Document:

<PAGE>   1
                                                                     EXHIBIT 4.4

                     SEE RESTRICTIVE LEGENDS ON THE REVERSE

*<< NUMBER >>*            Incorporated Under the Laws             *<< SHARES >>*
                           of the State of Delaware

                           RESTORATION HARDWARE, INC.

       THIS CERTIFIES THAT << INVESTOR >> is the record holder of
<< WRITTENSHARES >> Shares of Series A Preferred Stock of RESTORATION HARDWARE,
INC. transferable only on the books of the Corporation by the holder hereof, in
person or by duly authorized attorney, upon surrender of this certificate
properly endorsed or assigned.

       This certificate and the shares represented hereby are issued and shall
have the rights specified in and be held subject to all the provisions of the
Certificate of Incorporation (the "Charter") and the Bylaws of said corporation
and any amendments thereof, to all of which the holder of this certificate, by
acceptance hereof, assents.

       The shares represented by this Certificate are convertible into shares of
Common Stock at the election of the holder thereof and shall be so converted
upon the occurrence of certain events as set forth in the Charter.

       The Corporation is authorized to issue more than one class or series of
stock. Upon written request, the Corporation will furnish without charge to each
stockholder a copy of powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.

       IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be signed by its duly authorized officers this << Date >> day of << Month >>,
2001.

     -----------------------------------      ----------------------------------
     Chief Executive Officer                  Secretary

<PAGE>   2

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATES.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER
OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER
OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.<PAGE>   1
                                                                     EXHIBIT 4.5

                     SEE RESTRICTIVE LEGENDS ON THE REVERSE

*NUMBER*                  Incorporated Under the Laws                  *SHARES*
                           of the State of Delaware

                           RESTORATION HARDWARE, INC.

       THIS CERTIFIES THAT _________ is the record holder of _________ Shares of
Series B Preferred Stock of RESTORATION HARDWARE, INC. transferable only on the
books of the Corporation by the holder hereof, in person or by duly authorized
attorney, upon surrender of this certificate properly endorsed or assigned.

       This certificate and the shares represented hereby are issued and shall
have the rights specified in and be held subject to all the provisions of the
Certificate of Incorporation (the "Charter") and the Bylaws of said corporation
and any amendments thereof, to all of which the holder of this certificate, by
acceptance hereof, assents.

       The shares represented by this Certificate are convertible into shares of
Common Stock at the election of the holder thereof and shall be so converted
upon the occurrence of certain events as set forth in the Charter.

       The Corporation is authorized to issue more than one class or series of
stock. Upon written request, the Corporation will furnish without charge to each
stockholder a copy of powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or series
thereof and the qualifications, limitations or restrictions of such preferences
and/or rights.

       IN WITNESS WHEREOF, the said Corporation has caused this Certificate to
be signed by its duly authorized officers this _________ day of _________, 2001.

     -----------------------------------      ----------------------------------
     Chief Executive Officer                  Secretary

<PAGE>   2

THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES
ACT OF 1933, AS AMENDED (THE "ACT"), OR UNDER THE SECURITIES LAWS OF ANY STATES.
THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND
MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT AND THE
APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION
THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY MAY BE REQUIRED TO BEAR THE
FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME. THE ISSUER
OF THESE SECURITIES MAY REQUIRE AN OPINION OF COUNSEL IN FORM AND SUBSTANCE
REASONABLY SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY PROPOSED TRANSFER
OR RESALE IS IN COMPLIANCE WITH THE ACT AND ANY APPLICABLE STATE SECURITIES
LAWS.<PAGE>   1
                                                                     EXHIBIT 4.6

                           CERTIFICATE OF DESIGNATION
                                       OF
                      SERIES A AND SERIES B PREFERRED STOCK
                                       OF
                           RESTORATION HARDWARE, INC.

              Stephen Gordon and Walter Parks certify that:

       1. They are the Chief Executive Officer and Secretary, respectively, of
Restoration Hardware, Inc., a Delaware corporation (the "Corporation").

       2. The Corporation has 5,000,000 shares of Preferred Stock authorized,
none of which has been issued. The Board of Directors has by resolution
designated (i) 28,037 shares of the undesignated Preferred Stock as "Series A
Preferred Stock," none of which has been issued or is outstanding, and (ii)
21,217 shares of the undesignated Preferred Stock as "Series B Preferred Stock,"
none of which has been issued or is outstanding.

       3. Pursuant to the authority given to it by the Corporation's Certificate
of Incorporation, the Board of Directors of the Corporation has duly adopted the
following recitals and resolutions:

              "WHEREAS, the Certificate of Incorporation of the Corporation, as
       amended, provide for a class of shares known as the Preferred Stock,
       issuable from time to time in one or more series;

              WHEREAS, the Board of Directors of the Corporation is authorized,
       within the limitations and restrictions stated in the Certificate of
       Incorporation, to determine or alter the rights, preferences, privileges
       and restrictions granted to or imposed upon each wholly unissued series
       of the Preferred Stock, to fix the number of shares constituting each
       such series, and to determine the designation thereof; and

              WHEREAS, the Board of Directors of the Corporation desires,
       pursuant to its authority as aforesaid, to designate a series of the
       Preferred Stock as "Series A Preferred Stock" and another series of the
       Preferred Stock as "Series B Preferred Stock" and to designate the
       respective number of shares constituting each such series and to fix the
       respective rights, preferences, privileges and restrictions of each such
       series.

              NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors of the
       Corporation hereby designates such new series of the Preferred Stock and
       the number of shares constituting each such series and fixes the
       respective rights, preferences, privileges and restrictions relating to
       each such series as follows:

<PAGE>   2

       (A) Designation of Series. The Corporation shall have two series of
Preferred Stock, designated as "Series A Preferred Stock" (the "Series A
Preferred"), and "Series B Preferred Stock" (the "Series B Preferred").

       (B) Designation of Number of Shares in Each Series. The number of shares
constituting the Series A Preferred shall be 28,037, and the number of shares
constituting the Series B Preferred shall be 21,217, and the Corporation shall
not issue (i) any additional shares of Series A Preferred after the Purchase
Date (as defined in Section 3(C)(3)(d)(1)), except in connection with the
conversion of shares of Series B Preferred into shares of Series A Preferred or
(ii) any additional shares of Series B Preferred, except as dividends on shares
of Series B Preferred pursuant to Section 3(D)(1)(a).

