Document:

Exhibit 10.41

 

COMPENSATION
OF EXECUTIVE OFFICERS OF BIOSPHERE MEDICAL, INC.

 

As of March 29, 2005, the following sets forth
the compensation of the executive officers of BioSphere Medical, Inc. (“BioSphere”):

 

	
  Executive Officer

  	
   

  	
  Current Annual

  Salary

  	
   

  	
  2004 Bonus

  	
   

  	
  Other

  Compensation (1)

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Richard J. Faleschini

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  President and Chief Executive Officer

  	
   

  	
  $

  	
  300,000

  	
   

  	
  —

  	
   

  	
  $

  	
  397

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Martin J. Joyce

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Vice President and Chief Financial Officer

  	
   

  	
  $

  	
  190,000

  	
   

  	
  —

  	
   

  	
  —

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Peter C. Sutcliffe

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Vice President, Manufacturing

  	
   

  	
  $

  	
  183,361

  	
   

  	
  —

  	
   

  	
  $

  	
  3,596

  	
   

  
	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Gary M. Saxton

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  	
   

  
	
  Senior Vice President and General Manager

  	
   

  	
  $

  	
  223,000

  	
   

  	
  —

  	
   

  	
  $

  	
  194

  	
   

  

 

(1) Represents the amounts of matching contributions
made by BioSphere to the Retirement Savings Plan and the taxable portion of
group life insurance.

 

In addition, each of BioSphere’s executive officers is
eligible to participate in BioSphere’s 1997 Stock Incentive Plan and any
successor plan.Exhibit 10.42

 

COMPENSATION
PROGRAM FOR NON-EMPLOYEE DIRECTORS OF BIOSPHERE MEDICAL, INC.

 

As of March 29, 2005, the following sets forth
the compensation program for non-employee directors of BioSphere Medical, Inc.
(“BioSphere”):

 

•                                          Upon his or
her initial election to the board, each director is eligible to receive an
option to purchase 10,000 shares of BioSphere common stock, $.01 par value per
share (the “Common Stock”) pursuant to BioSphere’s 1997 Stock Incentive Plan,
as amended (the “Plan”), such shares to be priced at the fair market value of
the Common Stock on the date of grant and vest in five equal installments on
the first, second, third, fourth and fifth anniversaries of the date of grant;

 

•                                          Upon his or
her re-election to the board, each director is eligible to receive (i) an
option to purchase 5,000 shares of Common Stock pursuant to the Plan, such
shares to be priced at the fair market value of the Common Stock on the date of
grant and vest in full immediately, and (ii) a grant of 2,500 shares of
restricted Common Stock pursuant to the Plan, such shares to be priced at $.01
per share and shall be subject to repurchase by BioSphere at a price equal to
the purchase price, which right of repurchase shall lapse in full on the second
anniversary of the date of grant;

 

•                                          Each director
is eligible to receive a retainer of $3,000 per calendar quarter and is also
eligible to receive $1,500 per board meeting attended;

 

•                                          Members of
BioSphere’s audit committee, compensation committee and nominating and corporate
governance committee are each eligible to receive an additional $1,000 per
committee meeting attended, and the chairperson of each of these committees is
eligible to receive an additional $500 per committee meeting; and

 

•                                          The options
granted pursuant to the foregoing arrangement are not transferable by the
director except by will or by the laws of descent and distribution and are
exercisable during the lifetime of the director only while he or she is serving
as a director of BioSphere or within 90 days after he or she ceases to serve as
a director. No option is exercisable more than ten years from the date of
grant. If a director dies or becomes disabled while he or she is serving as a
director, the option is exercisable for a one-year period thereafter.Exhibit 4.1

 

Intrusion Series 2 5% Convertible Preferred

 

[FACE OF CERTIFICATE]

NUMBER

P

INCORPORATED UNDER THE
LAWS OF THE STATE OF DELAWARE

SEE REVERSE SIDE FOR
RESTRICTIONS

INTRUSION INC.

