redemption Election Notice Date and ending on and including
the Company’s Election Redemption Date, the Company shall have delivered
Conversion Shares upon conversion of the Preferred Shares and Warrant Shares
upon exercise of the Warrants to the Buyers on a timely basis as set forth in
Section 2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants,
respectively; provided, however, that for purposes of this Section 4(d) only,
the Company shall be deemed to have satisfied the conditions set forth in this
clause (iii) if on not more than two occasions prior to the Company’s
Redemption Election Notice Date the Company has failed to meet the requirements
set forth in Section 2(d)(ii) hereof and Sections 2(a) and 2(b) of the Warrants
by no more than three days; (iv) the conversion of any Preferred Shares in accordance
with this Certificate of Designations shall not cause a violation of the
Exchange Cap; (v) during the period beginning on the 90 days prior to the
Company’s Redemption Election Notice Date and ending on and including the
Company’s Election Redemption Date, the Company shall not have failed to timely
make any payments (other than payments of amounts less than $1,000 each) within
5 Business


 


18

















 


Days
of when such payment is due, whether as dividends or penalty payments, pursuant
to this Certificate of Designations, the Securities Purchase Agreement, the
Registration Rights Agreement or the Warrants; and (vi) the Company shall have
no knowledge of any fact that would cause both (x) the Registration Statement
required pursuant to the Registration Rights Agreement not to be effective and
available for the resale of at least all of the Registrable Securities in
accordance with the terms of the Registration Rights Agreement and (y) any
shares of Common Stock issuable upon conversion of the Preferred Shares and
shares of Common Stock issuable upon exercise of the Warrants not to be
eligible for sale without restriction pursuant to Rule 144(k) and any
applicable state securities laws. 
Notwithstanding the above, any holder of Preferred Shares may convert
such shares (including Preferred Shares selected for redemption) into Common
Stock pursuant to Section 2(b) on or prior to the date immediately preceding
the Company’s Election Redemption Date.


 


(e)                                  Purchase
Rights.  If at any time the Company
grants, issues or  sells any Options,
Convertible Securities or rights to purchase stock, warrants, securities or
other property pro rata to the record holders of any class of Common Stock (the
“Purchase Rights”), then the holders
of Preferred Shares will be entitled to acquire, upon the terms applicable to
such Purchase Rights, the aggregate Purchase Rights which such holder could
have acquired if such holder had held the number of shares of Common Stock
acquirable upon complete conversion of the Preferred Shares (without taking
into account any limitations or restrictions on the convertibility of the
Preferred Shares) immediately before the date on which a record is taken for
the grant, issuance or sale of such Purchase Rights, or, if no such record is
taken, the date as of which the record holders of Common Stock are to be
determined for the grant, issue or sale of such Purchase Rights.


 


(5)                                  Limitation
on Beneficial Ownership.  The
Company shall not effect and shall have no obligation to effect any conversion
of Preferred Shares, and no holder of Preferred Shares shall have the right to
convert any Preferred Shares, to the extent that after giving effect to such
conversion, the beneficial owner of such shares (together with such Person’s
affiliates) would have acquired, through conversion of Preferred Shares or
otherwise, beneficial ownership of a number of shares of Common Stock that
exceeds 4.99% of the number of shares of Common Stock outstanding immediately
after giving effect to such conversion. 
If the Company can convert some, but not all, of the outstanding
Preferred Shares pursuant a Company’s Conversion Election as a result of the
limitations set forth in this Section 5, the Company shall convert from each
holder of Preferred Shares the maximum number of shares allowable under this
Section 5 on the Company’s Election Conversion Date. The Company shall then
have the right to make such number of additional Company’s Conversion Elections
as are necessary to convert all of the remaining outstanding Preferred
Shares.  Any holder of Preferred Shares
who is affected by the limitations on conversion set forth in this Section 5
shall transfer a number shares of Common Stock, up to all of the shares of
Common Stock then held by such holder, within twenty (20) Business Days of each
Company’s Conversion Election Notice Date so that the Company may convert from
such holders the maximum number of shares of Preferred Stock allowable under
this Section 5 on each Company’s Election Conversion Date. For purposes of the
first sentence of this Section 5, the number of shares of Common Stock
beneficially owned by a Person and its