       (C) Fixing the Rights, Preferences, Privileges and Restrictions of Series
A Preferred. The following rights, preferences, privileges and restrictions are
hereby granted to and imposed upon the Series A Preferred:

              1. DIVIDEND RIGHTS.

                     (a) The holders of the Series A Preferred shall be entitled
to receive in any fiscal year, out of the funds legally available therefor, cash
dividends accrued from the date of the original issuance of the first shares of
Series A Preferred (no matter when such shares were actually issued) at the rate
of $100 per share (adjusted for any subdivisions, combinations, consolidations
or stock distributions or stock dividends with respect to such shares) per annum
on each outstanding share of Series A Preferred, payable in preference and
priority to any payment of any dividend on the Common Stock. Such dividends
shall be payable when, as and if declared. Upon the exercise of the
Corporation's redemption right set forth in Sections 3(b) and 7(a) and the
determination of the liquidation preference set forth in Section 2(a), the right
to such dividends on the Series A Preferred shall be deemed to be cumulative,
and the right to receive such dividends shall be deemed to have accrued to
holders of the Series A Preferred notwithstanding the fact that dividends on
such shares are not declared or paid in any prior year; provided, however, that
the right to such dividends on the Series A Preferred shall not be deemed to be
cumulative, and such right to receive such dividends shall not have been deemed
to have accrued to holders of the Series A Preferred upon any conversion of the
Series A Preferred on the terms and conditions set forth in this Certificate of
Designation. Notwithstanding anything to the contrary contained herein, upon any
conversion of the Series B Preferred into Series A Preferred on or before August
31, 2001, the shares of Series A Preferred issued pursuant to the conversion
shall be deemed to have been issued as of the date of the first issuance of the
Series A Preferred and shall have accrued dividends as of such date of first
issuance of the Series A Preferred as otherwise provided for Series A Preferred
herein.

                     (b) Except for any dividends to the holders of the Series B
Preferred, this Corporation shall not pay or declare a dividend in any year,
whether in cash or property, nor shall any other distribution be made in any
year, on any Common Stock or any other security junior to the Series A
Preferred, nor shall shares of any Common Stock or any other security junior to
the Series A Preferred of the Corporation be purchased, redeemed, or otherwise
acquired for value by the Corporation in any year (except for acquisitions of
Common Stock by the Corporation pursuant to existing agreements which permit the
Corporation to repurchase

                                      -2-
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such shares upon termination of services to the Corporation in an amount not to
exceed $200,000 or otherwise approved by the Series A Directors (as defined in
Section 4(b)) unless and until full dividends (set forth in Section 1(a) above)
on the Series A Preferred shall have been declared and paid for such fiscal
year. Upon full payment of the dividends to the Series A Preferred holders
pursuant to Section 1(a) above, any further dividends, whether payable in cash
or non-cash distribution, shall be payable pro rata to the holders of Series A
Preferred and Common Stock on an as-converted basis.

              2. LIQUIDATION.

                     (a) PREFERENCE. In the event of any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of Series A Preferred shall be entitled to receive, prior and in
preference to any distribution of any of the assets of the Corporation to the
holders of Common Stock, or any other equity security other than Series B
Preferred, by reason of their ownership thereof, an amount per share equal to
the greater of: (A) Original Issue Price (as defined in Section 3(a)) (as
adjusted for any stock splits, stock dividends, recapitalizations or the like)
plus all accrued and unpaid dividends thereon to the date of liquidation,
dissolution or winding up of the Corporation, payable in cash (except to the
extent of dividends payable in kind accrued pursuant to Section 3(e)) or (B) the
amount which such holder would have received assuming all shares of Series A
Preferred had been converted into Common Stock at the then applicable Conversion
Price immediately prior to the liquidation, dissolution or winding up of the
Corporation. If, upon the occurrence of such event, the assets and funds thus
distributed among the holders of Series A Preferred shall be insufficient to
permit the payment to such holders of the full aforesaid preferential amounts,
then, the entire assets and funds of the Corporation legally available for
distribution shall be distributed ratably among the holders of Series A
Preferred in proportion to the preferential amount each such holder is otherwise
entitled to receive.

                     (b) REMAINING ASSETS. Upon the completion of the
distribution required by Section 2(a) above, the remaining assets of the
Corporation available for distribution to stockholders shall be distributed
among the holders of Junior Stock in accordance with the terms thereof.

                     (c) CERTAIN ACQUISITIONS.

                            (i) DEEMED LIQUIDATION. For purposes of this Section
2, any holder of the Series A Preferred shall be entitled to designate that a
liquidation, dissolution or winding up of the Corporation shall be deemed to
have occurred with respect to its or his shares of Series A Preferred if (A) the
Corporation shall sell, convey, or otherwise dispose of all or substantially all
of its property or business or (B) the Corporation shall merge into or
consolidate with any other corporation (other than a wholly-owned subsidiary
corporation) or undergo a recapitalization or (C) the Corporation shall effect
any other transaction, in the case of clauses (B) and (C), as a result of which
the holders of outstanding voting stock of the Corporation immediately prior to
the transaction cease to own a majority of the outstanding voting stock
immediately following the transaction or (D) directors, including the Series A
Directors (as defined in Section 4(b)) and the Chief Executive Officer of the
Corporation, who, as of the original date of issuance of the Series A Preferred
(all such directors collectively referred to

                                      -3-
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herein as the "Incumbent Board"), cease for any reason to constitute at least a
majority of the Board of Directors, provided that any individual who becomes a
director after the date of the original issuance of the Series A Preferred whose
election, or nomination for election by the Corporation's stockholders, is
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered to be a member of the Incumbent Board, or
(E) any person (other than the holders of the Series A Preferred) becomes the
beneficial owner (within the meaning of Rule 13d-3 promulgated under the
Securities Exchange Act of 1934) of forty percent (40%) or more of either the
then outstanding shares of Common Stock or the combined voting power of the
Corporation's then outstanding securities entitled to vote generally in the
election of directors.

                            (ii) NOTICE OF TRANSACTION. The Corporation shall
give each holder of record of Series A Preferred written notice of such
impending transaction not later than twenty (20) days prior to the stockholders'
meeting called to approve such transaction, or twenty (20) days prior to the
closing of such transaction, whichever is earlier, and shall also notify such
holders in writing of the final approval of such transaction. The first of such
notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section 2, and the Corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after the
Corporation has given the first notice provided for herein or sooner than twenty
(20) days after the Corporation has given notice of any material changes
provided for herein; provided, however, that such periods may be shortened upon
the written consent of the holders of Series A Preferred that are entitled to
such notice rights or similar notice rights and that represent at least two
thirds (2/3) of the voting power of all then outstanding shares of the Series A
Preferred.

                            (iii) EFFECT OF NONCOMPLIANCE. In the event the
requirements of this Section 2(c) are not complied with, the Corporation shall
forthwith either cause the closing of the transaction to be postponed until such
requirements have been complied with, or cancel such transaction, in which event
the rights, preferences and privileges of the holders of Series A Preferred
shall revert to and be the same as such rights, preferences and privileges
existing immediately prior to the date of the first notice referred to in
Section 2(c)(ii) hereof.

                     (d) Nothing hereinabove set forth shall affect in any way
the right of each holder of Series A Preferred to convert such stock at any time
and from time to time in accordance with Section 3.

              3. CONVERSION. The holders of Series A Preferred shall have
conversion rights as follows (the "Conversion Rights"):

                     (a) HOLDERS' RIGHT TO CONVERT. Subject to Section 3(c),
each share of the Series A Preferred shall be convertible, in whole or in part,
at the option of the holder thereof, at any time or times after the date of
issuance of such shares, at the office of the Corporation or any transfer agent
for such stock, into such number of fully paid and nonassessable shares of
Common Stock as is determined by dividing (i) One Thousand Dollars ($1,000) (the
"Original Issue Price") (plus all declared and unpaid dividends) by (ii) the
Conversion Price applicable to such share, determined as hereafter provided, in
effect on the date the certificate is surrendered for conversion. The initial
"Conversion Price" per share of Series A

                                      -4-
<PAGE>   5

Preferred shall be equal to Two Dollars ($2.00). Such initial Conversion Price
shall be subject to adjustment as set forth in Section 3(d).