SHARES

PREFERRED STOCK

SEE REVERSE FOR CERTAIN
DEFINITIONS AND RESTRICTIONS ON TRANSFER

THIS CERTIFIES THAT

is the OWNER of

FULLY PAID AND
NON-ASSESSABLE SHARES OF PREFERRED STOCK, $.01 PAR VALUE PER SHARE, OF
INTRUSION INC. (herein called the “Corporation”) transferable 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 accompanied by a proper
assignment. This Certificate and the shares represented hereby are issued under
and shall be held subject to all of the provisions of the Certificate of
Incorporation and the By-laws of the Corporation, and all amendments thereto,
copies of which are on file at the principal offices of the Corporation, to all
of which the holder of this Certificate, by acceptance hereof, assents. IN
WITNESS WHEREOF, the Corporation has caused the facsimile signatures of its
duly authorized officers and its facsimile seal to be hereunto affixed.

[SIGNATURE]

PRESIDENT AND CHIEF
EXECUTIVE OFFICER

[SIGNATURE]

SECRETARY

[CORPORATE SEAL]

DATED:

 

[REVERSE OF CERTIFICATE]

INTRUSION INC.

THE SECURITIES REPRESENTED
BY THIS CERTIFICATE (THE “SECURITIES”) HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”) OR ANY STATE
SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
UNLESS REGISTERED UNDER THE SECURITIES ACT AND UNDER APPLICABLE STATE
SECURITIES LAWS OR INTRUSION INC. SHALL HAVE RECEIVED AN OPINION OF COUNSEL
THAT REGISTRATION OF SUCH SECURITIES UNDER THE SECURITIES ACT AND UNDER THE
PROVISIONS OF APPLICABLE STATE SECURITIES LAWS IS NOT REQUIRED, WHICH OPINION
AND COUNSEL SHALL BE REASONABLY SATISFACTORY TO INTRUSION INC. INTRUSION INC.
WILL FURNISH TO EACH HOLDER OF ITS 5% CONVERTIBLE PREFERRED STOCK WHO SO
REQUESTS WITHOUT CHARGE A COPY OF THE CERTIFICATE OF DESIGNATIONS SETTING FORTH
THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR
OTHER SPECIAL RIGHTS OF SUCH STOCK AND ANY OTHER CLASS OR SERIES THEREOF AND
THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS OF SUCH PREFERENCES AND/OR
RIGHTS.

The Certificate of
Incorporation of the Corporation on file in the Office of the Secretary of
State of Delaware sets forth a full statement of (i) all of the designations,
preferences, limitations and relative rights of the shares of each class of
capital stock authorized to be issued, (ii) the authority of the Board of
Directors to fix and determine the relative rights and preferences of the
shares of preferred stock which the Corporation is authorized to issue in
series and, if and to the extent fixed and determined, the relative rights and
preferences of any such series, (iii) the denial to stockholders of preemptive
rights to acquire unissued or treasury shares or other securities of the
Corporation and (iv) the denial to stockholders of the right to cumulate votes
in any election of directors of the Corporation. The Corporation will furnish a
copy of such statement to the record holder of this Certificate without charge
on written request to the Corporation at its principal place of business or to
the Transfer Agent and Registrar.

The following
abbreviations, when used in the inscription on the face of this certificate,
shall be construed as though they were written out in full according to
applicable laws or regulations:

TEN COM - as tenants in
common

TEN ENT - as tenants by
the entireties

 

1

 

JT TEN - as joint tenants
with right of survivorship and not as tenants in common

UNIF GIFT MIN ACT -                                                                             (Cust)
Custodian

                                                                         (Minor)
under Uniform Gifts to Minors Act

                                                                                                                                    
(State)

Additional abbreviations
may also be used though not in the above list.

