**Exhibit3.2**

#  

 

**CERTIFICATE OF DESIGNATIONS,PREFERENCES AND RIGHTS**

 

**of the**

 

**SERIES A CONVERTIBLE PREFERREDSTOCK**

 

**of**

 

**WORLDGATECOMMUNICATIONS, INC.**

 

**Pursuant to Section 151 of the**

**Delaware General Corporation Law**

 

WORLDGATE COMMUNICATIONS,INC., a Delaware corporation (the “Company”), hereby certifies that thefollowing resolutions were adopted by the Board of Directors of the Companypursuant to the authority of the Board of Directors as required by Section 151of the Delaware General Corporation Law.

 

RESOLVED, that pursuant to the authority granted tothe Board of Directors in accordance with the provisions of the Company’sCertificate of Incorporation, the Board of Directors hereby authorizes a seriesof the Company’s previously authorized Preferred Stock, par value $.01 pershare (the “Preferred Stock”), and hereby states the designation andnumber of shares, and fixes the relative rights, preferences, privileges andrestrictions thereof as follows:

 

1.*                                       DESIGNATION*.

 

This series shall consistof seven thousand five hundred fifty (7,550) shares of Preferred Stock andshall be designated the “Series A Convertible Preferred Stock” (the “SeriesA Preferred Stock”). The face amount of each share of Series A PreferredStock (each, a “Preferred Share” and collectively, the “PreferredShares”) shall be One Thousand Dollars ($1,000) (the “Stated Value”).

 

2.                                       *CERTAIN DEFINITIONS.*

 

“Boardof Directors” or “Board”means the Company’s Board of Directors, as constituted from time to time.

 

“BusinessDay” means any day other than a Saturday, a Sunday or a day on which theNew York Stock Exchange or commercial banks located in New York City areauthorized or permitted by law to close.

 

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“Cap Amount” means19.99% of the Common Stock outstanding on the Closing Date (subject toadjustment upon a stock split, stock dividend or similar event).

 

“Certificate” means this Certificate ofDesignation.

 

“Change of Control” means the existence oroccurrence of any of the following: (a) the sale, conveyance or disposition ofall or substantially all of the assets of the Company; (b) the effectuation ofa transaction or series of transactions in which more than fifty percent (50%)of the voting power of the Company is disposed of (other than as a directresult of normal, uncoordinated trading activities in the Common Stockgenerally); (c) the consolidation, merger or other business combination of theCompany with or into any other entity, immediately following which the priorstockholders of the Company fail to own, directly or indirectly, at least fiftypercent (50%) of the surviving entity; (d) a transaction or series oftransactions in which any Person or group acquires more than fifty percent(50%) of the voting equity of the Company; and (e) thereplacement of a majority of the Board of Directors with individuals who do notconstitute Continuing Directors.

 

“Closing Bid Price” shall mean, for the CommonStock as of any date, the closing bid price on such date for the Common Stockon the Principal Market as reported by Bloomberg Financial Markets (“Bloomberg”),or if the Principal Market begins to operate on an extended hours basis, anddoes not designate the closing bid price, then the last bid price at 4:00 p.m.(eastern time), as reported by Bloomberg, or if the foregoing do not apply, thelast closing bid price of the Common Stock in the over-the-counter market onthe electronic bulletin board for such security as reported by Bloomberg, or,if no closing bid price is reported for such security by Bloomberg, the lastclosing trade price for such security as reported by Bloomberg, or, if no lastclosing trade price is reported for such security by Bloomberg, the average ofthe bid prices of any market makers for such security as reported in the “pinksheets” by Pink Sheets LLC (formerly the National Quotation Bureau, Inc.). Ifthe Closing Bid Price cannot be calculated for the Common Stock on such date onany of the foregoing bases, then the Company shall submit such calculation toan independent investment banking firm of national reputation reasonablyacceptable to Holders of a majority of the Preferred Shares then outstanding,and shall cause such investment banking firm to perform such determination andnotify the Company and each Holder of the results of determination no later thantwo (2) Business Days from the time such calculation was submitted to it by theCompany.  All such determinations shallbe appropriately adjusted for any stock dividend, stock split or other similartransaction during such period.

 

“Closing Date” means the first date on whichthe Preferred Shares are issued pursuant to the Securities Purchase Agreementand this Certificate.

 

“Common Stock” means the Company’s commonstock, par value $.01 per share.

 

“Common Stock Payment Condition” means each ofthe following events:

 

(i)                                     thenumber of shares of Common Stock to be delivered to a Holder in satisfaction ofthe applicable payment obligation shall not (A) exceed 4.99% of the totalnumber of shares of Common Stock then outstanding or (B) result in the issuanceof a

 

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number of shares of Common Stock to such Holder inexcess of that permitted by Section 7(b) hereof;

 

(ii)                                  theRegistration Statement shall have been declared effective and be available toeach Holder, and shall cover the number of Registrable Securities required bythe Registration Rights Agreement, or all Registrable Securities may be sold byeach Holder pursuant to Rule 144(k) under the Securities Act;

 

(iii)                               theCommon Stock shall be listed on the American Stock Exchange, the NasdaqNational Market, the Nasdaq SmallCap Market or the New York Stock Exchange andtrading in the Common Stock on such market or exchange shall not have beensuspended; and

 

(iv)                              aFundamental Change, or an event that with the giving of notice, wouldconstitute a Fundamental Change, shall not have occurred and be continuing.

 

“ContinuingDirector” means, on any date, a member of the Board of Directors who (i)was a member of such board on the Execution Date (as defined in the SecuritiesPurchase Agreement) or (ii) was nominated or elected by at least a majority ofthe directors who were Continuing Directors at the time of such nomination orelection or whose election to the Board of Directors was recommended orendorsed by at least a majority of the directors who were Continuing Directorsat the time of such nomination or election.

 

“Conversion Price” means $2.35, subject toadjustment as provided herein.

 

“Default Interest Rate” means the lower of tenpercent (10%) and the highest rate permitted by applicable law.

 

“Effective Date” means the date on which theRegistration Statement is declared effective by the Securities and ExchangeCommission.

 

“First Maturity Date” means the eighteen (18)month anniversary of the Closing Date (or, if such date is not a Business Day,on the Business Day immediately following such date).

 

“Floor Price” means, as of a particular date,one hundred and five percent (105%) of the Market Price on such date.

 

“Fundamental Change” means any of the followingevents or circumstances: (i) any representation or warranty of the Company setforth in the Securities Purchase Agreement, this Certificate or the otherTransaction Documents was not true and correct in all material respects as ofthe Closing Date as if made on such date; (ii) the Company fails at any time tocomply with or perform in all material respects all of the agreements,obligations and conditions set forth in the Securities Purchase Agreement, thisCertificate or the other Transaction Documents that are required to be compliedwith or performed by the Company; or (iii) a Change of Control occurs.

 

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“Holder” means any holder of Preferred Shares.

 

“Junior Securities” means the Common Stock andall other capital stock of the Company that does not constitute Pari PassuSecurities or Senior Securities.

 

“Last Sale Price” means, as of any date, thelast sale price on such date for the Common Stock on the Principal Market asreported by Bloomberg Financial Markets (“Bloomberg”), or if thePrincipal Market begins to operate on an extended hours basis, and does notdesignate the last sale price, then the last sale price at 4:00 p.m. (easterntime), as reported by Bloomberg, or if the foregoing do not apply, the lastsale price of the Common Stock in the over-the-counter market on the electronicbulletin board for such security as reported by Bloomberg, or, if no last saleprice is reported for such security by Bloomberg, the average of the bid pricesof any market makers for such security as reported in the “pink sheets” by PinkSheets LLC (formerly the National Quotation Bureau, Inc.). If the last saleprice for the Common Stock cannot be calculated on such date on any of theforegoing bases, then the Company shall submit such calculation to anindependent investment banking firm of national reputation reasonablyacceptable to the holders of at least a majority of the then OutstandingRegistrable Securities, and shall cause such investment banking firm to performsuch determination and notify the Company and each Holder of the results ofsuch determination no later than two (2) Business Days from the time suchcalculation was submitted to it by the Company. Such investment banking firm’sdetermination shall be deemed conclusive absent manifest error. All suchdeterminations shall be appropriately adjusted for any stock dividend, stocksplit or other similar transaction during such period.

 

“Liquidation Preference” means, with respect toa Preferred Share, an amount equal to the Stated Value of such Preferred Shareplus all accrued but unpaid Dividends thereon.