 


19

















 


affiliates shall include
the number of shares of Common Stock issuable upon conversion of the Preferred
Shares with respect to which the determination of such sentence is being made,
but shall exclude the number of shares of Common Stock which would be issuable
upon (A) conversion of the remaining, nonconverted Preferred Shares
beneficially owned by such Person or any of its affiliates and (B) exercise or
conversion of the unexercised or unconverted portion of any other securities of
the Company (including, without limitation, any warrants) subject to a
limitation on conversion or exercise analogous to the limitation contained
herein beneficially owned by such Person or any of its affiliates.  Except as set forth in the preceding
sentence, for purposes of this Section 5, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended.  For purposes of this
Section 5, in determining the number of outstanding shares of Common Stock, a
holder may rely on the number of outstanding shares of Common Stock as reflected
in (1) the Company’s most recent Form 10-Q, Form 10-K or other public filing
with the SEC, as the case may be, (2) a more recent public announcement by the
Company, or (3) any other notice by the Company or its transfer agent setting
forth the number of shares of Common Stock outstanding.  Upon the written request of any holder, the
Company shall promptly, but in no event later than five (5) Business Days
following the receipt of such notice, confirm in writing to any such holder the
number of shares of Common Stock then outstanding.  In any case, the number of outstanding shares of Common Stock
shall be determined after giving effect to conversions of Preferred Shares and
exercise of the Warrants by such holder and its affiliates since the date as of
which such number of outstanding shares of Common Stock was reported.


 


(6)                                  Reservation
of Shares.  The Company shall, so
long as any of the Preferred Shares are outstanding, take all action necessary
to reserve and keep available out of its authorized and unissued Common Stock,
solely for the purpose of effecting the conversions of the Preferred Shares,
such number of shares of Common Stock as shall from time to time be sufficient
to effect the conversion of all of the Preferred Shares, including Dividends payable
by inclusion of the Dividend in the Stated Value, then outstanding; provided
that the number of shares of Common Stock so reserved shall at no time be less
than the number of shares of Common Stock for which the Preferred Shares are at
any time convertible (without regard to any limitations on conversions).  The initial number of shares of Common Stock
reserved for conversions of the Preferred Shares and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Preferred Shares based on the number of Preferred Shares held by each
holder at the time of issuance of the Preferred Shares or increase in the
number of reserved shares, as the case may be. 
In the event a holder shall sell or otherwise transfer any of such
holder’s Preferred Shares, each transferee shall be allocated a pro rata
portion of the number of reserved shares of Common Stock reserved for such
transferor.  Any shares of Common Stock
reserved and allocated to any Person which ceases to hold any Preferred Shares
shall be allocated to the remaining holders of Preferred Shares, pro rata based
on the number of Preferred Shares then held by such holders.


 


(7)                                  Voting
Rights.  On any matter presented to
the stockholders of the Company for their action or consideration at any
meeting of stockholders of the Company (or by written action of stockholders in
lieu of meeting), each holder of outstanding Preferred Shares shall be entitled
to the number of votes equal to the number of whole shares of Common Stock


 


20

















 


into which the Preferred
Shares held by such holder are convertible (subject to the limitations of
Section 5 above) as of the record date for determining stockholders entitled to
vote on such matter.  Except as provided
by law, holders of Preferred Shares shall vote together with the holders of
Common Stock, and with the holders of any other series of preferred stock the
terms of which so provide, as a single class.


 