For Value Received,

hereby sell(s), assign(s)
and transfer(s) unto

PLEASE INSERT SOCIAL
SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE

PLEASE PRINT OR TYPEWRITE
NAME AND ADDRESS, INCLUDING POSTAL ZIP CODE, OF ASSIGNEE

Shares of the Preferred
Stock represented by the within Certificate and do(es) hereby irrevocably
constitute and appoint

Attorney to transfer the
said stock on the books of the within-named Corporation with full power of
substitution in the premises.

Dated

NOTICE: THE SIGNATURE(S)
TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF
THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER.

X (SIGNATURE)

X (SIGNATURE)

THE SIGNATURE(S) MUST BE
GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS
AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15.

SIGNATURE(S) GUARANTEED
BY:

 

2Exhibit 4.2
 
INTRUSION INC.
 
CERTIFICATE OF DESIGNATION OF PREFERENCES,
RIGHTS AND LIMITATIONS
OF
SERIES 2 5% CONVERTIBLE PREFERRED STOCK
 
PURSUANT TO SECTION 151 OF THE
DELAWARE GENERAL CORPORATION LAW
 
The undersigned, G. Ward Paxton and Michael Paxton, do hereby certify that:
 
1. They are the President and Secretary, respectively, of Intrusion Inc., a Delaware corporation (the “Corporation”).
 
2. The Corporation is authorized to issue 5,000,000 shares of preferred stock, 1,000,000 shares of designated 5% Convertible Preferred Stock which have been issued.
 
3. The following resolutions were duly adopted by the Board of Directors:
 
WHEREAS, the Certificate of Incorporation of the Corporation provides for a class of its authorized stock known as preferred stock, comprised of 5,000,000 shares, $0.01 par value, issuable from time to time in one or more series;
 
WHEREAS, the Board of Directors of the Corporation is authorized to fix the dividend rights, dividend rate, voting rights, conversion rights, rights and terms of redemption and liquidation preferences of any wholly unissued series of preferred stock and the number of shares constituting any Series and the designation thereof, of any of them; and
 
WHEREAS, it is the desire of the Board of Directors of the Corporation, pursuant to its authority as aforesaid, to fix the rights, preferences, restrictions and other matters relating to a series of the preferred stock, which shall consist of, except as otherwise set forth in the Purchase Agreement, up to 1,200,000 shares of the preferred stock which the corporation has the authority to issue, as follows:
 
NOW, THEREFORE, BE IT RESOLVED, that the Board of Directors does hereby provide for the issuance of a series of preferred stock for cash or exchange of other securities, rights or property and does hereby fix and determine the rights, preferences, restrictions and other matters relating to such series of preferred stock as follows:

 

1

 
TERMS OF PREFERRED STOCK
 
Section 1.                                            Definitions. Capitalized terms used and not otherwise defined herein that are defined in the Purchase Agreement shall have the meanings given such terms in the Purchase Agreement. For the purposes hereof, the following terms shall have the following meanings:
 
“Alternate Consideration” shall have the meaning set forth in Section 7(e).
 
“Bankruptcy Event” means any of the following events: (a) the Corporation or any Significant Subsidiary (as such term is defined in Rule 1.02(s) of Regulation S-X) thereof commences a case or other proceeding under any bankruptcy, reorganization, arrangement, adjustment of debt, relief of debtors, dissolution, insolvency or liquidation or similar law of any jurisdiction relating to the Corporation or any Significant Subsidiary thereof; (b) there is commenced against the Corporation or any Significant Subsidiary thereof any such case or proceeding that is not dismissed within 60 days after commencement; (c) the Corporation or any Significant Subsidiary thereof is adjudicated insolvent or bankrupt or any order of relief or other order approving any such case or proceeding is entered; (d) the Corporation or any Significant Subsidiary thereof suffers any appointment of any custodian or the like for it or any substantial part of its property that is not discharged or stayed within 60 days; (e) the Corporation or any Significant Subsidiary thereof makes a general assignment for the benefit of creditors; (f) the Corporation or any Significant Subsidiary thereof calls a meeting of its creditors with a view to arranging a composition, adjustment or restructuring of its debts; or (g) the Corporation or any Significant Subsidiary thereof, by any act or failure to act, expressly indicates its consent to, approval of or acquiescence in any of the foregoing or takes any corporate or other action for the purpose of effecting any of the foregoing.
 