                     (b) CORPORATION'S RIGHT OF CONVERSION. At any time after
the third anniversary of the date of the original issuance of the Series A
Preferred, the Corporation may require, by written notice (the "Conversion
Notice") to each holder of Series A Preferred, that such holders convert their
shares of Series A Preferred into shares of Common Stock of the Corporation;
provided that, the average of the closing prices per share of Common Stock of
the Corporation on Nasdaq or a national securities exchange for the twenty (20)
trading days ending three (3) business days preceding the date that the
Corporation sent the Conversion Notice exceeds three times the then Conversion
Price. Upon delivery of the Conversion Notice to the holders of Series A
Preferred, the holders of Series A Preferred shall be deemed to have
automatically exercised a demand right for the registration of such shares;
provided, however, that although such demand registration shall not constitute
an exercise of a demand registration right under Sections 2.2(a) and 2.2(c) of
the Investor Rights Agreement among the holders of the Series A Preferred and
the Corporation, such demand registration shall otherwise be on the terms and
conditions of the Investor Rights Agreement. Notwithstanding anything to the
contrary contained in the first sentence of this Section 3(b), if the holders of
Series A Preferred do not receive a price per share for their stock equal to at
least three times the then Conversion Price, the Conversion Notice shall have no
further force or effect and the holders of the Series A Preferred Stock may
elect to sell their shares in the registered offering required by their demand
right or retain their shares of Series A Preferred. Any shares of Series A
Preferred held by a holder who notifies the Corporation that it does not wish to
be included in such demand registration within thirty (30) days of receipt of
the Conversion Notice shall be automatically converted into shares of Common
Stock at the close of business on the thirtieth (30th) day, unless it indicates
it wants to be redeemed by the Corporation for an amount equal to the Original
Issue Price plus accrued but unpaid dividends, in which case the Corporation
shall effect such redemption.

                     (c) MECHANICS OF CONVERSION. Before any holder of Series A
Preferred shall be entitled to convert the same into shares of Common Stock
pursuant to Section 3(a), the holder shall surrender the certificate or
certificates therefor, duly endorsed, at the office of the Corporation or of any
transfer agent for the Series A Preferred, and shall give written notice to the
Corporation at its principal corporate office, of the election to convert the
same and shall state therein the name or names in which the certificate or
certificates for shares of Common Stock are to be issued. The Corporation shall,
as soon as practicable thereafter, issue and deliver at such office to such
holder of Series A Preferred, or to the nominee or nominees of such holder, a
certificate or certificates for the number of shares of Common Stock to which
such holder shall be entitled as aforesaid. Such conversion shall be deemed to
have been made immediately prior to the close of business on the date of such
surrender of the shares of Series A Preferred to be converted, and the person or
persons entitled to receive the shares of Common Stock issuable upon such
conversion shall be treated for all purposes as the record holder or holders of
such shares of Common Stock as of such date.

                                      -5-
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                     (d) CONVERSION PRICE ADJUSTMENTS OF PREFERRED STOCK FOR
CERTAIN DILUTIVE ISSUANCES, SPLITS AND COMBINATIONS. The Conversion Price of the
Series A Preferred shall be adjusted from time to time as follows, unless such
adjustment is specifically waived by the holder of at least two-thirds (2/3) of
the outstanding shares of Series A Preferred:

                            (i) ISSUANCE OF ADDITIONAL STOCK BELOW CONVERSION
PRICE OR MARKET PRICE. If the Corporation shall issue, after the date upon which
any of Series A Preferred were first issued (the "Purchase Date" with respect to
such series), any Additional Stock (as defined below) without consideration or
for a consideration per share less than the greater of (1) the Conversion Price
for the Series A Preferred in effect immediately prior to the issuance of such
Additional Stock or (2) the lesser of the last bid price or the last sale price
for a share of the Corporation's Common Stock on the trading day preceding the
date of issuance, then, the new Conversion Price shall be determined by
multiplying the Conversion Price then in effect by a fraction, (x) the numerator
of which shall be the number of shares of Common Stock outstanding immediately
prior to such issuance (the "Outstanding Common") plus the number of shares of
Common Stock that the aggregate consideration received by the Corporation for
such issuance would purchase at such existing Conversion Price or market price;
and (y) the denominator of which shall be the number of shares of Outstanding
Common plus the number of shares of such Additional Stock. Anything in this
paragraph to the contrary notwithstanding, without prior approval of the
Company's stockholders, the Series A Preferred shall not be convertible into
more than 3,410,000 shares of Common Stock. Any adjustment which is not made as
a result of the foregoing sentence shall be deferred and made retroactively at
the time of such stockholder approval.

                            (A) DEFINITION OF "ADDITIONAL STOCK". For purposes
              of this Section 3(d)(i), "Additional Stock" shall mean any shares
              of Common Stock issued (or deemed to have been issued pursuant to
              Section 3(d)(i)(D)) by the Corporation after the Purchase Date),
              other than:

                                   (1) Common Stock issued pursuant to a
                     transaction described in Section 3(d)(ii) hereof;

                                   (2) Shares of Common Stock, or options or
                     warrants to purchase Common Stock, not to exceed One
                     Million shares of Common Stock, issuable or issued to
                     employees, officers, consultants or directors of the
                     Corporation for the primary purpose of soliciting or
                     retaining their employment or services directly or pursuant
                     to a stock option plan or restricted stock plan approved by
                     the Board of Directors of the Corporation;

                                   (3) Shares of Common Stock issuable upon
                     exercise of warrants, options, notes or other rights to
                     acquire securities of the Corporation outstanding as of the
                     Purchase Date; and

                                   (4) Shares of Common Stock issued or issuable
                     upon conversion of the Series A Preferred.

                                      -6-
<PAGE>   7

                            (B) NO FRACTIONAL ADJUSTMENTS. No adjustment of the
              Conversion Price for the Series A Preferred shall be made in an
              amount less than one-tenth of a cent per share, provided that any
              adjustments which are not required to be made by reason of this
              sentence shall be carried forward and shall be either taken into
              account in any subsequent adjustment made prior to three years
              from the date of the event giving rise to the adjustment being
              carried forward, or shall be made at the end of three years from
              the date of the event giving rise to the adjustment being carried
              forward.

                            (C) DETERMINATION OF CONSIDERATION. In the case of
              the issuance of Common Stock for cash, the consideration shall be
              deemed to be the amount of cash paid therefor before deducting any
              reasonable discounts, commissions or other expenses allowed, paid
              or incurred by the Corporation for any underwriting or otherwise
              in connection with the issuance and sale thereof. In the case of
              the issuance of the Common Stock for a consideration in whole or
              in part other than cash, the consideration other than cash shall
              be deemed to be the fair value thereof as mutually determined by
              the Board of Directors and the holders of a majority of the shares
              of the Series A Preferred; provided, however, that if the Board of
              Directors and such holders are unable to reach a mutual agreement
              on the fair value thereof, the Company shall select and retain an
              investment bank of national reputation, reasonably acceptable to
              such holders, to opine on such fair value of the property, which
              opinion shall be conclusive.