(8)                                  Liquidation,
Dissolution, Winding-Up.  In the
event of any voluntary or involuntary liquidation, dissolution or winding up of
the Company, the holders of the Preferred Shares shall be entitled to receive
in cash out of the assets of the Company, whether from capital or from earnings
available for distribution to its stockholders (the “Liquidation Funds”), before any amount shall be paid to the
holders of any of the capital stock of the Company of any class junior in rank
to the Preferred Shares in respect of the preferences as to distributions and
payments on the liquidation, dissolution and winding up of the Company, an
amount per Preferred Share equal to the greater of (x) the Conversion Amount
and (y) the product of (A) the Conversion Rate in effect at such time of such
liquidation, dissolution or winding up and (B) the Closing Bid Price of the
Common Stock on the trading day immediately preceding such liquidation,
dissolution or winding up on which the Principal Market is open for trading or
if no Closing Bid Price is reported by the Principal Market on such trading
day, then the most recently reported Closing Bid Price; provided that, if the
Liquidation Funds are insufficient to pay the full amount due to the holders of
Preferred Shares and holders of shares of other classes or series of preferred
stock of the Company that are of equal rank with the Preferred Shares as to
payments of Liquidation Funds (the “Pari
Passu Shares”), then each holder of Preferred Shares and Pari Passu
Shares shall receive a percentage of the Liquidation Funds equal to the full
amount of Liquidation Funds payable to such holder as a liquidation preference,
in accordance with their respective Certificate of Designations, Preferences
and Rights, as a percentage of the full amount of Liquidation Funds payable to
all holders of Preferred Shares and Pari Passu Shares.  The purchase or redemption by the Company of
stock of any class, in any manner permitted by law, shall not, for the purposes
hereof, be regarded as a liquidation, dissolution or winding up of the Company.  Neither the consolidation or merger of the
Company with or into any other Person, nor the sale or transfer by the Company
of less than substantially all of its assets, shall, for the purposes hereof,
be deemed to be a liquidation, dissolution or winding up of the Company.


 


(9)                                  Preferred
Rank.  All shares of Common Stock
shall be of junior rank to all Preferred Shares with respect to the preferences
as to distributions and payments upon the liquidation, dissolution and winding
up of the Company.  The rights of the
shares of Common Stock shall be subject to the preferences and relative rights
of the Preferred Shares.  Without the
prior express written consent of the holders of not less than a majority of the
then outstanding Preferred Shares, the Company shall not hereafter (v)
authorize or issue additional or other capital stock (of the Company or any
Subsidiary (as defined in the Securities Purchase Agreement) of the Company)
that is of senior or pari-passu rank to the Preferred Shares in respect of the
preferences as to distributions and payments upon the liquidation, dissolution
and winding up of the Company, (w) permit any of its Subsidiaries to issue any
preferred stock to any Person other than the Company (and if the Subsidiaries
issue to the Company any such preferred stock, then the Company shall not sell,
assign, convey or otherwise transfer in any way, directly or indirectly, such
shares of preferred stock), (x) increase or decrease the authorized


 


21

















 


number of shares of
Series B Preferred Stock or (y) redeem or repurchase any outstanding securities
of the Company except pursuant to the Company’s Stockholder Rights Plan, an
Approved Stock Plan or as provided for with respect to the Preferred Shares.  Without the prior express written consent of
the holders of not less than a majority of the Preferred Shares then
outstanding, the Company shall not hereafter authorize or make any amendment to
the Company’s Certificate of Incorporation or bylaws, or file any resolution of
the board of directors of the Company with the Secretary of State of the State
of Delaware or enter into any agreement containing any provisions, which would
adversely affect or otherwise impair the rights or relative priority of the
holders of the Preferred Shares relative to the holders of the Common Stock or
the holders of any other class of capital stock.  In the event of the merger or consolidation of the Company with
or into another corporation, the Preferred Shares shall maintain their relative
powers, designations and preferences provided for herein and no merger shall
result inconsistent  therewith.


 


(10)                            Participation.  Subject to the rights of the holders, if
any, of the Pari Passu Shares, the holders of the Preferred Shares shall, as
holders of Preferred Stock, be entitled to such dividends paid and
distributions made to the holders of Common Stock to the same extent as if such
holders of Preferred Shares had converted the Preferred Shares into Common
Stock (without regard to any limitations on conversion herein or elsewhere) and
had held such shares of Common Stock on the record date for such dividends and
distributions.  Payments under the
preceding sentence shall be made concurrently with the dividend or distribution
to the holders of Common Stock.