“Base Conversion Price” shall have the meaning set forth in Section 6(b).
 
“Buy-In” shall have the meaning set forth in Section 6(e)(iii).
 
“Change of Control Transaction” means the occurrence after the date hereof of any of (i) an acquisition after the date hereof by an individual or legal entity or “group” (as described in Rule 13d-5(b)(1) promulgated under the Exchange Act), other than a purchaser of Preferred Stock under the Purchase Agreement or a director, officer or other affiliate (as defined in Rule 144 of the Securities Act) of the Corporation of effective control (whether through legal or beneficial ownership of capital stock of the Corporation, by contract or otherwise) of in excess of 33% of the voting securities of the Corporation, or (ii) the Corporation merges into or consolidates with any other Person, or any Person merges into or consolidates with the Corporation and, after giving effect to such transaction, the stockholders of the Corporation immediately prior to such transaction own less than 66% of the aggregate voting power of the Corporation or the successor entity of such transaction, or (iii) the Corporation sells or transfers its assets, as

 

2

 

an entirety or substantially as an entirety, to another Person and the stockholders of the Corporation immediately prior to such transaction own less than 66% of the aggregate voting power of the acquiring entity immediately after the transaction, (iv) a replacement at one time or within a one year period of more than one-half of the members of the Corporation’s board of directors which is not approved by a majority of those individuals who are members of the board of directors on the date hereof (or by those individuals who are serving as members of the board of directors on any date whose nomination to the board of directors was approved by a majority of the members of the board of directors who are members on the date hereof), or (v) the execution by the Corporation of an agreement to which the Corporation is a party or by which it is bound, providing for any of the events set forth above in (i) or (iv).
 
“Closing Date” means the Trading Day when all of the Transaction Documents have been executed and delivered by the applicable parties thereto, and all conditions precedent to (i) the Holders’ obligations to pay the Subscription Amount and (ii) the Corporation’s obligations to deliver the Securities have been satisfied or waived.
 
“Commission” means the Securities and Exchange Commission.
 
“Common Stock” means the Corporation’s common stock, par value $0.01 per share, and stock of any other class of securities into which such securities may hereafter have been reclassified or changed into.
 
“Common Stock Equivalents” means any securities of the Corporation or the Subsidiaries which would entitle the holder thereof to acquire at any time Common Stock, including without limitation, any debt, preferred stock, rights, options, warrants or other instrument that is at any time convertible into or exchangeable for, or otherwise entitles the holder thereof to receive, Common Stock.
 
“Conversion Amount” means the sum of the Stated Value at issue.
 
“Conversion Date” shall have the meaning set forth in Section 6(a).
 
“Conversion Price” shall have the meaning set forth in Section 6(b).
 
“Conversion Shares” means, collectively, the shares of Common Stock into which the shares of Preferred Stock are convertible in accordance with the terms hereof.
 
“Conversion Shares Registration Statement” means a registration statement that meets the requirements of the Registration Rights Agreement and registers the resale of all Conversion Shares by the Holder, who shall be named as a “selling stockholder” thereunder, all as provided in the Registration Rights Agreement.
 
“Dividend Payment Date” shall have the meaning set forth in Section 3(a).

 

3

 

“Effective Date” means the date that the Conversion Shares Registration Statement is declared effective by the Commission.
 