 

“Market Price” means, as of a particular date,the average Last Sale Price for the period of ten (10) consecutive Trading Daysoccurring immediately prior to (but not including) such date.

 

“Maturity Date” means each of the FirstMaturity Date, the Second Maturity Date and the Third Maturity Date.

 

“Milestone” means each of the following:

 

(i)                                     eachCommon Stock Payment Condition has been satisfied; and

 

(ii)                                  theClosing Bid Price is equal to at least two hundred percent (200%) of theConversion Price then in effect.

 

“Outstanding RegistrableSecurities” means, at any time, all Registrable Securities that at suchtime are either issued and outstanding or issuable upon conversion of theSeries A Preferred Stock or exercise of the Warrants (without regard to anylimitation on such conversion or exercise).

 

“Pari Passu Securities” means any securitiesranking by their terms pari passu with the Series A Preferred Stock in respectof redemption or distribution upon liquidation.

 

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“Preferred Shares”means the shares of Preferred Stock issued pursuant to the Securities PurchaseAgreement.

 

“Principal Market” means the principalsecurities exchange or market on which the Common Stock is listed or traded.

 

“Reference Price” means $0.75, subject toadjustment for stock splits, stock dividends and similar events with respect tothe Common Stock.

 

“Registrable Securities” means the ConversionShares and the Warrant Shares, any other shares of Common Stock issuablepursuant to the terms of this Certificate or the Warrants, and any shares ofcapital stock issued or issuable from time to time (with any adjustments) in replacementof, in exchange for or otherwise in respect of the Conversion Shares or theWarrant Shares; provided, however, that “Registrable Securities”shall not include any such shares that have been sold to the public pursuant tothe Registration Statement or are sold or saleable pursuant to Rule 144.

 

“Registration Rights Agreement” means theagreement pursuant to which the Company has agreed to register the resale ofshares of Common Stock issuable upon conversion of the Series A Preferred Stockor exercise of the Warrants.

 

“Registration Statement” has the meaning setforth in the Registration Rights Agreement.

 

“Second Maturity Date” means the twenty four(24) month anniversary of the Closing Date (or, if such date is not a BusinessDay, on the Business Day immediately following such date).

 

“Securities Act” means the Securities Act of1933, as amended.

 

“Securities Purchase Agreement” means theagreement pursuant to which the Company is obligated to issue the PreferredShares to the persons named therein.

 

“Senior Securities” means (i) any debt issuedor assumed by the Company and (ii) any securities of the Company which by theirterms have a preference over the Series A Preferred Stock in respect ofredemption or distribution upon liquidation.

 

“Stated Value” means $1,000, subject toadjustment in the event of a stock split or similar event.

 

“Stockholder Approval” means the affirmativevote of the holders of the requisite number of votes cast at a meeting ofstockholders to duly and validly approve the transactions contemplated by thisCertificate, the Securities Purchase Agreement and the other TransactionDocuments and the issuance of Common Stock in excess of the Cap Amount.

 

“Third Maturity Date” means the thirty six (36)month anniversary of the Closing Date (or,

 

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if such date is not aBusiness Day, on the Business Day immediately following such date).

 

“Trading Day” means any day on which the CommonStock is purchased and sold on the principal securities exchange or market onwhich the Common Stock is then listed or traded.

 

“Transaction Documents” has the meaning givento it in the Securities Purchase Agreement.

 

“Warrants” means the warrants issued by theCompany pursuant to the Securities Purchase Agreement.

 

All definitions contained in this Certificate are equally applicable tothe singular and plural forms of the terms defined.  The words “hereof”, “herein” and “hereunder”and words of similar import referring to this Certificate refer to this Certificateas a whole and not to any particular provision of this Certificate.

 

3.*                                       PRIORITYIN LIQUIDATION*.

 

Upon the occurrence of(x) any insolvency or bankruptcy proceedings, or any receivership, liquidation,reorganization or other similar proceedings in connection therewith, commencedby the Company or by its creditors, as such, or relating to its assets or (y)the dissolution or other winding up of the Company whether total or partial,whether voluntary or involuntary and whether or not involving insolvency orbankruptcy proceedings, or (z) any assignment for the benefit of creditors orany marshalling of the material assets or material liabilities of the Company(each, a “Liquidation Event”), no distribution shall be made to theholders of any shares of Junior Securities unless each Holder shall havereceived the Liquidation Preference with respect to each Preferred Share thenheld by such Holder.  In the event thatupon the occurrence of a Liquidation Event, the assets available fordistribution to the Holders and the holders of Pari Passu Securities areinsufficient to pay the Liquidation Preference with respect to all of theoutstanding Preferred Shares and the preferential amounts payable to suchholders, the entire assets of the Company shall be distributed ratably amongthe Preferred Shares and the shares of such Pari Passu Securities in proportionto the ratio that the preferential amount payable on each such share (whichshall be the Liquidation Preference in the case of a Preferred Share) bears tothe aggregate preferential amount payable on all such shares.

 

4.                                       *DIVIDENDS*.

 

(a)                                  DividendRate.  Each Holder shall be entitledto receive, to the extent permitted by applicable law, in preference to thepayment of any dividend on any class or series of Junior Securities, cumulativedividends (“Dividends”) on each Preferred Share in an amount equal to,on an annualized basis, the Stated Value of such Preferred Share timesfive percent (5%). Dividends shall accrue, whether or not earned or declared,on each Preferred Share from the Closing Date through the earlier to occur of(A) the date on which such Preferred Share matures and (B) the redemption orconversion of such Preferred Share in accordance with the terms hereof.  Accrued Dividends on a Preferred Share shallbe payable quarterly on each April 1, July 1, October 1 and January 1 of eachcalendar year following the Closing Date, commencing October 1, 2004, and onthe Maturity Date for such Preferred Share (each, a “Dividend Payment Date”).  Dividends shall be

 

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computed on the basis ofa 365-day year for the actual number of days elapsed.

 

(b)                                 DividendPayments.  The Company shall payDividends in cash by wire transfer of immediately available funds; provided*,*however*,*that the Company may elect, subject to the satisfaction of all of the CommonStock Dividend Conditions specified in paragraph (c) below, to pay Dividends(including, without limitation, any Dividend Make-Whole Payment pursuant toSection 5B(d) below) in shares of Common Stock (the “Common Stock DividendOption”).   Dividends that are due incash and which are not paid within five (5) Business Days of the applicableDividend Payment Date shall bear interest until paid at the Default InterestRate.

 

(c)                                  CommonStock Payment Conditions. The Company shall be entitled to exercise theCommon Stock Dividend Option with respect to a Dividend Payment Date only if,on such date, on each of the three (3) Trading Days immediately preceding suchdate, and on at least ten (10) of the fifteen (15) Trading Days immediatelypreceding such date, all of the Common Stock Payment Conditions are satisfiedin full.  In the event that any CommonStock Payment Condition is not satisfied as of the applicable Dividend PaymentDate and each such Trading Day, the Company shall not be permitted to exercisethe Common Stock Dividend Option and must pay all amounts due on such DividendPayment Date in cash by wire transfer of immediately available funds.

 

(d)                               CommonStock Dividend Notice.  In order toexercise the Common Stock Dividend Option with respect to a Dividend PaymentDate, the Company must deliver, on or before the fifth (5th)Business Day immediately prior to such date, written notice to each Holderstating that the Company wishes to exercise such option (a “Common StockDividend Notice”).  If the Companywishes to exercise the Common Stock Dividend Option with respect to anyDividends due on a Dividend Payment Date, it must do so with respect to all(but not less than all) of such Dividends. A Common Stock Dividend Notice, oncedelivered by the Company, shall be irrevocable.

 

(e)                                Deliveryof Shares.  On or before the third (3rd)Business Day following aDividend Payment Date with respect to which the Company has validly exercisedthe Common Stock Dividend Option (each a “Common Stock Dividend DeliveryDate”), the Company must deliver to each Holder a number of shares ofCommon Stock equal to (A) the amount of Dividends payable with respect to suchHolder’s Preferred Shares divided by (B) the product of (i) the MarketPrice in effect on such date times (ii) ninety percent (90%).  The Company must deliver such shares ofCommon Stock to such Holder in accordance with the provisions of paragraph 5(d)below, with the Common Stock Dividend Delivery Date being deemed the DeliveryDate, and in the event of the Company’s failure to effect such delivery on theapplicable Delivery Date therefor (calculated in accordance with paragraph5(d)), such Holder shall have the remedies specified in paragraph 5(e) below.