 


(11)                            Restriction
on Redemption and Cash Dividends. 
Unless all of the Preferred Shares have been converted or redeemed as
provided herein, the Company shall not, directly or indirectly, redeem, or
declare or pay any cash dividend or distribution on, its capital stock (other
than the Preferred Shares) without the prior express written consent of the
holders of not less than a majority of the Preferred Shares then outstanding;
provided that the foregoing shall not preclude required redemptions pursuant to
an Approved Stock Plan.


 


(12)                            Limitation
on Number of Conversion Shares. 
Notwithstanding anything to the contrary contained herein, the Company
shall not be obligated to issue any shares of Common Stock upon conversion of
the Preferred Shares if the issuance of such shares of Common Stock would
exceed that number of shares of Common Stock which the Company may issue upon
conversion of the Preferred Shares without breaching the Company’s obligations
under the rules or regulations of the Principal Market, or the market or
exchange where the Common Stock is then traded (the “Exchange Cap”), except that such limitation shall not apply in
the event that the Company (a) obtains the approval of its stockholders as
required by the applicable rules of the Principal Market (or any successor rule
or regulation) for issuances of Common Stock in excess of such amount, or (b)
obtains a written opinion from outside counsel to the Company that such
approval is not required, which opinion shall be reasonably satisfactory to the
holders of at least a majority of the Preferred Shares then outstanding.  Until such approval or written opinion is
obtained, no purchaser of Preferred Shares pursuant to the Securities Purchase
Agreement (the “Purchasers”) shall
be issued, upon conversion of Preferred Shares, shares of Common Stock in an
amount greater than the product of (i) the Exchange Cap 


 


22

















 


amount multiplied by (ii)
a fraction, the numerator of which is the number of Preferred Shares issued to
such Purchaser pursuant to the Securities Purchase Agreement and the
denominator of which is the aggregate amount of all the Preferred Shares issued
to the Purchasers pursuant to the Securities Purchase Agreement (the “Cap Allocation Amount”).  In the event that any Purchaser shall sell
or otherwise transfer any of such Purchaser’s Preferred Shares, the transferee
shall be allocated a pro rata portion of such Purchaser’s Cap Allocation
Amount.  In the event that any holder of
Preferred Shares shall convert all of such holder’s Preferred Shares into a
number of shares of Common Stock which, in the aggregate, is less than such
holder’s Cap Allocation Amount, then the difference between such holder’s Cap
Allocation Amount and the number of shares of Common Stock actually issued to
such holder shall be allocated to the respective Cap Allocation Amounts of the
remaining holders of Preferred Shares on a pro rata basis in proportion to the
number of Preferred Shares then held by each such holder.


 


(13)                            Vote
to Change the Terms of or Issue 
Preferred Shares.  The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than a majority of the
Preferred Shares then outstanding, shall be required for (a) any change to this
Certificate of Designations or the Company’s Certificate of Incorporation which
would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares and (b) the issuance of
Preferred Shares other than pursuant to the Securities Purchase Agreement.


 


(14)                            Lost
or Stolen Certificates.  Upon
receipt by the Company of evidence reasonably satisfactory to the Company of
the loss, theft, destruction or mutilation of any Preferred Stock Certificates
representing the Preferred Shares, and, in the case of loss, theft or
destruction, of an indemnification undertaking by the holder to the Company in
customary form (accompanied by the posting of a standard indemnity bond if so
requested by the Company) and, in the case of mutilation, upon surrender and
cancellation of the Preferred Stock Certificate(s), the Company shall execute
and deliver new preferred stock certificate(s) of like tenor and date;
provided, however, the Company shall not be obligated to re-issue preferred
stock certificates if the holder contemporaneously requests the Company to
convert such Preferred Shares into Common Stock.


 


(15)                            Remedies,
Characterizations, Other Obligations, Breaches and Injunctive Relief.  The remedies provided in this Certificate of
Designations shall be cumulative and in addition to all other remedies
available under this Certificate of Designations, at law or in equity
(including a decree of specific performance and/or other injunctive
relief).  No remedy contained herein
shall be deemed a waiver of compliance with the provisions giving rise to such
remedy.  Nothing herein shall limit a
holder’s right to pursue actual damages for any failure by the Company to
comply with the terms of this Certificate of Designations.  The Company covenants to each holder of
Preferred Shares that there shall be no characterization concerning this
instrument other than as expressly provided herein.  Amounts set forth or provided for herein with respect to
payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof).  The Company
acknowledges that a breach by it of its obligations hereunder will cause
irreparable harm to the


 


23

















 


holders of the Preferred
Shares and that the remedy at law for any such breach may be inadequate.  The Company therefore agrees that, in the
event of any such breach or threatened breach, the holders of the Preferred
Shares shall be entitled, in addition to all other available remedies, to an injunction
restraining any breach, without the necessity of showing economic loss and
without any bond or other security being required.