“Equity
Conditions” shall mean, during the period in question, (i) the Corporation
shall have duly honored all conversions scheduled to occur or occurring by virtue
of one or more Notices of Conversion, if any, (ii) all liquidated damages and
other amounts owing in respect of the Preferred Stock shall have been paid;
(iii) there is an effective Conversion Shares Registration Statement pursuant
to which the Holder is permitted to utilize the prospectus thereunder to resell
all of the shares issuable pursuant to the Transaction Documents (and the
Corporation believes, in good faith, that such effectiveness will continue
uninterrupted for the foreseeable future), (iv) the Common Stock is trading on
the Trading Market and all of the shares issuable pursuant to the Transaction
Documents are listed for trading on a Trading Market (and the Corporation
believes, in good faith, that trading of the Common Stock on a Trading Market
will continue uninterrupted for the foreseeable future), (v) there is a
sufficient number of authorized but unissued and otherwise unreserved shares of
Common Stock for the issuance of all of the shares issuable pursuant to the
Transaction Documents, (vi) there is then existing no Triggering Event or event
which, with the passage of time or the giving of notice, would constitute a
Triggering Event, (vii) the issuance of all of the shares issued or issuable
pursuant to the Transaction Documents would not violate the limitations set
forth in Sections 6(c) and (d) and (viii) no public announcement of a pending
or proposed Fundamental Transaction, Change of Control Transaction or
acquisition transaction has occurred that has not been consummated.

 

“Exchange
Act” means the Securities Exchange Act of 1934, as amended, and the rules
and regulations promulgated thereunder.

 

“Exempt
Issuance” means the issuance of (a) shares of Common Stock or options to
employees, officers or directors of, or consultants to, the Corporation
pursuant to any stock or option plan duly adopted by a majority of the
non-employee members of the Board of Directors of the Corporation or a majority
of the members of a committee of non-employee directors established for such
purpose, (b) securities upon the exercise of or conversion of (i) any
Securities issued hereunder or (ii), convertible securities, options or
warrants issued and outstanding on the date of the Purchase Agreement, provided
that in the case of this clause (ii) such securities have not been amended
since the date of the Purchase Agreement to increase the number of such
securities or to decrease the exercise or conversion price of any such
securities other than as a result of the operation of the anti-dilution
provisions thereof, (c) securities issued pursuant to acquisitions or strategic
transactions, provided any such issuance shall only be to a Person which is,
itself or through its subsidiaries, an operating company in a business
synergistic with the business of the Corporation and in which the Corporation
receives benefits in addition to the investment of funds, but shall not include
a transaction in which the Corporation is issuing securities primarily for the
purpose of raising capital or to an entity whose primary business is investing
in securities, (d) shares of capital stock, convertible securities, options or
warrants issued in connection with any pro rata stock split or stock

 

4

 

dividend in respect of any series or class of
capital stock of the Corporation or recapitalization by the Corporation, (e)
warrants issued pursuant to a commercial borrowing, secured lending or lease
financing transaction approved by the Corporation’s Board of Directors, (f)
shares of capital stock issued in a firm-commitment underwritten public
offering of securities pursuant to a registration statement filed under the
Securities Act with gross proceeds of at least $30,000,000 and (g) securities
issued upon the conversion or exercise of any of the capital stock, convertible
securities, options or warrants described in clauses (a) through (f), provided
that in the case of this clause (g) such securities have not been amended since
the date of the Purchase Agreement to increase the number of such securities or
to decrease the exercise or conversion price of any such securities other than
as a result of the operation of the anti-dilution provisions thereof.

 

“Existing
Preferred Stock” means the Corporation’s 1,000,000 shares of 5% Convertible
Preferred Stock, par value $0.01 per share, designated pursuant the Certificate
of Designation filed with the Delaware Secretary of State on March 25,
2004.

 

“Forced
Conversion Notice” shall have the meaning set forth in Section 8(a).

 

“Forced
Conversion Notice Date” shall have the meaning set forth in Section 8(a).

 

“Fundamental
Transaction” shall have the meaning set forth in Section 7(e).

 

“Holder”
shall have the meaning given such term in Section 2.

 

“Junior Securities” means the Common Stock, the Existing Preferred Stock and all other equity or equity equivalent securities of the Corporation other than those securities that are (a) outstanding on the Original Issue Date and (b) which are explicitly senior or pari passu in rights or liquidation preference to the Preferred Stock.
 