 

(f)                                    Paymenton Junior Securities. As long as any Preferred Shares are outstanding, theCompany shall not (i) purchase, redeem or otherwise acquire for value anyshares of Junior Securities, directly or indirectly, other than as a result ofreclassification of Junior Securities or the exchange or conversion of one typeof Junior Securities for or into another type of Junior Securities, or (ii)make any payment on account of, or set aside money for, a sinking or other likefund for the purchase, redemption or other acquisition for value of any shareof Junior Securities.

 

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5.*                                       CONVERSION*.

 

(a)                                  Rightto Convert.  Each Holder shall havethe right to convert, at any time and from time to time after the Closing Date,all or any part of the Preferred Shares held by such Holder into such number offully paid and non-assessable shares (“Conversion Shares”) of the CommonStock as is determined in accordance with the terms hereof (a “Conversion”).

 

(b)                                 ConversionNotice.  In order to convertPreferred Shares, a Holder shall send to the Company by facsimile transmission,at any time prior to 6:00 p.m., eastern time, on the date on which such Holderwishes to effect such Conversion (the “Conversion Date”), (i) a noticeof conversion (a “Conversion Notice”), in substantially the form ofExhibit A hereto, stating the number of Preferred Shares to be converted, theamount of Dividends accrued (but remaining unpaid) thereon, and a calculationof the number of shares of Common Stock issuable upon such Conversion and (ii)a copy of the certificate or certificates representing the Preferred Sharesbeing converted.  The Holder shallthereafter send the original of the Conversion Notice and of such certificateor certificates to the Company.  TheCompany shall issue a new certificate for Preferred Shares to the Holder in theevent that less than all of the Preferred Shares represented by a certificateare converted; provided, however, that the failure of the Companyto deliver such new certificate shall not affect the right of the Holder tosubmit a further Conversion Notice with respect to such Preferred Shares and,in any such case, the Holder shall be deemed to have submitted the original ofsuch new certificate at the time that it submits such further ConversionNotice. Except as otherwise provided herein, upon delivery of a ConversionNotice by a Holder in accordance with the terms hereof, such Holder shall, asof the applicable Conversion Date, be deemed for all purposes to be the recordowner of the Common Stock to which such Conversion Notice relates.  In the case of a dispute between the Companyand a Holder as to the calculation of the Conversion Price or the number ofConversion Shares issuable upon a Conversion (including without limitation thecalculation of any adjustment to the Conversion Price pursuant to Section 8below), the Company shall issue to such Holder the number of Conversion Sharesthat are not disputed within the time periods specified in paragraph 5(d) belowand shall submit the disputed calculations to its independent accountant withintwo (2) Business Days of receipt of such Holder’s Conversion Notice.  The Company shall cause such accountant tocalculate the Conversion Price as provided herein and to notify the Company andsuch Holder of the results in writing no later than five (5) Business Daysfollowing the Company’s receipt of such Holder’s Conversion Notice (such fifthBusiness Day being referred to herein as the “Disputed Share CalculationDate”).  Such accountant’scalculation shall be deemed conclusive absent manifest error.  The fees of any such accountant shall beborne by the party whose calculations were most at variance with those of suchaccountant.

 

(c)                                  Numberof Conversion Shares.  The number ofConversion Shares to be delivered by the Company pursuant to a Conversion shallbe determined by dividing (i) the aggregate Liquidation Preference of thePreferred Shares to be converted by (ii) the Conversion Price in effect on theapplicable Conversion Date.

 

(d)                                 Deliveryof Conversion Shares.  Upon receiptof a fax copy of a Conversion Notice from a Holder, the Company shall, no laterthan the close of business on the later to occur of (i) the third (3rd)Business Day following the Conversion Date set forth in such Conversion Noticeand (ii) the date after the date on which the Company receives the originalConversion Notice and Preferred

 

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Shares (the “DeliveryDate”), issue and deliver or caused to be delivered to such Holder thenumber of Conversion Shares determined pursuant to paragraph 5(c) above, provided,however, that any Conversion Shares that are the subject of the disputeprocedure described in paragraph 5(b) above shall be delivered no later thanthe close of business on the third (3rd) Business Day following thedetermination made pursuant thereto. The Company shall effect delivery ofConversion Shares to such Holder by, as long as Company’s transfer agent (“Transfer Agent”)participates in the Depository Trust Company (“DTC”) Fast AutomatedSecurities Transfer program (“FAST”), crediting theaccount of such Holder or its nominee at DTC (as specified in the applicableConversion Notice) with the number of Conversion Shares required to bedelivered, no later than the close of business on such Delivery Date. In theevent that the Transfer Agent is not a participant in FAST or if a Holder sospecifies in a Conversion Notice or otherwise in writing on or before theConversion Date, the Company shall effect delivery of Conversion Shares bydelivering to such Holder or its nominee physical certificates representingsuch Conversion Shares, no later than the close of business on such DeliveryDate. If any Conversion would create a fractional Conversion Share, suchfractional Conversion Share shall be disregarded and the number of ConversionShares issuable upon such Conversion, in the aggregate, shall be the nextclosest number of Conversion Shares. Conversion Shares delivered to a Holder shall not contain anyrestrictive legend as long as the resale of such Conversion Shares (x) has beenor will be made (as certified in writing by such Holder to the Company)pursuant to an effective Registration Statement (as defined in the RegistrationRights Agreement), (y) has been made pursuant to Rule 144 under the SecuritiesAct, or (z) may be made pursuant to Rule 144(k) under the Securities Actor any successor rule or provision.

 

(e)                                  Failureto Deliver Conversion Shares.

 

(i)                                     Inthe event that, for any reason, a Holder has not received certificatesrepresenting the number of Conversion Shares specified in the applicableConversion Notice, without any restrictive legend in the circumstancesdescribed in clause (x), (y) or (z) of paragraph 5(d) above, on or before theDelivery Date therefor (a “Conversion Default”), and such failure todeliver certificates continues for five (5) Business Days following thedelivery of written notice thereof from such Holder (such fifth Business Daybeing referred to herein as the “Conversion Default Date”), the Companyshall pay to such Holder payments (“Conversion Default Payments”) in theamount of (A) “N” multiplied by (B) the aggregate Liquidation Preferenceof the Preferred Shares which are the subject of such Conversion Default multipliedby (C) one percent (1%),  where “N”equals the number of days elapsed between the Conversion Default Date and thedate on which all of the certificates representing such Conversion Shares(without any restrictive legend in the circumstances described in clause (x),(y) or (z) of paragraph 5(d) above) are issued and delivered to such Holder; provided,however, that in no event shall the aggregate amount payable to a Holderunder this paragraph (e)(i) exceed twenty four percent (24%) of the aggregateLiquidation Preference of such Holder’s Preferred Shares that are the subjectof a Conversion Default.  Notwithstandingthe foregoing, Conversion Default Payments shall not apply to ConversionDefaults resulting directly from acts of God, acts of civil or militaryauthority, fire, flood, strikes, war, terrorist attack, epidemics, shortages ofpower or similar events.  Amounts payablehereunder to a Holder shall be paid to such Holder in immediately availablefunds on or before the fifth (5th) Business Day of the calendar monthimmediately following the calendar month in which such amounts have accrued.

 

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(ii)                                  Inaddition to any other remedies provided herein, each Holder shall have theright to pursue actual damages for the Company’s failure to issue and deliverConversion Shares on the applicable Delivery Date, including, withoutlimitation, damages relating to any purchase of shares of Common Stock by or onbehalf of such Holder in order to make delivery on a sale lawfully effected inanticipation of receiving Conversion Shares, such damages to be in an amountequal to (A) the aggregate amount paid by such Holder for the shares of CommonStock so purchased minus (B) the aggregate amount received by suchHolder upon the sale of such Conversion Shares, and such Holder shall have theright to pursue all other remedies available to it at law or in equity(including, without limitation, a decree of specific performance and/orinjunctive relief).

 

5B.                               *FORCED CONVERSION*.

 

(a)                                  ForcedConversion.  In the event that allMilestones are satisfied on each Trading Day occurring during any period offifteen (15) consecutive Trading Days commencing after the six-monthanniversary of the Closing Date (a “Forced Conversion Period”), theCompany shall have the right to require Conversion of some or all of thePreferred Shares then outstanding (a “Forced Conversion”), provided,that if the Company requires Conversion of less than all of such PreferredShares, it shall allocate the number of Preferred Shares being converted amongthe Holders on a *pro rata*basis.  In the event of a Forced Conversion, theCompany and the Holder shall follow the procedures for delivery of ConversionShares set forth in Section 5 above, with the Forced Conversion Date (asdefined below) deemed to be the Conversion Date for purposes of Section 5,except that the Holder shall not be required to send a Conversion Notice ascontemplated by paragraph (b) of Section 5.