                            (D) DEEMED ISSUANCES OF COMMON STOCK. In the case of
              the issuance (whether before, on or after the Purchase Date) of
              options to purchase or rights to subscribe for Common Stock,
              securities by their terms convertible into or exchangeable for
              Common Stock or options to purchase or rights to subscribe for
              such convertible or exchangeable securities, the following
              provisions shall apply for all purposes of this Section 3(d)(i):

                                   (1) The aggregate maximum number of shares of
                     Common Stock deliverable upon exercise (assuming the
                     satisfaction of any conditions to exercisability, including
                     without limitation, the passage of time, but without taking
                     into account potential antidilution adjustments) of such
                     options to purchase or rights to subscribe for Common Stock
                     shall be deemed to have been issued at the time such
                     options or rights were issued and for a consideration equal
                     to the consideration (determined in the manner provided in
                     Section 3(d)(i)(C)), if any, received by the Corporation
                     upon the issuance of such options or rights plus the
                     minimum exercise price provided in such options or rights
                     (without taking into account potential antidilution
                     adjustments) for the Common Stock covered thereby.

                                   (2) The aggregate maximum number of shares of
                     Common Stock deliverable upon conversion of or in exchange
                     (assuming the satisfaction of any conditions to
                     convertibility or exchangeability, including, without
                     limitation, the passage of time, but without taking into

                                      -7-
<PAGE>   8

                     account potential antidilution adjustments) for any such
                     convertible or exchangeable securities or upon the exercise
                     of options to purchase or rights to subscribe for such
                     convertible or exchangeable securities and subsequent
                     conversion or exchange thereof shall be deemed to have been
                     issued at the time such securities were issued or such
                     options or rights were issued and for a consideration equal
                     to the consideration, if any, received by the Corporation
                     for any such securities and related options or rights
                     (excluding any cash received on account of accrued interest
                     or accrued dividends), plus the minimum additional
                     consideration, if any, to be received by the Corporation
                     (without taking into account potential antidilution
                     adjustments) upon the conversion or exchange of such
                     securities or the exercise of any related options or rights
                     (the consideration in each case to be determined in the
                     manner provided in Section 3(d)(i)(C).

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

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

                                   (5) The number of shares of Common Stock
                     deemed issued and the consideration deemed paid therefor
                     pursuant to Sections 3(d)(i)(E)(1) and 3(d)(i)(E)(2) shall
                     be appropriately adjusted to reflect any change,
                     termination or expiration of the type described in either
                     Section 3(d)(i)(E)(3) or 3(d)(i)(E)(4).

                            (E) NO INCREASED CONVERSION PRICE. Notwithstanding
              any other provisions of this Section 3(d)(i), except to the
              limited extent provided for in

                                      -8-
<PAGE>   9

              Sections 3(d)(i)(D)(3) and 3(d)(i)(D)(4), no adjustment of the
              Conversion Price pursuant to this Section 3(d)(i) shall have the
              effect of increasing the Conversion Price above the Conversion
              Price in effect immediately prior to such adjustment.

                            (ii) STOCK SPLITS AND DIVIDENDS. In the event the
Corporation should at any time or from time to time after the Purchase Date fix
a record date, or shall otherwise cause, for the effectuation of a split or
subdivision of the outstanding shares of Common Stock or the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in additional shares of Common Stock or other securities or rights
convertible into, or entitling the holder thereof to receive directly or
indirectly, additional shares of Common Stock (hereinafter referred to as
"Common Stock Equivalents") without payment of any consideration by such holder
for the additional shares of Common Stock or the Common Stock Equivalents
(including the additional shares of Common Stock issuable upon conversion or
exercise thereof), then, as of such record date (or the date of such dividend,
distribution, split or subdivision if no record date is fixed), the Conversion
Price of the Series A Preferred shall be appropriately decreased so that the
number of shares of Common Stock issuable on conversion of each share of such
series shall be increased in proportion to such increase of the aggregate of
shares of Common Stock outstanding and those issuable with respect to such
Common Stock Equivalents with the number of shares issuable with respect to
Common Stock Equivalents determined from time to time.

                            (iii) REVERSE STOCK SPLITS. If the number of shares
of Common Stock outstanding at any time after the Purchase Date is decreased by
a combination of the outstanding shares of Common Stock, then, following the
record date of such combination, the Conversion Price for the Series A Preferred
shall be appropriately increased so that the number of shares of Common Stock
issuable on conversion of each share of such series shall be decreased in
proportion to such decrease in outstanding shares.

                     (e) OTHER DISTRIBUTIONS. In the event the Corporation shall
declare a distribution payable in securities of other persons, evidences of
indebtedness issued by the Corporation or other persons, assets (excluding cash
dividends) or options or rights not referred to in Section 3(d)(ii), then, in
each such case for the purpose of this Section 3(e), the holders of Series A
Preferred shall be entitled to a proportionate share of any such distribution as
though they were the holders of the number of shares of Common Stock of the
Corporation into which their shares of Series A Preferred are convertible as of
the record date fixed for the determination of the holders of Common Stock of
the Corporation entitled to receive such distribution, and such distributions
(to the extent such distributions have previously not been paid to the holders
of the shares of Series A Preferred) shall be deemed to be accrued dividends for
shares of the Series A Preferred.

                     (f) RECAPITALIZATIONS AND MERGERS. If at any time or from
time to time there shall be a recapitalization of the Common Stock or a merger
or sale of assets transaction (other than a subdivision or combination provided
for elsewhere in this Section 3) provision shall be made so that the holders of
Series A Preferred shall thereafter be entitled to receive upon conversion of
such Series A Preferred the number of shares of stock or other securities or
property of the Corporation or otherwise, to which a holder of Common Stock
deliverable upon conversion would have been entitled on such recapitalization,
merger or sale

                                      -9-
<PAGE>   10

transaction. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 3 with respect to the rights of
the holders of such Series A Preferred after the recapitalization, merger or
sale transaction to the end that the provisions of this Section 3 (including
adjustment of the Conversion Price then in effect and the number of shares
purchasable upon conversion of such Series A Preferred) shall be applicable
after that event and be as nearly equivalent as practicable.

                     (g) NO IMPAIRMENT. The Corporation will not, by amendment
of its Certificate of Incorporation or through any reorganization,
recapitalization, transfer of assets, consolidation, merger, dissolution, issue
or sale of securities or any other voluntary action, avoid or seek to avoid the
observance or performance of any of the terms to be observed or performed
hereunder by the Corporation, but will at all times in good faith assist in the
carrying out of all the provisions of this Section 3 and in the taking of all
such actions as may be necessary or appropriate in order to protect the
Conversion Rights of the holders of Series A Preferred against impairment.

                     (h) NO FRACTIONAL SHARES AND CERTIFICATE AS TO ADJUSTMENTS.

                            (i) No fractional shares shall be issued upon the
conversion of any share or shares of Series A Preferred, and the number of
shares of Common Stock to be issued shall be rounded to the nearest whole share.
The number of shares issuable upon such conversion shall be determined on the
basis of the total number of shares of Series A Preferred the holder is at the
time converting into Common Stock and the number of shares of Common Stock
issuable upon such aggregate conversion.