“Liquidation” shall have the meaning given such term in Section 5.
 
“New York Courts” shall have the meaning given such term in Section 10(d).
 
“Notice of Conversion” shall have the meaning given such term in Section 6(a).
 
“Original Issue Date” shall mean the date of the first issuance of any shares of the Preferred Stock regardless of the number of transfers of any particular shares of Preferred Stock and regardless of the number of certificates which may be issued to evidence such Preferred Stock.
 
“Person” means a corporation, an association, a partnership, an organization, a business, an individual, a government or political subdivision thereof or a governmental agency.

 

5

 

“Purchase Agreement” means the Securities Purchase Agreement, dated as of the Original Issue Date, to which the Corporation and the original Holders are parties, as amended, modified or supplemented from time to time in accordance with its terms.
 
“Registration Rights Agreement” means the Registration Rights Agreement, dated as of the date of the Purchase Agreement, to which the Corporation and the original Holder are parties, as amended, modified or supplemented from time to time in accordance with its terms.
 
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder.
 
“Share Delivery Date” shall have the meaning given such term in Section 6(e).
 
“Stated Value” shall have the meaning given such term in Section 2.
 
“Subscription Amount” shall mean, as to each Purchaser, the amount to be paid for the Preferred Stock purchased pursuant to the Purchase Agreement as specified below such Purchaser’s name on the signature page of the Purchase Agreement and next to the heading “Subscription Amount”, in United States Dollars and in immediately available funds.
 
“Subsidiary” shall have the meaning given to such term in the Purchase Agreement.
 
“Trading Day” means a day on which the Common Stock is traded on a Trading Market.
 
“Trading Market” means the following markets or exchanges on which the Common Stock is listed or quoted for trading on the date in question: the Nasdaq SmallCap Market, the American Stock Exchange, the New York Stock Exchange, the Nasdaq National Market or the OTC Bulletin Board.
 
“Transaction Documents” shall have the meaning set forth in the Purchase Agreement.
 
“Triggering Event” shall have the meaning set forth in Section 9(a).
 
“Triggering Redemption Amount” for each share of Preferred Stock means the sum of (i) the greater of (A) 130% of the Stated Value and (B) the product of (a) the VWAP on the Trading Day immediately preceding the date of the Triggering Event and (b) the Stated Value divided by the then Conversion Price, (ii) all accrued but unpaid dividends thereon and (iii) all liquidated damages and other amounts due in respect of the Preferred Stock.

 

6

 

“Triggering Redemption Payment Date” shall have the meaning set forth in Section 9(b).
 
“VWAP” means, for any date, the price determined by the first of the following clauses that applies: (a) if the Common Stock is then listed or quoted on a Trading Market, the daily volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the Trading Market on which the Common Stock is then listed or quoted as reported by Bloomberg Financial L.P. (based on a Trading Day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern Time); (b) if the Common Stock is not then listed or quoted on a Trading Market and if prices for the Common Stock are then quoted on the OTC Bulletin Board, the volume weighted average price of the Common Stock for such date (or the nearest preceding date) on the OTC Bulletin Board; (c) if the Common Stock is not then listed or quoted on the OTC Bulletin Board and if prices for the Common Stock are then reported in the “Pink Sheets” published by the Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the Common Stock so reported; or (d) in all other cases, the fair market value of a share of Common Stock as determined by an independent appraiser selected in good faith by the Purchasers and reasonably acceptable to the Corporation.
 
“Warrants” means the warrants to purchase up to 600,000 shares of Common Stock issuable pursuant to the Purchase Agreement.
 
Section 2.                                            Designation, Amount and Par Value. The series of preferred stock shall be designated as its Series 2 5% Convertible Preferred Stock (the “Preferred Stock”) and the number of shares so designated shall be 1,200,000 (which shall not be subject to increase without the consent of all of the holders of the Preferred Stock (each, a “Holder” and collectively, the “Holders”)). Each share of Preferred Stock shall have a par value of $0.01 per share and a stated value equal to $2.50 (the “Stated Value”).  Capitalized terms not otherwise defined herein shall have the meaning given such terms in Section 1 hereof.  For avoidance of doubt, the Preferred Stock shall rank senior in priority to any Junior Securities with respect to the payment of dividends and to liquidation rights.
 