 

(b)                                 ForcedConversion Notice. In order to effect a Forced Conversion hereunder, theCompany must deliver to each Holder written notice thereof (a “ForcedConversion Notice”) on or before 5:00 p.m. (eastern time) on the BusinessDay immediately following the last Trading Day of the Forced Conversion Period,and shall indicate in such Forced Conversion Notice the Business Day on whichsuch Forced Conversion will be effected (such Business Day, a “ForcedConversion Date”), which Business Day will be at least ten (10) TradingDays following the date on which such Forced Conversion Notice is delivered,and, at the same time that it delivers such notice, the Company shall send acopy of such notice by email to each Holder as long as such Holder has providedan email address to the Company. Notwithstanding the delivery by the Company ofa Forced Conversion Notice, nothing contained herein shall be deemed to limitin any way (i) the right of a Holder to convert such Holder’s Preferred Sharesprior to the Forced Conversion Date or (ii) the availability of any and allremedies that are provided to a Holder hereunder, including without limitationin the event that the Company fails to deliver Conversion Shares upon a ForcedConversion as required by the terms of Section 5 hereof. The Forced ConversionNotice shall specify the number of Preferred Shares that are subject to theForced Conversion, and whether the Company has elected, subject to theprovisions of paragraph (d) below, to pay the Dividend Make-Whole Payment (asdefined below) in cash or in shares of Common Stock.

 

(c)                                  ConversionShares Issuable Upon Forced Conversion. On the Forced Conversion Date, eachHolder will be deemed to have converted a number of Preferred Shares equal to(A) its pro rata share of the aggregate number of Preferred Shares specified inthe Forced Conversion Notice minus (B) the number of any Preferred Sharesconverted by the Holder during the fifteen

 

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(15) Trading Daysimmediately preceding the Forced Conversion Date. The number of ConversionShares to be delivered to a Holder upon a Forced Conversion shall be equal tothe Liquidation Preference of the Preferred Shares being converted hereunder dividedby the Conversion Price.

 

(d)                                 DividendMake-Whole Provision.  In the eventthat a Forced Conversion Date occurs prior to the Second Maturity Date, theCompany will pay to each Holder, on or before the third Business Day followingthe Forced Conversion Date, an amount (the “Dividend Make-Whole Amount”)equal to the present value of the Dividends that would have otherwise accruedon such Holder’s Preferred Shares from the Forced Conversion Date through theSecond Maturity Date, such present value to be calculated using a discount rateequal to the rate of interest applicable to Treasury securities issued on theForced Conversion Date and having a maturity closest to the Second MaturityDate. The Company shall pay to each Holder the Dividend Make-Whole Payment incash by wire transfer of immediately available funds; provided*,*however*,*that the Company may elect, subject to the satisfaction of all of the CommonStock Dividend Conditions in the manner specified in Section 4(c) above, to paythe Dividend Make-Whole Payment in shares of Common Stock pursuant to Section4(b) and 4(e) above, in which case the Forced Conversion Date shall be deemedto be the Dividend Payment Date. Any Dividend Make-Whole Payment that ispayable in cash and not paid within five (5) Business Days of the due datetherefor shall bear interest until paid at the Default Interest Rate.

 

(e)                                  SubsequentForced Conversions.  The Company mayrequest one or more Forced Conversions prior to the Maturity Date, subject tothe terms hereof, provided that (i) there must be at least fifteen (15) TradingDays between each such Forced Conversion and (ii) all Milestones must besatisfied prior to any such Forced Conversion.

 

6.                                       *MATURITY OF PREFERRED SHARES*.

 

(a)                                  Paymentat Maturity.  The Preferred Sharesshall mature as follows: (A) on the First Maturity Date, one-third (1/3) ofeach Holder’s Preferred Shares then outstanding shall mature, (B) on the SecondMaturity Date, one-half (1/2) of each Holder’s Preferred Shares thenoutstanding shall mature, and (C) on the Third Maturity Date, all PreferredShares then outstanding shall mature. On a Maturity Date, the Company shall payto each Holder the aggregate Liquidation Preference for such Holder’s PreferredShares that are subject to maturity on such Maturity Date.  Such payment shall be made in cash by wiretransfer of immediately available funds; provided*,*however*,*that the Company may elect, subject to the satisfaction of all of the CommonStock Payment Conditions, to pay such Liquidation Preference in shares ofCommon Stock (the “Common Stock Payment Option”).   Any amount of cash that is due on a MaturityDate and which is not paid within five (5) Business Days of such date shallbear interest until paid at the Default Interest Rate.

 

(b)                                 CommonStock Payment Conditions. The Company shall not be entitled to exercise theCommon Stock Payment Option with respect to a Maturity Date unless, on suchdate, on each of the five (5) Trading Days immediately preceding such date, andon at least twenty (20) of the thirty (30) Trading Days immediately precedingsuch date, (A) all of the Common Stock Payment Conditions are satisfied in fulland (B) the Market Price in effect on each such date is equal to or greaterthan the Reference Price.  In the eventthat any condition specified in (A) or (B) above is not satisfied as of

 

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the applicable MaturityDate and each such Trading Day, the Company shall not be permitted to exercisethe Common Stock Payment Option and must pay all amounts due on such MaturityDate in cash by wire transfer of immediately available funds; provided,however, that, upon the delivery of a Common Stock Payment Notice in accordancewith paragraph (c) below, any Holder may, in its sole and absolute discretion,waive in writing the condition specified in clause (B) above, for itself onlyand not with respect to any other Holder, in which case (assuming thesatisfaction of the Common Stock Payment Conditions in accordance with thisparagraph (b)) the Company shall be deemed to have validly exercised the CommonStock Payment Option with respect to such Holder only, and such Holder shall beentitled to receive shares of Common Stock in accordance with paragraph (d)below.

 

(c)                                CommonStock Option Notice.  In order toexercise the Common Stock Payment Option with respect to a Maturity Date, theCompany must deliver, on or before the tenth (10th) Trading Dayimmediately prior to such date, written notice to each Holder stating that theCompany wishes to exercise such option (a “Common Stock Option Notice”).  If the Company wishes to exercise the CommonStock Payment Option with respect to any Preferred Shares then maturing, itmust do so with respect to all (but not less than all) of the Preferred Sharesthen maturing. A Common Stock Option Notice, once delivered by the Company,shall be irrevocable.

 

(d)                               Deliveryof Shares.  On or before the third (3rd)Business Day following aMaturity Date with respect to which the Company has validly exercised theCommon Stock Payment Option (each a “Common Stock Option Delivery Date”),the Company must deliver to each Holder a number of shares of Common Stockequal to (A) the Liquidation Preference of such Holder’s Preferred Shares thenmaturing divided by (B) the Market Price in effect on such date.  The Company must deliver such shares ofCommon Stock to such Holder in accordance with the provisions of paragraph 5(d)above, with the Common Stock Option Delivery Date being deemed the DeliveryDate, and in the event of the Company’s failure to effect such delivery on theapplicable Delivery Date therefor (calculated in accordance with paragraph5(d)), such Holder shall have the remedies specified in paragraph 5(e) above.

 

7.*                                       CONVERSIONLIMITATIONS.*

 

(a)                                  Inno event shall a Holder be permitted to convert any Preferred Shares to theextent that, upon the Conversion of such Preferred Shares the number of sharesof Common Stock beneficially owned by such Holder (other than shares of CommonStock issuable upon conversion of such Preferred Shares or which would otherwisebe deemed beneficially owned except for being subject to a limitation onconversion or exercise analogous to the limitation contained in this paragraph7), when added to the number of shares of Common Stock issuable upon theConversion of such Preferred Shares, would exceed 4.9% of the number of sharesof Common Stock then issued and outstanding. As used herein, beneficial ownership shall be determined in accordancewith Section 13(d) of the Securities Exchange Act of 1934, as amended, and therules thereunder. To the extent that the limitation contained in this paragraphapplies (and without limiting any rights the Company may otherwise have), theCompany may rely on the Holder’s determination of whether Preferred Shares areconvertible pursuant to the terms hereof, the Company having no obligationwhatsoever to verify or confirm the accuracy of such determination, and thesubmission of a Conversion Notice by the Holder shall be deemed to be theHolder’s representation that the Preferred Shares specified therein are

 

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convertible pursuant tothe terms hereof.  Nothing containedherein shall be deemed to restrict the right of a Holder to convert PreferredShares at such time as the Conversion thereof will not violate the provisionsof this paragraph. The limitation contained in this paragraph shall cease toapply to a Holder (x) upon sixty (60) days’ prior written notice from suchHolder to the Company, (y) immediately upon written notice from such Holder tothe Company at any time after the public announcement or other disclosure of aMajor Transaction (as defined below) and (z) on the Third Maturity Date.