                            (ii) Upon the occurrence of each adjustment or
readjustment of the Conversion Price of the Series A Preferred pursuant to this
Section 3, the Corporation, at its expense, shall promptly compute such
adjustment or readjustment in accordance with the terms hereof and prepare and
furnish to each holder of Series A Preferred a certificate setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon the written
request at any time of any holder of Series A Preferred, furnish or cause to be
furnished to such holder a like certificate setting forth (A) such adjustment
and readjustment, (B) the Conversion Price for the Series A Preferred at the
time in effect, and (C) the number of shares of Common Stock and the amount, if
any, of other property which at the time would be received upon the conversion
of a share of the Series A Preferred.

                     (i) NOTICES OF RECORD DATE AND EXTRAORDINARY TRANSACTIONS.
In the event of any taking by the Corporation of a record of the holders of any
class of securities for the purpose of determining the holders thereof who are
entitled to receive any dividend (other than a cash dividend) or other
distribution, any right to subscribe for, purchase or otherwise acquire any
shares of stock of any class or any other securities or property, or to receive
any other right, or in the event of a proposed liquidation, recapitalization,
merger or sale involving the Corporation, the Corporation shall mail to each
holder of Series A Preferred, at least twenty (20) days prior to the record date
or date of the proposed transaction, a notice specifying the date on which any
such record is to be taken for the purpose of such dividend, distribution or
right, and the amount

                                      -10-
<PAGE>   11

and character of such dividend, distribution or right, or the nature of the
proposed transaction and the proposed date of consummation of such transaction.

                     (j) RESERVATION OF STOCK ISSUABLE UPON CONVERSION. The
Corporation shall at all times reserve and keep available out of its authorized
but unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of the Series A Preferred, such number of its shares of
Common Stock as shall from time to time be sufficient to effect the conversion
of all outstanding shares of Series A Preferred; and if at any time the number
of authorized but unissued shares of Common Stock shall not be sufficient to
effect the conversion of all then outstanding shares of Series A Preferred, in
addition to such other remedies as shall be available to the holder of Series A
Preferred, the Corporation will take such corporate action as may, in the
opinion of its counsel, be necessary to increase its authorized but unissued
shares of Common Stock to such number of shares as shall be sufficient for such
purposes, including, without limitation, engaging in best efforts to obtain the
requisite stockholder approval of any necessary amendment to this Certificate of
Incorporation.

                     (k) NOTICES. Any notice required by the provisions of this
Section 3 to be given to the holders of shares of Series A Preferred shall be
deemed given if deposited in the United States mail, postage prepaid, and
addressed to each holder of record at its, his or her address appearing on the
books of the Corporation.

              4. VOTING RIGHTS.

                     (a) GENERALLY. The holder of each share of Series A
Preferred shall have the right to one vote for each share of Common Stock into
which such Preferred Stock could then be converted, and with respect to such
vote, such holder shall have full voting rights and powers equal to the voting
rights and powers of the holders of Common Stock, and shall be entitled,
notwithstanding any provision hereof, to notice of any stockholders' meeting in
accordance with the Bylaws of the Corporation, and shall be entitled to vote,
together with holders of Common Stock, with respect to any question upon which
holders of Common Stock have the right to vote. Fractional votes shall not,
however, be permitted and any fractional voting rights available on an
as-converted basis shall be rounded to the nearest whole number (with one-half
being rounded upward).

                     (b) RIGHT TO ELECT DIRECTORS. The Board of Directors of the
Corporation shall consist of nine (9) members. So long as the holders of Series
A Preferred and their respective affiliates hold, in the aggregate, fifty
percent (50%) or more of the shares of Series A Preferred originally issued to
such holders, the holders of Series A Preferred shall be entitled, voting
together as a separate class, to elect two (2) directors of this Corporation
(the "Series A Directors"); provided, however, that, except as provided below in
this Section 4(b), if the holders of Series A Preferred and their respective
affiliates hold, in the aggregate, twenty-five percent (25%) or more but less
than fifty percent (50%) of the shares of Series A Preferred originally issued
to such holders, the holders of Series A Preferred shall be entitled, voting
together as a separate class, to elect only one (1) Series A Director; provided,
further, that if the holders of Series A Preferred and their respective
affiliates hold, in the aggregate, less than twenty-five percent (25%) of the
shares of Series A Preferred originally issued to such holders or such
equivalent number of shares of Common Stock issued upon any conversion of such
Series

                                      -11-
<PAGE>   12

A Preferred, or if more than fifty percent (50%) of the shares of Series A
Preferred originally issued on the Purchase Date or such equivalent number of
shares of Common Stock issued upon any conversion of such Series A Preferred are
transferred to a Competitor of the Corporation, such holders of Series A
Preferred shall not be entitled to elect any Series A Directors. For purposes of
this Section 4(b), "Competitor of the Corporation" shall mean (a) a retail
company (including without limitation, a subsidiary or business unit of a
company, which subsidiary or business unit has more than $50,000,000 in
revenues), where an aggregate of 25% or more of its revenue (including revenue
of any subsidiary or business unit) is derived from the home furnishings
business, including without limitation, lighting, floor covering, furniture,
hardware and tools, or hard goods business or (b) a manufacturer, supplier or
other vendor that has a material vendor relationship with the Company. The
holders of the Series A Preferred and the Common Stock, voting together as a
single class, shall be entitled to elect the remaining directors of this
Corporation (the "At Large Directors"). Notwithstanding the foregoing, (i) as
long as Palladin Capital Group, Inc. and its affiliates (collectively,
"Palladin") continue to hold at least fifty percent (50%) of the shares of
Series A Preferred originally issued to Palladin or such equivalent number of
shares of Common Stock upon any conversion of such Series A Preferred, the
Corporation shall cause a Palladin designee to be nominated as a Series A
Director, and the Corporation shall use its best efforts to cause the election
of a Palladin designee to the Board of Directors and (ii) as long as Reservoir
Capital Group, L.L.C. and its affiliates and Glenhill Capital LP (collectively,
"Reservoir") continue to hold at least fifty percent (50%) of the shares of
Series A Preferred originally issued to Reservoir or such equivalent number of
shares of Common Stock upon any conversion of such Series A Preferred, the
Corporation shall cause a Reservoir designee to be nominated as a Series A
Director, and the Corporation shall use its best efforts to cause the election
of a Reservoir designee to the Board of Directors. At least one of the Series A
Directors shall be entitled to serve on all committees of the Board of Directors
of the Corporation. In the case of any vacancy in the office of a director
occurring among the directors elected by the holders of a class and/or series as
aforesaid, such vacancy shall be filled by the remaining director or directors
elected by that class and/or series, if any, or if no such director remains, by
the affirmative vote of the holders of the applicable class and/or series as
provided above. A director elected by a particular class of stock as set forth
above may only be removed by the vote of the holders of a majority of the shares
of the class or series entitled to elect such director.