Section 3.                                            Dividends.
 

a)                                      The Holders shall
be entitled to receive and the Corporation shall pay, cumulative dividends at
the rate per share (as a percentage of the Stated Value per share) of 5% per
annum (subject to increase pursuant to Section 9(b)), payable quarterly on March 1, June 1,
September 1 and December 1, beginning with the first such date after
the Original Issue Date and on any Conversion Date (except that, if such date
is not a Trading Day, the payment date shall be the next succeeding Trading
Day)(“Dividend Payment Date”). 
Any dividends that are not paid within five Trading Days following a
Dividend Payment Date shall continue to accrue and shall entail a late fee,
which must be paid in cash, at the rate of 18% per annum or the lesser rate
permitted by applicable law

 

 

 

7

 

(such fees to accrue daily, from the Dividend Payment Date through and
including the date of payment).

 

b)                                     So long as any
Preferred Stock shall remain outstanding, neither the Corporation nor any
Subsidiary thereof shall redeem, purchase or otherwise acquire directly or
indirectly any Junior Securities (unless all of the shares of the Preferred
Stock are concurrently redeemed), other than as a result of the conversion into
or exchange for Junior Securities or in connection with repurchases of shares of Common Stock from
employees, officers, directors, consultants or other persons performing
services for the Corporation or any subsidiary pursuant to agreements under
which the Corporation has the option to repurchase such shares upon the
happening of certain events, such as termination in an aggregate amount not to
exceed $100,000 per calendar year. So long as any Preferred Stock shall
remain outstanding, neither the Corporation nor any Subsidiary thereof shall
directly or indirectly pay or declare any dividend or make any distribution
(other than a dividend or distribution described in Section 6 or dividends
due and paid in the ordinary course on preferred stock, including the Existing
Preferred Stock, of the Corporation at such times when the Corporation is in
compliance with its payment and other obligations hereunder) upon, nor shall
any distribution be made in respect of, any Junior Securities other than
dividends or distributions otherwise permitted by this paragraph (b) so long as
any dividends due on the Preferred Stock remain unpaid, nor shall any monies be
set aside for or applied to the purchase or redemption (through a sinking fund
or otherwise) of any Junior Securities or shares pari passu with the Preferred
Stock.

 

c)                                      The Corporation
acknowledges and agrees that the capital of the Corporation (as such term is
used in Section 154 of the Delaware General Corporation Law) in respect of
the Preferred Stock and any future issuances of the Corporation’s capital stock
shall be equal to the aggregate par value of such Preferred Stock or capital
stock, as the case may be, and that, on or after the date of the Purchase
Agreement, it shall not increase the capital of the Corporation with respect to
any shares of the Corporation’s capital stock issued and outstanding on such date if such increase
could adversely affect the Corporation’s ability to pay cash dividends on the
Preferred Stock under Section 170 of the Delaware General Corporation Law.  The Corporation also acknowledges and agrees
that it shall not create any special reserves under Section 171 of the
Delaware General Corporation Law without the prior written consent of each
Holder.

 

d)                                     Any reference to “distribution”
contained in this Section 3 shall not be deemed to include any
distribution made in connection with any liquidation, dissolution or winding-up
of the Corporation, whether voluntary or involuntary, including any Liquidation
under Section 5.

 

Section 4.                                            Voting Rights. Except as otherwise provided herein and as otherwise required by law, the Preferred Stock shall have no voting rights. However, so long as any shares of Preferred Stock are outstanding, the Corporation shall not, without the affirmative vote of the Holders of the shares of the Preferred Stock then outstanding, (a) alter or change

 

8

 

adversely the powers, preferences or rights given to the Preferred
Stock or alter or amend this Certificate of Designation, (b) authorize or
create any class of stock ranking as to dividends, redemption or distribution of
assets upon a Liquidation (as defined in Section 5) senior to or otherwise
pari passu with the Preferred Stock, (c) amend its certificate of incorporation
or other charter documents so as to affect adversely any rights of the Holders,
(d) increase the authorized number of shares of Preferred Stock, or (e) enter
into any agreement with respect to the foregoing.