 

(b)                                 UnlessStockholder Approval has been obtained or a Holder has delivered to the Companya legal opinion reasonably acceptable to the Company that such approval is nolonger required under the applicable listing requirements of the Nasdaq StockMarket, the Company shall not issue to any Holder, whether pursuant to aConversion, upon the payment of a Dividend in shares of Common Stock, or uponthe payment of amounts due on a Maturity Date in shares of Common Stock, anumber of shares of Common Stock that, when added to the number of shares ofCommon Stock previously received by such Holder pursuant to the provisions ofthis Certificate, would exceed the product of (A) the Cap Amount multipliedby (B) a fraction, the numerator of which is the aggregate Stated Value ofthe Preferred Shares purchased by such Holder and the denominator of which isthe aggregate Stated Value of all Preferred Shares purchased by the Holders(such product, the “Allocation Amount”). In the event that any Holder shall sell or otherwise transfer any ofsuch Holder’s Preferred Shares, the remaining Conversion Shares constitutingsuch transferring Holder’s Allocation Amount shall be allocated between thetransferring Holder and transferee *pro rata*in proportion to the Stated Value of the Preferred Shares transferred to suchtransferee and the Stated Value of the Preferred Shares retained by suchtransferring Holder.  In the event thatany Holder shall convert all of such Holder’s Preferred Shares into a number ofConversion Shares that, in the aggregate, is less than such Holder’s AllocationAmount, then the difference between such Holder’s Allocation Amount and thenumber of Conversion Shares actually issued to such Holder shall be allocatedto the remaining Holders on a *pro rata*basis in proportion to number of Preferred Shares held by each Holder. In theevent that, at any time, the number of Conversion Shares issuable under thePreferred Shares (without regard to any restrictions on such issuance containedin this Certificate) exceeds eighty percent (80%) of the Cap Amount, theCompany shall, upon the written request of any Holder, hold a special meetingof its stockholders for the purpose of obtaining, and use its best efforts toobtain, Stockholder Approval. In the event that the stockholders do not approvesuch transactions at such meeting, the Company shall continue to use its bestefforts to seek such approval as soon as practicable after such meeting but noless frequently than annually thereafter.

 

8.                                       *ADJUSTMENTS TO CONVERSION PRICE*. TheConversion Price shall be subject to adjustment from time to time as providedin this Section 8. Adjustments of the Conversion Price required herein shall berounded up or down to the nearest one hundredth of a cent.

 

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(a)                                  Subdivisionor Combination of Common Stock.  Ifthe Company, at any time after the Closing Date, subdivides (by any stocksplit, stock dividend, recapitalization, reorganization, reclassification orotherwise) the outstanding shares of Common Stock into a greater number ofshares, then after the date of record for effecting such subdivision, theConversion Price in effect immediately prior to such subdivision will beproportionately reduced.  If the Company,at any time after the Closing Date, combines (by reverse stock split,recapitalization, reorganization, reclassification or otherwise) theoutstanding shares of Common Stock into a smaller number of shares, then, afterthe date of record for effecting such combination, the Conversion Price ineffect immediately prior to such combination will be proportionally increased.

 

(b)                                 Distributions.  If the Company shall declare or make anydistribution of cash or any other assets (or rights to acquire such assets) toholders of Common Stock, as a partial liquidating dividend or otherwise,including without limitation any dividend or distribution to the Company’sstockholders in shares (or rights to acquire shares) of capital stock of asubsidiary (a “Distribution”),the Company shall deliver written notice of such Distribution (a “Distribution Notice”) to eachHolder at least thirty (30) days prior to the earlier to occur of (i) therecord date for determining stockholders entitled to such Distribution (the “RecordDate”) and (ii) the date on which such Distribution is made (the “DistributionDate”).  The earlier to occur of theRecord Date and the Distribution Date is referred to herein as the “DeterminationDate”.  In the Distribution Notice toa Holder, the Company must indicate whether the Company has elected (A) todeliver to such Holder the same amount and type of assets being distributed insuch Distribution as though the Holder were a holder on the Determination Datetherefor of a number of shares of Common Stock into which the Preferred Sharesheld by such Holder are convertible as of such Determination Date (such numberof shares to be determined at the Conversion Price then in effect and withoutgiving effect to any limitations on such conversion) or (B) to reduce theConversion Price as of the Determination Date therefor by an amount equal tothe fair market value of the assets to be distributed divided by thenumber of shares of Common Stock as to which such Distribution is to be made,such fair market value to be reasonably determined in good faith by theindependent members of the Company’s Board of Directors. If the Company doesnot notify the Holders of its election pursuant to the preceding sentence on orprior to the Determination Date, the Company shall be deemed to have electedclause (A) of the preceding sentence.

 

(c)                                  DilutiveIssuances.

 

(i)                                     AdjustmentUpon Dilutive Issuance.  If, at anytime after the Closing Date, the Company issues or sells or, pursuant tosubparagraph (iii) of this paragraph (c), is deemed to have issued or sold, anyshares of Common Stock for per share consideration less than the ConversionPrice on the date of such issuance or sale (or deemed issuance or sale) (a “Dilutive Issuance”), then theConversion Price shall be adjusted as follows (provided, however, that if anyadjustment made pursuant to this Section 8(c)(i) would reduce the Conversion Priceto a price that is less than the Floor Price, the Conversion Price shall bedeemed to be equal to the Floor Price for purposes of such adjustment):

 

(A)                              Ifsuch Dilutive Issuance occurs prior to the Effective Date, then effectiveimmediately upon the Dilutive Issuance, the Conversion Price shall be adjustedso as to equal the consideration received or receivable by the Company (on aper share basis) for the

 

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additional shares of Common Stock so issued, sold or deemed issued orsold in such Dilutive Issuance (which, in the case of a deemed issuance orsale, shall be calculated in accordance with subparagraph (iii) below).

 

(B)                                Ifsuch Dilutive Issuance occurs on or after the Effective Date, then effectiveimmediately upon the Dilutive Issuance, the Conversion Price shall be adjustedso as to equal an amount determined by multiplying such Conversion Price by thefollowing fraction:

 
|   | N0 + N1 |   |
|--------|---------|--------|
|   | N0 + N2 |

 
| where: |   |
|--------|--------|
|   |   |
|   | N0 =   | the number of shares of Common Stock outstanding  immediately prior to the issuance, sale or deemed issuance or sale of such  additional shares of Common Stock in such Dilutive Issuance (without taking  into account any shares of Common Stock issuable upon conversion, exchange or  exercise of any securities or other instruments which are convertible into or  exercisable or exchangeable for Common Stock (“Convertible Securities”)  or options, warrants or other rights to purchase or subscribe for Common  Stock or Convertible Securities (“Purchase Rights”), other than shares  of Common Stock issuable under the Preferred Shares and the Warrants, which  shall be taken into account in determining such number); |
|   |   |   |
|   | N1 =   | the number of shares of Common Stock which the  aggregate consideration, if any, received or receivable by the Company for  the total number of such additional shares of Common Stock so issued, sold or  deemed issued or sold in such Dilutive Issuance (which, in the case of a  deemed issuance or sale, shall be calculated in accordance with subparagraph  (iii) below) would purchase at the Conversion Price in effect immediately  prior to such Dilutive Issuance; and |
|   |   |   |
|   | N2 =   | the number of such additional shares of Common Stock  so issued, sold or deemed issued or sold in such Dilutive Issuance. |

 

Notwithstandingthe foregoing, no adjustment shall be made pursuant hereto if such adjustmentwould result in an increase in the Conversion Price.