              5. PROTECTIVE PROVISIONS.

              The Corporation shall not, without first obtaining the approval
(by vote or written consent, as provided by law) of the holders of at least a
two-thirds (2/3) of the then outstanding shares of the Series A Preferred,
voting together as a single class, including by way of merger (except any
merger, consolidation, acquisition or similar transaction, or series of
transactions, to which the provisos in sub-Section (h) below shall apply):

                     (a) Alter or change the Corporation's Certificate of
Incorporation, as amended to date, so as to affect the rights, preferences or
privileges of the Series A Preferred;

                     (b) Create or issue any new class of shares having a
preference senior to or on a parity with the Series A Preferred;

                                      -12-
<PAGE>   13

                     (c) Reclassify any outstanding shares into shares having
preferences or priority as to dividends or assets senior to or on a parity with
the preference of the Series A Preferred;

                     (d) Alter or change the Corporation's Bylaws;

                     (e) Effect any redemption or repurchase of any capital
stock or options of the Corporation;

                     (f) Declare or pay any dividend or other distribution on
any shares of Common Stock, all other existing or future classes or series of
Preferred Stock (other than the Series B Preferred), or parity stock;

                     (g) Enter into a transaction with an officer or director of
the Corporation, a holder of five percent (5%) or greater of the Corporation's
outstanding shares of Common Stock and Common Stock equivalents, a holder of the
Corporation's Preferred Stock, or their respective affiliates (collectively,
"Corporation Affiliates") valued in excess of Two Hundred and Fifty Thousand
Dollars ($250,000);

                     (h) Enter into a transaction resulting in a merger,
consolidation, acquisition or similar transaction, or series of transactions, of
the Corporation with one or more other corporations in which stockholders of the
Corporation prior to such transaction, or series of transactions, would hold
stock representing less than a majority of the voting power of the outstanding
stock of the surviving corporation immediately after such transaction, or series
of transactions; provided, however, that this Section 5(h) shall not apply to
any transaction in which the holders of the Series A Preferred receive in cash
or in cash equivalents (including without limitation, freely tradeable
securities reasonably acceptable to the holders of the Series A Preferred,
valued on the basis of net proceeds to the holders thereof on a sale of such
securities), and the holders of Common Stock will receive consideration at least
three (3) times the then current Conversion Price per share; provided, further,
that in the case of cash equivalents, the value of the property shall be
mutually agreed by the Company and the holders of the Series A Preferred, and if
the Company and such holders are unable to mutually agree, they shall jointly
select and retain an investment banking firm of national reputation to opine on
the value of the property to be received, which opinion shall be conclusive;

                     (i) Enter into a transaction that results in the sale of
all or substantially all of the Corporation's assets; provided, however, that
this Section 5(i) shall not apply to any transaction in which the holders of the
Series A Preferred receive in cash or in cash equivalents, and the holders of
Common Stock will receive consideration at least three (3) times the then
current Conversion Price per share; provided, further, that in the case of cash
equivalents (including, without limitation, freely tradable securities
reasonably acceptable to the holders of two-thirds (2/3) of the Series A
Preferred, valued on the basis of net proceeds to the holders thereof on a sale
of such securities), the value of the property shall be mutually agreed by the
Company and the holders of the Series A Preferred, and if the Company and such
holders are unable to mutually agree, they shall jointly select and retain an
investment banking firm of national reputation to opine on the value of the
property to be received, which opinion shall be conclusive;

                                      -13-
<PAGE>   14

                     (j) Increase the authorized number of Preferred Stock or
issue any additional shares of Preferred Stock; or

                     (k) Increase or decrease the authorized number of directors
of the Corporation;

              provided, however, that with respect to matters set forth in
Section 5(d) through 5(k) above, such approval of the holders of the shares of
the Series A Preferred shall not be required if less than twenty percent (20%)
of the shares of the Series A Preferred originally issued by the Corporation
remain outstanding.

              6. STATUS OF REDEEMED, REPURCHASED OR CONVERTED STOCK. In the
event any shares of Preferred Stock shall be redeemed, repurchased or converted
into shares of Common Stock, the shares so redeemed, repurchased or converted
shall be canceled and shall not be issuable by the Corporation. The Certificate
of Incorporation of the Corporation shall be appropriately amended to effect the
corresponding reduction in the Corporation's authorized capital stock.

              7. REDEMPTION.

                     (a) Redemption at Option of Corporation. At any time and
from time to time after the fifth anniversary of the date of the original
issuance of the Series A Preferred, the Corporation may redeem some or all of
the outstanding shares of Series A Preferred out of funds legally available
therefor, in accordance with the provisions contained in this Section 7(a). If
less than all of the shares are capable of being redeemed, then such shares
shall be redeemed on a pro rata basis, based on the number of shares of Series A
Preferred outstanding.

                     (b) Redemption Price. The price at which each share of
Series A Preferred shall be redeemed shall be equal to the greater of (i) the
average of the closing prices per share of Common Stock of the Corporation for
the twenty (20) trading days ending three (3) business days preceding the date
that the Corporation sent the Redemption Notice (as defined in sub-Section (c))
or (ii) the Original Issue Price plus all accrued and unpaid dividends (the
"Series A Redemption Price").

                     (c) Exercise of Option to Redeem. If the Corporation elects
to exercise its option to redeem some or all of the outstanding shares of Series
A Preferred pursuant to this Section 7, the Corporation must deliver written
notice thereof of such election to each holder of Series A Preferred (a
"Redemption Notice") at least thirty (30) days prior to the date of redemption;
provided, further, that any holder of shares of Series A Preferred shall have
the right to convert its shares of Series A Preferred in accordance with the
terms and conditions set forth in Section 3 above following its receipt of the
Redemption Notice. Holders of shares of Series A Preferred will be required to
present and surrender the certificate or certificates representing shares to be
redeemed on the date that the Corporation set for redemption in the Redemption
Notice (duly endorsed for transfer) to the Corporation at the principal
executive offices of the Corporation. The Corporation shall pay the Series A
Redemption Price to, or to the order of, the person whose name appears on such
certificate or certificates so surrendered. If the number of shares represented
by the certificate or certificates surrendered shall exceed the number of shares

                                      -14-
<PAGE>   15

to be redeemed, the Corporation shall issue and deliver on the redemption date
of the Series A Preferred to the person entitled thereto a certificate or
certificates representing the unredeemed balance of such shares. If the
Corporation elects to exercise its option to redeem some but not all of the
outstanding shares of Series A Preferred pursuant to this Section 7, the
Corporation shall redeem the shares of Series A Preferred ratably on the basis
of the number of shares of Series A Preferred held by each such holder to be
redeemed.

                     (d) Effect of Redemption. From and after each Series A
Preferred redemption date, unless the Corporation shall default in providing for
the payment of the Series A Redemption Price, all dividends (if any) shall cease
to accrue with respect to the shares to be redeemed on such Series A Preferred
redemption date pursuant to this Section 7, and all rights of the holders of any
shares subject to redemption on such Series A Preferred redemption date as
stockholders of the Corporation, except the right to receive the Series A
Redemption Price shall cease and terminate. Any shares of Series A Preferred
that are redeemed by the Corporation shall be retired and shall not be reissued
(it being understood that if notes have been issued to evidence such redemption
obligations, redemption does not occur until such notes and any interest thereon
have been paid in full).

       (D) Fixing the Rights, Preferences, Privileges and Restrictions of Series
B Preferred. The following rights, preferences, privileges and restrictions are
hereby granted to and imposed upon the Series B Preferred:

              1. DIVIDEND RIGHTS.

                     (a) The holders of the Series B Preferred shall be entitled
to receive on each March 15 and September 15, commencing on September 15, 2001,
out of the funds legally available therefor, cash dividends (or in additional
shares of newly issued Series B Preferred if the Corporation's lenders do not
consent to cash dividends valued at $1,000 per share) at the rate of $200 per
share (adjusted for any subdivisions, combinations, consolidations or stock
distributions or stock dividends with respect to such shares) per annum on each
outstanding share of Series B Preferred commencing from the date of the original
issuance of the Series B Preferred, payable in preference and priority to any
payment of any dividend on the Common Stock, Series A Preferred and any other
equity securities of the Corporation. The right to such dividends on the Series
B Preferred shall be cumulative, and the right to receive such dividends shall
accrue to holders of the Series B Preferred even if dividends on such shares are
not declared or paid in any prior year.