 


(16)                            Construction.  This Certificate of Designations shall be
deemed to be jointly drafted by the Company and all Buyers and shall not be
construed against any person as the drafter hereof.


 


(17)                            Failure
or Indulgence Not Waiver.  No
failure or delay on the part of a holder of Preferred Shares in the exercise of
any power, right or privilege hereunder shall operate as a waiver thereof, nor
shall any single or partial exercise of any such power, right or privilege
preclude other or further exercise thereof or of any other right, power or
privilege.


 


(18)                            Notice.  Whenever notice is required to be given
under this Certificate of Designations, unless otherwise provided herein, such
notice shall be given in accordance with Section 9(f) of the Securities
Purchase Agreement.


 


*  * 
*  *  *


 


24

















 


IN WITNESS WHEREOF, the
Company has caused this Certificate of Designations to be signed by Charles
Boynton, its Senior Vice President and Chief Financial Officer, as of the 10th
day of July, 2003.


 


	
   

  	
  COMMERCE ONE, INC.

  
	
   

  	
   

  
	
   

  	
   

  	
   

  
	
   

  	
  By:

  	
         /s/
  Charles Boynton

  
	
   

  	
   

  	
  Name:  Charles Boynton

  
	
   

  	
   

  	
  Title:  Senior Vice President and

  
	
   

  	
   

  	
  Chief
  Financial Officer

  



 


25

















 


EXHIBIT I


 


COMMERCE ONE, INC.
CONVERSION NOTICE


 


Reference is made to the
Certificate of Designations, Preferences and Rights of Commerce One, Inc., a
Delaware corporation (the “Company”),
for its Series B Convertible Preferred Stock (the “Certificate of Designations”).  In accordance with and pursuant to the Certificate of
Designations, the undersigned hereby elects to convert the number of shares of
Series B Convertible Preferred Stock, par value $0.0001 per share (the “Preferred Shares”), of the Company
indicated below into shares of Common Stock, par value $0.0001 per share (the “Common Stock”), of the Company, as of the
date specified below.


 


	
  Date of Conversion:

  
	
   

  
	
  Number of Preferred Shares
  to be converted:    

  
	
   

  
	
  Stock certificate
  no(s). of Preferred Shares to be converted:

  



 


Please confirm the
following information:


 


	
  Conversion Price:

  
	
   

  
	
  Number of shares of
  Common Stock to be issued:

  
	
   

  



 


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


 


 


	
  Issue to:

  
	
   

  
	
  Facsimile Number:

  
	
   

  
	
  Authorization:

  
	
   

  
	
  By:

  	
   

  	
   

  
	
  Title:

  	
   

  	
   

  
	
   

  
	
  Dated:

  
	
   

  
	
  Account Number (if
  electronic book entry transfer):

  
	
   

  
	
  Transaction Code Number
  (if electronic book entry transfer):

  
				



 


[NOTE TO HOLDER --
THIS FORM MUST BE SENT CONCURRENTLY TO TRANSFER AGENT]


 


26

















 


ACKNOWLEDGMENT


 


The Company hereby
acknowledges this Conversion Notice and hereby directs Equiserve to issue the
above indicated number of shares of Common Stock in accordance with the
Irrevocable Transfer Agent Instructions dated July 10, 2003 from the Company
and acknowledged and agreed to by Equiserve.


 


	
   

  	
  COMMERCE ONE, INC.

  
	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  By:

  	
   

  	
   

  
	
   

  	
   

  
	
   

  	
  Name:

  	
   

  	
   

  
	
   

  	
  Title:

  	
   

  	
   

  
						



 


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