 

(ii)                                  AdjustmentUpon Below Market Issuance.  If, atany time after the Closing Date, the Company issues or sells, or in accordancewith subparagraph (iii) of this paragraph (c), is deemed to have issued orsold, any shares of Common Stock for a consideration per share less than theMarket Price on the date of such issuance or sale (or deemed issuance or sale)(a “Below Market Issuance”),then the Conversion Price shall be adjusted as follows (without regard towhether the resulting Conversion Price is less than the Floor Price):

 

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(A)                              Ifsuch Below Market Issuance occurs prior to the Effective Date, then effectiveimmediately upon the Below Market Issuance, the Conversion Price shall beadjusted so as to equal the consideration received or receivable by the Company(on a per share basis) for the additional shares of Common Stock so issued,sold or deemed issued or sold in such Below Market Issuance (which, in the caseof a deemed issuance or sale, shall be calculated in accordance withsubparagraph (iii) below).

 

(B)                                Ifsuch Below Market Issuance occurs on or after the Effective Date, theneffective immediately upon the Below Market Issuance, then the Conversion Priceshall be adjusted so as to equal an amount determined by multiplying suchConversion Price by the following fraction:

 
|   | N0 + N1 |   |
|--------|---------|--------|
|   | N0 + N2 |

 
| where: |   |
|--------|--------|
|   |   |
|   | N0 =   | the number of shares of Common Stock outstanding  immediately prior to the issuance, sale or deemed issuance or sale of such  additional shares of Common Stock in such Below Market Issuance (without  taking into account any shares of Common Stock issuable upon conversion,  exchange or exercise of any Convertible Securities or Purchase Rights, other  than shares of Common Stock issuable under the Preferred Shares and the  Warrants, which shall be taken into account in determining such number); |
|   |   |   |
|   | N1 =   | the number of shares of Common Stock which the  aggregate consideration, if any, received or receivable by the Company for  the total number of such additional shares of Common Stock so issued, sold or  deemed issued or sold in such Below Market Issuance (which, in the case of a  deemed issuance or sale, shall be calculated in accordance with subparagraph  (iii) below) would purchase at the Market Price in effect on the date of such  Below Market Issuance; and |
|   |   |   |
|   | N2 =   | the number of such additional shares of Common Stock  so issued, sold or deemed issued or sold in such Below Market Issuance. |

 

Notwithstandingthe foregoing, no adjustment shall be made pursuant to this paragraph (c)(ii)if such adjustment would result in an increase in the Conversion Price.  In the event that the Company effects anissuance that is both a Dilutive Issuance and a Below Market Issuance, theConversion Price will be adjusted to the lower of the prices calculatedpursuant to subparagraphs (i) and (ii) of this paragraph (c).

 

(iii)                               Effect On ConversionPrice Of Certain Events.  Forpurposes of determining the adjusted Conversion Price under subparagraph (i) or(ii) of this paragraph (c), the following will be applicable:

 

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(A)                              Issuanceof Purchase Rights.  If the Companyissues or sells any Purchase Rights, whether or not immediately exercisable,and the price per share for which Common Stock is issuable upon the exercise ofsuch Purchase Rights (and the price of any conversion of ConvertibleSecurities, if applicable) is less than either or both of the Conversion Priceand the Market Price in effect on the date of issuance or sale of such PurchaseRights, then the maximum total number of shares of Common Stock issuable uponthe exercise of all such Purchase Rights (assuming full conversion, exercise orexchange of Convertible Securities, if applicable) shall, as of the date of theissuance or sale of such Purchase Rights, be deemed to be outstanding and tohave been issued and sold by the Company for such price per share. For purposesof the preceding sentence, the “price per share for which Common Stock isissuable upon the exercise of such Purchase Rights” shall be determined bydividing (x) the total amount, if any, received or receivable by the Company asconsideration for the issuance or sale of all such Purchase Rights, plus theminimum aggregate amount of additional consideration, if any, payable to theCompany upon the exercise of all such Purchase Rights, plus, in the case of ConvertibleSecurities issuable upon the exercise of such Purchase Rights, the minimumaggregate amount of additional consideration payable upon the conversion,exercise or exchange thereof (determined in accordance with the calculationmethod set forth in subparagraph (iii)(B) below) at the time such ConvertibleSecurities first become convertible, exercisable or exchangeable, by (y) themaximum total number of shares of Common Stock issuable upon the exercise ofall such Purchase Rights (assuming full conversion, exercise or exchange ofConvertible Securities, if applicable). No further adjustment to the ConversionPrice shall be made upon the actual issuance of such Common Stock upon theexercise of such Purchase Rights or upon the conversion, exercise or exchangeof Convertible Securities issuable upon exercise of such Purchase Rights. To the extent that shares of Common Stock orConvertible Securities are not delivered pursuant to such Purchase Rights, uponthe expiration or termination of such Purchase Rights, the Conversion Priceshall be readjusted to the Conversion Price that would then be in effect hadthe adjustments made upon the issuance of such Purchase Rights been made on thebasis of delivery of only the number of shares of Common Stock actually delivered.

 

(B)                                Issuanceof Convertible Securities.  If theCompany issues or sells any Convertible Securities, whether or not immediatelyconvertible, exercisable or exchangeable, and the price per share for whichCommon Stock is issuable upon such conversion, exercise or exchange is lessthan either or both of the Conversion Price and the Market Price in effect onthe date of issuance or sale of such Convertible Securities, then the maximumtotal number of shares of Common Stock issuable upon the conversion, exerciseor exchange of all such Convertible Securities shall, as of the date of theissuance or sale of such Convertible Securities, be deemed to be outstandingand to have been issued and sold by the Company for such price per share. Ifthe Convertible Securities so issued or sold do not have a fluctuatingconversion or exercise price or exchange ratio, then for the purposes of theimmediately preceding sentence, the “price per share for which Common Stock isissuable upon such conversion, exercise or exchange” shall be determined bydividing (x) the total amount, if any, received or receivable by the Company asconsideration for the issuance or sale of all such Convertible Securities, plusthe minimum aggregate amount of additional consideration, if any, payable tothe Company upon the conversion, exercise or exchange 

 

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thereof (determined in accordance with the calculationmethod set forth in this subparagraph (iii)(B)) at the time such Convertible Securitiesfirst become convertible, exercisable or exchangeable, by (y) the maximum totalnumber of shares of Common Stock issuable upon the exercise, conversion orexchange of all such Convertible Securities. If the Convertible Securities soissued or sold have a fluctuating conversion or exercise price or exchangeratio (a “Variable Rate Convertible Security”) (provided, however, that if theconversion or exercise price or exchange ratio of a Convertible Security mayfluctuate solely as a result of provisions designed to protect againstdilution, such Convertible Security shall not be deemed to be a Variable RateConvertible Security), then for purposes of the first sentence of thissubparagraph (B), the “price per share for which Common Stock is issuable uponsuch conversion, exercise or exchange” shall be deemed to be the lowest priceper share which would be applicable (assuming all holding period and otherconditions to any discounts contained in such Variable Rate ConvertibleSecurity have been satisfied) if the conversion price of such Variable RateConvertible Security on the date of issuance or sale thereof were seventy-fivepercent (75%) of the actual conversion price on such date (the “AssumedVariable Market Price”), and, further, if the conversion price of suchVariable Rate Convertible Security at any time or times thereafter is less thanor equal to the Assumed Variable Market Price last used for making anyadjustment under this paragraph (c) with respect to any Variable RateConvertible Security, the Conversion Price in effect at such time shall bereadjusted to equal the Conversion Price which would have resulted if theAssumed Variable Market Price at the time of issuance of the Variable RateConvertible Security had been seventy-five percent (75%) of the actualconversion price of such Variable Rate Convertible Security existing at thetime of the adjustment required by this sentence.  No further adjustment to the Conversion Priceshall be made upon the actual issuance of such Common Stock upon conversion,exercise or exchange of such Convertible Securities. To the extent that sharesof Common Stock are not delivered pursuant to conversion of such ConvertibleSecurities, upon the expiration or termination of the right to convert suchConvertible Securities into Common Stock, the Conversion Price shall bereadjusted to the Conversion Price that would then be in effect had theadjustments made upon the issuance of such Convertible Securities been made onthe basis of delivery of only the number of shares of Common Stock actuallydelivered.