                     (b) This Corporation shall not pay or declare a dividend in
any year, whether in cash or property, nor shall any other distribution be made
in any year, on any Common Stock or Series A Preferred or any other equity
securities of the Corporation, nor shall shares of any Common Stock or Series A
Preferred or any other equity securities of the Corporation be purchased,
redeemed, or otherwise acquired for value by the Corporation in any year unless
and until full dividends (set forth in Section 1(a) above) on the Series B
Preferred shall have been declared and paid for such fiscal year.

                                      -15-
<PAGE>   16

              2. LIQUIDATION.

                     (a) PREFERENCE. In the event of any liquidation,
dissolution or winding up of the Corporation, either voluntary or involuntary,
the holders of Series B Preferred shall be entitled to receive, prior and in
preference to any distribution of any of the assets of the Corporation to the
holders of Common Stock or the Series A Preferred by reason of their ownership
thereof, an amount per share equal to the original purchase price of the Series
B Preferred (as adjusted for any stock splits, stock dividends,
recapitalizations or the like) plus all accrued and unpaid dividends thereon to
the date of liquidation. If, upon the occurrence of such event, the assets and
funds thus distributed among the holders of Series B Preferred shall be
insufficient to permit the payment to such holders of the full aforesaid
preferential amounts, then, the entire assets and funds of the Corporation
legally available for distribution shall be distributed ratably among the
holders of Series B Preferred in proportion to the preferential amount each such
holder is otherwise entitled to receive.

                     (b) REMAINING ASSETS. Upon the completion of the
distribution required by Section 2(a) above, the remaining assets of the
Corporation available for distribution to stockholders shall be distributed
first among the holders of Series A Preferred in accordance with Section
3(C)(2)(a), and then to holders of Junior Stock, in accordance with the terms
thereof).

                     (c) CERTAIN ACQUISITIONS.

                            (i) Deemed Liquidation. For purposes of this Section
2, any holder of the Series B Preferred shall be entitled to designate that a
liquidation, dissolution or winding up of the Corporation shall be deemed to
have occurred with respect to its or his shares of Series B Preferred if the
Corporation shall (A) sell, convey, or otherwise dispose of all or substantially
all of its property or business or (B) merge into or consolidate with any other
corporation (other than a wholly-owned subsidiary corporation) or undergo a
recapitalization or (C) effect any other transaction, in the case of clauses (B)
and (C), as a result of which the holders of outstanding voting stock of the
Corporation immediately prior to the transaction cease to own a majority of the
outstanding voting stock immediately following the transaction or (D) directors
who constitute the Incumbent Board cease for any reason to constitute at least a
majority of the Board of Directors, provided that any individual who becomes a
director after the date of the original issuance of the Series A Preferred whose
election, or nomination for election by the Corporation's stockholders, is
approved by a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered to be a member of the Incumbent Board unless
that individual was nominated or elected by any person, entity or group having
the power to exercise, through beneficial ownership, voting agreement and/or
proxy, twenty percent (20%) or more of either the outstanding shares of Common
Stock or the combined voting power of the Corporation's then outstanding voting
securities entitled to vote generally in the election of directors, in which
case that individual shall not be considered to be a member of the Incumbent
Board unless such individual's election or nomination for election by the
Corporation's stockholders is approved by a vote of at least two-thirds of the
directors then comprising the Incumbent Board and the Series A Directors, or (E)
any person becomes the beneficial owner (within the meaning of Rule 13d-3
promulgated under the Securities Exchange Act of 1934) of forty percent (40%) or
more of either the then outstanding shares of Common Stock or the

                                      -16-
<PAGE>   17

combined voting power of the Corporation's then outstanding securities entitled
to vote generally in the election of directors.

                            (ii) NOTICE OF TRANSACTION. The Corporation shall
give each holder of record of Series B Preferred written notice of such
impending transaction not later than twenty (20) days prior to the stockholders'
meeting called to approve such transaction, or twenty (20) days prior to the
closing of such transaction, whichever is earlier, and shall also notify such
holders in writing of the final approval of such transaction. The first of such
notices shall describe the material terms and conditions of the impending
transaction and the provisions of this Section 2, and the Corporation shall
thereafter give such holders prompt notice of any material changes. The
transaction shall in no event take place sooner than twenty (20) days after the
Corporation has given the first notice provided for herein or sooner than twenty
(20) days after the Corporation has given notice of any material changes
provided for herein; provided, however, that such periods may be shortened upon
the written consent of the holders of Series B Preferred that are entitled to
such notice rights or similar notice rights and that represent at least a
majority of the voting power of all then outstanding shares of the Series B
Preferred.

                            (iii) EFFECT OF NONCOMPLIANCE. In the event the
requirements of this Section 2(c) are not complied with, the Corporation shall
forthwith either cause the closing of the transaction to be postponed until such
requirements have been complied with, or cancel such transaction, in which event
the rights, preferences and privileges of the holders of Series B Preferred
shall revert to and be the same as such rights, preferences and privileges
existing immediately prior to the date of the first notice referred to in
Section 2(c)(ii) hereof.

                     (d) Nothing hereinabove set forth shall affect in any way
the right of each holder of Series B Preferred to convert such stock at any time
and from time to time in accordance with Section 3.

              3. CONVERSION.

                     (a) AUTOMATIC CONVERSION. The Series B Preferred shall not
be convertible into Common Stock. All shares of Series B Preferred Stock shall
automatically be converted into shares of Series A Preferred on the date of
receipt of the requisite approval of such conversion by stockholders of the
Corporation, and each share of the Series B Preferred shall be converted
automatically at the office of the Corporation or any transfer agent for such
stock, into one fully paid and nonassessable shares of Series A Preferred. Such
conversion shall be deemed to have taken place on the original date of issuance
of the Series A Preferred, and the person or persons entitled to receive the
shares of Series A Preferred issuable upon such conversion shall be treated for
all purposes as the record holder or holders of such shares of Series A
Preferred as of such date.

                     (b) MECHANICS OF CONVERSION. Upon any conversion of the
shares of Series B Preferred into shares of Series A Preferred pursuant to
Section 3(a), the holder shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or of any transfer
agent for the Series B Preferred, and shall state the name or names in which the
certificate or certificates for shares of Series A Preferred are to be issued.
The Corporation shall, as soon as practicable thereafter, issue and deliver at
such office to such holder of Series B

                                      -17-
<PAGE>   18

Preferred, or to the nominee or nominees of such holder, a certificate or
certificates for the number of shares of Series A Preferred to which such holder
shall be entitled as aforesaid.

              4. VOTING RIGHTS. Except as specifically provided in Section 5,
the holder of each share of Series B Preferred shall not have the right to vote.