 

(C)                                Changein Option Price or Conversion Rate. If, following an adjustment to the Conversion Price upon the issuance ofPurchase Rights or Convertible Securities pursuant to a Below Market Issuance,there is a change at any time in (x) the amount of additional considerationpayable to the Company upon the exercise of any Purchase Rights; (y) the amountof additional consideration, if any, payable to the Company upon theconversion, exercise or exchange of any Convertible Securities; or (z) the rateat which any Convertible Securities are convertible into or exercisable orexchangeable for Common Stock (in each such case, other than under or by reasonof provisions designed to protect against dilution), then in any such case, theConversion Price in effect at the time of such change shall be readjusted tothe Conversion Price which would have been in effect at such time had suchPurchase Rights or Convertible Securities still outstanding provided for suchchanged additional consideration or changed conversion, exercise or exchangerate, as the case may be, at the time initially issued or sold.

 

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(D)                               Calculationof Consideration Received.  If anyCommon Stock, Purchase Rights or Convertible Securities are issued or sold forcash, the consideration received therefor will be the amount received by theCompany therefor. In case any Common Stock, Purchase Rights or ConvertibleSecurities are issued or sold for a consideration part or all of which shall beother than cash, including in the case of a strategic or similar arrangement inwhich the other entity will provide services to the Company, purchase servicesfrom the Company or otherwise provide intangible consideration to the Company,the amount of the consideration other than cash received by the Company(including the net present value of the consideration other than cash expectedby the Company for the provided or purchased services) shall be the fair marketvalue of such consideration, except where such consideration consists ofsecurities, in which case the amount of consideration received by the Companywill be the average of the last sale prices thereof on the principal market forsuch securities during the period of ten Trading Days immediately preceding thedate of receipt. In case any Common Stock, Purchase Rights or ConvertibleSecurities are issued in connection with any merger or consolidation in whichthe Company is the surviving corporation, the amount of consideration thereforwill be deemed to be the fair market value of such portion of the net assetsand business of the non-surviving corporation as is attributable to such CommonStock, Purchase Rights or Convertible Securities, as the case may be. Notwithstandinganything else herein to the contrary, if Common Stock, Purchase Rights orConvertible Securities are issued or sold in conjunction with each other aspart of a single transaction or in a series of related transactions, a Holdermay elect to determine the amount of consideration deemed to be received by theCompany therefor by deducting the fair value of any type of securities (the “Disregarded Securities”) issued orsold in such transaction or series of transactions. If a Holder makes anelection pursuant to the immediately preceding sentence, no adjustment to theConversion Price shall be made pursuant to this paragraph (c) for the issuanceof the Disregarded Securities or upon any conversion, exercise or exchangethereof. The independent members of the Company’s Board of Directors shallcalculate reasonably and in good faith, using standard commercial valuationmethods appropriate for valuing such assets, the fair market value of anyconsideration other than cash or securities.

 

(E)                                 IssuancesWithout Consideration Pursuant to Existing Securities.  If the Company issues (or becomes obligatedto issue) shares of Common Stock pursuant to any anti-dilution or similaradjustments (other than as a result of stock splits, stock dividends and thelike) contained in any Convertible Securities or Purchase Rights outstanding asof the date hereof but not included in the Disclosure Schedule to theSecurities Purchase Agreement, then all shares of Common Stock so issued shallbe deemed to have been issued for no consideration. If the Company issues (orbecomes obligated to issue) shares of Common Stock pursuant to anyanti-dilution or similar adjustments contained in any Convertible Securities orPurchase Rights disclosed in a schedule to the Securities Purchase Agreement asa result of the issuance of the Warrants and the number of shares that theCompany issues (or is obligated to issue) as a result of such initial issuanceexceeds the amount specified in such schedule, such excess shares shall bedeemed to have been issued for no consideration.

 

(iv)                              ExceptionsTo Adjustment Of Conversion Price. Notwithstanding the

 

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foregoing, no adjustmentto the Conversion Price shall be made pursuant to this paragraph (c) upon theissuance of any Excluded Securities.  Forpurposes hereof, “Excluded Securities” means (A) securities purchasedunder the Securities Purchase Agreement; (B) securities issued upon conversionof the Preferred Shares or exercise of the Warrants; (C) shares of Common Stockissuable or issued to (x) employees or directors from time to time eitherdirectly or upon the exercise of options, in such case granted or to be grantedin the discretion of the Board of Directors, as approved by the independent membersof the Board, pursuant to one or more stock option plans or restricted stockplans or stock purchase plans in effect as of the Closing Date or approved by the independentmembers of the Board of Directors or by the Company’s shareholders, or (y) consultants,either directly or pursuant to warrants to purchase Common Stock that areoutstanding on the date hereof or issued hereafter, provided such issuances areapproved by the independent members of the Board of Directors or by theCompany’s shareholders; (D) shares ofCommon Stock issued in connection with any Convertible Securities or PurchaseRights outstanding on the date hereof, and (E) shares of Common Stock issued toa Person in connection with a joint venture, strategic alliance or othercommercial relationship with such Person relating to the operation of theCompany’s business and not for the primary purpose of raising equity capital.

 

(v)                                 NoticeOf Adjustments.  Upon the occurrenceof an adjustment to the Conversion Price pursuant to this paragraph (c), theCompany, at its expense, shall promptly compute such adjustment or readjustmentor change and prepare and furnish to each Holder a notice (an “AdjustmentNotice”) setting forth such adjustment or readjustment or change andshowing in detail the facts upon which such adjustment or readjustment orchange is based.  The failure of theCompany to deliver an Adjustment Notice shall not affect the validity of anysuch adjustment.

 

(d)                                 MajorTransactions.  In the event of amerger, consolidation, business combination, tender offer, exchange of shares,recapitalization, reorganization, redemption or other similar event, as aresult of which shares of Common Stock shall be changed into the same or adifferent number of shares of the same or another class or classes of stock orsecurities or other assets of the Company or another entity or the Companyshall sell all or substantially all of its assets (each of the foregoing beinga “Major Transaction”), the Company will give each Holder at leasttwenty (20) days written notice prior to the closing of such Major Transaction,and: (i) each Holder shall be permitted to convert the Preferred Shares held bysuch Holder in whole or in part at any time prior to the record date for thereceipt of such consideration and shall be entitled to receive, for each shareof Common Stock issuable to such Holder for such exercise, the same per shareconsideration payable to the other holders of Common Stock in connection withsuch Major Transaction, and (ii) if and to the extent that a Holder retains anyPreferred Shares following such record date, the Company will cause thesurviving or, in the event of a sale of assets, purchasing entity, as acondition precedent to such Major Transaction, to assume the obligations of theCompany with respect to the Series A Preferred Stock, with such adjustments tothe Conversion Price and the securities covered hereby as may be necessary inorder to preserve the economic benefits of the Series A Preferred Stock to suchHolder.

 

(e)                                  Adjustments;Additional Shares, Securities or Assets. In the event that at any time, as a result of an adjustment madepursuant to this Section 8, each Holder shall, upon conversion of such Holder’sPreferred Shares, become entitled to receive securities or assets (other thanCommon Stock) then, wherever appropriate, all references herein to shares ofCommon Stock shall be deemed

 

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to refer to and includesuch shares and/or other securities or assets; and thereafter the number ofsuch shares and/or other securities or assets shall be subject to adjustmentfrom time to time in a manner and upon terms as nearly equivalent aspracticable to the provisions of this Section 8.

 

9.                                       *REDEMPTION*.

 

(a)                                  MandatoryRedemption.  In the event that aFundamental Change occurs, each Holder shall have the right to require theCompany to redeem all or any portion of the Preferred Shares held by suchHolder (a “Mandatory Redemption”) at the Mandatory Redemption Price (asdefined below).  In order to exercise itsright to effect a Mandatory Redemption, a Holder must deliver a written notice(a “Mandatory Redemption Notice”) to the Company at any time on orbefore 6:00 p.m. (eastern time) on the third (3rd) Business Dayfollowing the Business Day on which the Fundamental Change to which suchMandatory Redemption Notice relates is no longer in effect. The MandatoryRedemption Notice shall specify the effective date of such Mandatory Redemption(the “Mandatory Redemption Date”) and the number of such shares to beredeemed.

 

(b)                                 MandatoryRedemption Price.  The “MandatoryRedemption Price” shall be equal to the greater of (i) (x) the Stated Valueof the Preferred Shares being redeemed times one hundred and one percent(101%) plus (y) accrued and unpaid Dividends thereon and (ii) theLiquidation Preference for such Preferred Shares divided by theConversion Price times the Market Price in effect on the MandatoryRedemption Date.

 

(c)                                  Paymentof Mandatory Redemption Price.