              5. PROTECTIVE PROVISIONS.

              The Corporation shall not, without first obtaining the approval
(by vote or written consent, as provided by law) of the holders of at least
two-thirds (2/3) of the then outstanding shares of the Series B Preferred,
voting together as a single class, including by way of merger:

                     (a) Alter or change the Corporation's Certificate of
Incorporation, as amended to date, so as to affect the rights, preferences or
privileges of the Series B Preferred;

                     (b) Create or issue any new class of shares having a
preference senior to or on a parity with the Series B Preferred;

                     (c) Reclassify any outstanding shares into shares having
preferences or priority as to dividends or assets senior to or on a parity with
the preference of the Series B Preferred;

                     (d) Declare or pay any dividend or other distribution on
any shares of Common Stock, all other existing or future classes or series of
Preferred Stock, other than Series A Preferred, or parity stock;

                     (e) Enter into a transaction resulting in a merger,
consolidation, acquisition or similar transaction, or series of transaction, of
the Corporation with one or more other corporations in which stockholders of the
Corporation prior to such transaction, or series of transactions, would hold
stock representing less than a majority of the voting power of the outstanding
stock of the surviving corporation immediately after such transaction, or series
of transaction;

                     (f) Enter into a transaction that results in the sale of
all or substantially all of the Corporation's assets; or

                     (g) Take any action relating to the liquidation or
dissolution of the Corporation.

              6. STATUS OF REDEEMED OR CONVERTED STOCK. In the event any shares
of Preferred Stock shall be redeemed or converted into shares of Common Stock,
the shares so redeemed or converted shall be canceled and shall not be issuable
by the Corporation. The Certificate of Incorporation of the Corporation shall be
appropriately amended to effect the corresponding reduction in the Corporation's
authorized capital stock.

                                      -18-
<PAGE>   19

              7. REDEMPTION.

                     (a) Mandatory Redemption. On June 30, 2006, the Company
shall redeem any outstanding shares of Series B Preferred.

                     (b) Redemption at Option of Holders. At any time and from
time to time after the third anniversary of the date of the original issuance of
the Series B Preferred, each holder thereof may elect to require the Corporation
to redeem some or all of its outstanding shares of Series B Preferred out of
funds legally available therefor, in accordance with the provisions contained in
this Section 7.

                     (c) Redemption at Option of Corporation. At any time and
from time to time after the third anniversary of the date of the original
issuance of the Series B Preferred, the Corporation may redeem some or all of
the outstanding shares of Series B Preferred out of funds legally available
therefor, in accordance with the provisions contained in this Section 7.

                     (d) Redemption Price. The price at which each share of
Series B Preferred shall be redeemed shall be cash equal to the original
purchase price of such Series B Preferred plus all accrued and unpaid dividends
as of the date of redemption (the "Series B Redemption Price").

                     (e) Exercise of Option to Redeem. If any holder of Series B
Preferred elects its option to require the Corporation to redeem its Series B
Preferred pursuant to this Section 7, such holder must deliver written notice
thereof of such election to the Corporation at least thirty (30) days prior to
the date of redemption. If the Corporation elects to exercise its option to
redeem some or all of the outstanding shares of Series B Preferred pursuant to
this Section 7, the Corporation must deliver written notice thereof of such
election to each holder of Series B Preferred (a "Series B Redemption Notice")
at least thirty (30) days prior to the date of redemption. Holders of shares of
Series B Preferred will be required to present and surrender the certificate or
certificates representing shares to be redeemed on the date that the Corporation
or the holder, as appropriate, set for redemption in the applicable redemption
notice (duly endorsed for transfer) to the Corporation at the principal
executive offices of the Corporation. The Corporation shall pay the Series B
Redemption Price to, or to the order of, the person whose name appears on such
certificate or certificates so surrendered. If the number of shares represented
by the certificate or certificates surrendered shall exceed the number of shares
to be redeemed, the Corporation shall issue and deliver on the redemption date
of the Series B Preferred to the person entitled thereto a certificate or
certificates representing the unredeemed balance of such shares. If the
Corporation elects to exercise its option to redeem some but not all of the
outstanding shares of Series B Preferred pursuant to this Section 7, the
Corporation shall redeem the shares of Series B Preferred ratably on the basis
of the number of shares of Series B Preferred held by each such holder to be
redeemed.

                     (f) Effect of Redemption. From and after each Series B
Preferred redemption date, unless the Corporation shall default in providing for
the payment of the Series B Redemption Price, all dividends (if any) shall cease
to accrue with respect to the shares to be redeemed on such Series B Preferred
redemption date pursuant to this Section 7, and all rights of the holders of any
shares subject to redemption on such Series B Preferred redemption

                                      -19-
<PAGE>   20

date as stockholders of the Corporation, except the right to receive the Series
B Redemption Price shall cease and terminate. Any shares of Series B Preferred
that are redeemed by the Corporation shall be retired and shall not be reissued.

                                    ARTICLE V

       The Board of Directors of the Corporation is expressly authorized to
make, alter or repeal Bylaws of the Corporation.

                                   ARTICLE VI

       Elections of directors need not be by written ballot unless otherwise
provided in the Bylaws of the Corporation.

                                   ARTICLE VII

       A. To the fullest extent permitted by the General Corporation Law of the
State of Delaware, as the same exists or as may hereafter be amended, a director
of the Corporation shall not be personally liable to the Corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director.

       B. The Corporation shall indemnify to the fullest extent permitted by law
any person made or threatened to be made a party to an action or proceeding,
whether criminal, civil, administrative or investigative, by reason of the fact
that he, his testator or intestate is or was a director or officer of the
Corporation or any predecessor of the Corporation, or serves or served at any
other enterprise as a director or officer at the request of the Corporation or
any predecessor to the Corporation.

       C. Neither any amendment nor repeal of this Article VII, nor the adoption
of any provision of the Corporation's Certificate of Incorporation inconsistent
with this Article VII, shall eliminate or reduce the effect of this Article VII
in respect of any matter occurring, or any action or proceeding accruing or
arising or that, but for this Article VII, would accrue or arise, prior to such
amendment, repeal or adoption of an inconsistent provision.

                                  ARTICLE VIII

       To the fullest extent permitted by applicable law, this Corporation is
authorized to provide indemnification of (and advancement of expenses to) agents
of this Corporation (and any other persons to which Delaware law permits this
Corporation to provide indemnification) through bylaw provisions, agreements
with such agents or other persons, vote of stockholders or disinterested
directors otherwise, in excess of the indemnification and advancement otherwise
permitted by Section 145 of the General Corporation Law of the State of
Delaware, subject only to limits created by applicable Delaware law (statutory
or non-statutory), with respect to actions for breach of duty to this
Corporation, its stockholders, and others.

                                      * * *

                                      -20-
<PAGE>   21

       The undersigned, declare under penalty of perjury under the laws of the
State of Delaware that the matters set out in the foregoing Certificate are true
of their own knowledge and that the foregoing Certificate has been duly adopted
by this Corporation's Board of Directors and stockholders in accordance with the
General Corporations Law of the State of Delaware.

       Executed at Corte Madera, California, on March 21, 2001.

                                        /s/ Stephen Gordon
                                        ----------------------------------------
                                        Stephen Gordon, Chief Executive Officer

                                        /s/ Walter Parks
                                        ----------------------------------------
                                        Walter Parks, Secretary

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