 

(i)                                     TheCompany shall pay the Mandatory Redemption Price to the Holder exercising itsright to redemption on the later to occur of (A) the fifth (5th) Business Dayfollowing the Mandatory Redemption Date and (B) the date on which the PreferredShares being redeemed are delivered by the Holder to the Company forcancellation (the “Mandatory Redemption Payment Date”).

 

(ii)                                  IfCompany fails to pay the Mandatory Redemption Price to a Holder on or beforethe Mandatory Redemption Date, such Holder shall be entitled to interest thereon,from and after the Mandatory Redemption Payment Date until the MandatoryRedemption Price has been paid in full, at an annual rate equal to the DefaultInterest Rate.

 

10.*                                 MISCELLANEOUS*.

 

(a)                                  Transferof Preferred Shares.  Upon notice tothe Company, a Holder may sell or transfer all or any portion of the PreferredShares to any person or entity as long as such sale or transfer is the subjectof an effective registration statement under the Securities Act or is exemptfrom registration thereunder and otherwise is made in accordance with the termsof the Securities Purchase Agreement. From and after the date of such sale or transfer, the transferee thereofshall be deemed to be a Holder.  Upon anysuch sale or transfer, the Company shall, promptly following the return of thecertificate or certificates representing the Preferred Shares that are thesubject of such sale or transfer, issue and deliver to such transferee a newcertificate in the name of such transferee.

 

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(b)                                 Notices.  Any notice, demand or request required orpermitted to be given by the Company or an Holder pursuant to the terms of thisAgreement shall be in writing and shall be deemed delivered (i) when deliveredpersonally or by verifiable facsimile transmission, unless such delivery ismade on a day that is not a Business Day, in which case such delivery will bedeemed to be made on the next succeeding Business Day, (ii) on the nextBusiness Day after timely delivery to an overnight courier and (iii) on theBusiness Day actually received if deposited in the U.S. mail (certified orregistered mail, return receipt requested, postage prepaid), addressed asfollows:

 

*If to theCompany*:

 

WorldGate Communications,Inc.

3190Tremont Avenue Trevose, Pennsylvania 19053

Attn:                    Randy Gort

Tel:                          (215)354-5100

Fax:                           (215)354-1049

 

*with acopy to*:

 

Drinker Biddle &Reath LLP

1000 Westlakes Drive,Suite 300

Berwyn, Pennsylvania19312

Attn:                    Walter J.Mostek, Jr.

Tel:                            (610)993-2200

Fax:                           (610)993-8585

 

and if to any Holder, tosuch address for such Holder as shall be designated by such Holder in writingto the Company in accordance with this paragraph (b).

 

(c)                                  Lostor Stolen Certificate.  Upon receiptby the Company of evidence of the loss, theft, destruction or mutilation of acertificate representing a Holder’s Preferred Shares, and (in the case of loss,theft or destruction) of indemnity or security reasonably satisfactory to theCompany and the Transfer Agent, and upon surrender and cancellation of suchcertificate if mutilated, the Company shall execute and deliver to such Holdera new certificate identical in all respects to the original certificate.

 

(d)                                 NoVoting Rights.  Except as provided byapplicable law and paragraph 10(g) below, the Holders of the Preferred Sharesshall have no voting rights with respect to the business, management or affairsof the Company; provided that the Company shall provide each Holder with priornotification of each meeting of stockholders (and copies of proxy statementsand other information sent to such stockholders).

 

(e)                                  Remedies.  The remedies provided to a Holder in thisCertificate shall be cumulative and in addition to all other remedies availableto such Holder under this Certificate or under any Transaction Document, at lawor in equity (including without limitation a decree of specific

 

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performance and/or otherinjunctive relief), no remedy contained herein shall be deemed a waiver ofcompliance with the provisions giving rise to such remedy and nothing containedherein shall limit such Holder’s right to pursue actual damages for any failureby the Company to comply with the terms of this Certificate. Amounts set forthor provided for herein with respect to payments, conversion and the like (andthe computation thereof) shall be the amounts to be received by the Holderhereof and shall not, except as expressly provided herein, be subject to anyother obligation of the Company (or the performance thereof). The Companyacknowledges that a material breach by it of its obligations hereunder willcause irreparable harm to the Holders and that the remedy at law for any suchbreach may be inadequate. The Company agrees, in the event of any such breachor threatened breach, each Holder shall be entitled, in addition to all otheravailable remedies, to an injunction restraining any breach, without thenecessity of showing economic loss and without any bond or other security beingrequired.

 

(f)                                    Failureor Delay not Waiver.  No failure ordelay on the part of a Holder in the exercise of any power, right or privilegehereunder shall operate as a waiver thereof, nor shall any single or partialexercise of any such power, right or privilege preclude other or furtherexercise thereof or of any other right, power or privilege.

 

(g)                                 ProtectiveProvisions. So long as shares of Series A Preferred Stock are outstanding,the Company shall not, without first obtaining the approval of the Holders ofat least two-thirds (2/3) of outstanding shares of Series A Preferred Stock:

 

(i)                                     alter,change, modify or amend (x) the terms of the Series A Preferred Stock in anyway or (y) the terms of any other capital stock of the Company so as to affectadversely the Series A Preferred Stock;

 

(ii)                                  createany new class or series of capital stock, or increase the authorized number ofany existing class or series of capital stock, in either such case having apreference over or ranking pari passu with the Series A Preferred Stock as toredemption or distribution of assets upon a Liquidation Event or any otherliquidation, dissolution or winding up of the Company;

 

(iii)                               increasethe authorized number of shares of Series A Preferred Stock;

 

(iv)                              re-issueany shares of Series A Preferred Stock which have been converted or redeemed inaccordance with the terms hereof;

 

(v)                                 issueany Pari Passu Securities or Senior Securities; or

 

(vi)                              issueany Series A Preferred Stock except pursuant to the terms of the SecuritiesPurchase Agreement.

 

In the event that the Holdersof at least two-thirds of the outstanding shares of Series A Preferred Stockagrees to allow the Company to alter or change the rights, preferences orprivileges of the shares of Series A Preferred Stock pursuant to the termshereof, no such change shall be effective to the extent that, by its terms, itapplies to less than all of the Holders of Preferred Shares then 

 

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outstanding.

 

(h)                                 FractionalShares.  No fractional shares shallbe issuable upon the conversion of the Preferred Shares or upon payment ofamounts due hereunder in shares of Common Stock.  If, upon any such conversion or payment, aHolder would be entitled to a fractional share of Common Stock or a right toacquire a fractional share of Common Stock, the number of shares of CommonStock issuable to such Holder will be rounded up or down to the nearest wholenumber of shares.

 

[Remainder of PageIntentionally Left Blank]

 

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IN WITNESS WHEREOF, theCompany has executed this Certificate as of the 23 day of June, 2004.

 

WORLDGATE COMMUNICATIONS,INC.

 

 
| By:    | /s/ Randall J. Gort                            |   |
|--------|------------------------------------------------|--------|
|   | Name:  Randall J. Gort                    |
|   | Title:    C. LO & Secretary |

 

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EXHIBIT A

 

NOTICE OFCONVERSION

 

The undersigned herebyelects to convert shares of Series A Convertible Preferred Stock (the“Preferred Stock”), represented by stock certificateNo(s).                              (the“Preferred Stock Certificates”), into shares of common stock (“Common Stock”)of WORLDGATE COMMUNICATIONS, INC. according to the terms and conditions of theCertificate of Designation relating to the Series A Preferred Stock (the“Certificate of Designation”), as of the date written below.  Capitalized terms used herein and nototherwise defined shall have the respective meanings set forth in theCertificate of Designation. Unless otherwise specified in writing to theCompany, the undersigned represents to the Company that the shares of Common Stockcovered by this notice have been or will be sold pursuant to the terms of aneffective registration statement.

 
|   | Date of Conversion:               |
|--------|-----------------------------------|
|   |                              |
|   | Stated Value of                   |
|   | Preferred Stock to be  Converted: |
|   |                              |
|   | Applicable Conversion  Price:     |
|   |                              |
|   | Number of Shares of               |
|   | Common Stock to be  Issued:       |
|   |                              |
|   | Name of Holder:                   |
|   |                              |
|   | Address:                          |
|   |                              |
|   |                              |
|   | Signature:                        |   |
|   |                              | Name: |
|   |                              | Title: |

 

Holder Requests Deliveryto be made: (check one)

 

o                                    By Delivery ofPhysical Certificates to the Above Address

 

o                                    Through DepositoryTrust Corporation

(Account                                                   )

 

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