 
Section 5.                                            Liquidation. Upon any liquidation, dissolution or winding-up of the Corporation, whether voluntary or involuntary (a “Liquidation”), the Holders shall be entitled to receive out of the assets of the Corporation, whether such assets are capital or surplus, for each share of Preferred Stock an amount equal to the Stated Value per share plus any accrued and unpaid dividends thereon and any other fees or liquidated damages owing thereon before any distribution or payment shall be made to the holders of any Junior Securities, and if the assets of the Corporation shall be insufficient to pay in full such amounts, then the entire assets to be distributed to the Holders shall be distributed among the Holders ratably in accordance with the respective amounts that would be payable on such shares if all amounts payable thereon were paid in full.  A Fundamental Transaction shall not be treated as a Liquidation, but a Change of Control Transaction shall be deemed to be a Liquidation. The Corporation shall mail written notice of any such Liquidation, not less than 30 days prior to the payment date stated therein, to each record Holder.
 
Section 6.                                            Conversion.
 

a)                                      Conversions at Option of Holder.
Each share of Preferred Stock shall be convertible into that number of shares
of Common Stock (subject to the limitations set forth in Sections 6(c) and (d))
determined by dividing the Stated Value of such share of Preferred Stock by the
Conversion Price, at the option of the Holder, at any time and from time to
time from and after the Original Issue Date. Holders shall effect conversions
by providing the Corporation with the form of conversion notice attached hereto
as Annex A (a “Notice of Conversion”). Each Notice of Conversion
shall specify the number of shares of Preferred Stock to be converted, the
number of shares of Preferred Stock owned prior to the conversion at issue, the
number of shares of Preferred Stock owned subsequent to the conversion at issue
and the date on which such conversion is to be effected, which date may not be
prior to the date the Holder delivers such Notice of Conversion to the
Corporation by facsimile (the “Conversion Date”). If no Conversion Date
is specified in a Notice of Conversion, the Conversion Date shall be the date
that such Notice of Conversion to the Corporation is deemed delivered
hereunder. The calculations and entries set forth in the Notice of Conversion
shall control in the absence of manifest or mathematical error.  To effect conversions, as the case may be, of
shares of Preferred Stock, a Holder shall not be required to surrender the
certificate(s) representing such shares of Preferred Stock to the Corporation
unless all of the shares of Preferred Stock represented thereby are so
converted, in which case the Holder shall deliver the certificate representing
such share of Preferred Stock promptly following the Conversion

 

9

 

Date at issue.  Shares of
Preferred Stock converted into Common Stock or redeemed in accordance with the
terms hereof shall be canceled and may not be reissued.

 

b)                                     Conversion
Price.  The conversion price for the
Preferred Stock shall equal $2.50 (the
“Conversion Price”), subject to adjustment herein.

 

c)                                      Beneficial Ownership Limitation.  The Corporation shall not
effect any conversion of the Preferred Stock, and the Holder shall not have the
right to convert any portion of the Preferred Stock to the extent that after
giving effect to such conversion, the Holder (together with the Holder’s
affiliates), as set forth on the applicable Notice of Conversion, would
beneficially own in excess of 4.99% of the number of shares of the Common Stock
outstanding immediately after giving effect to such conversion.  For
purposes of the foregoing sentence, the number of shares of Common Stock
beneficially owned by the Holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of the Preferred Stock with
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of Common Stock which would be issuable upon (A)
conversion of the remaining, nonconverted Stated Value of Preferred Stock beneficially
owned by the Holder or any of its affiliates and (B) exercise or conversion of
the unexercised or nonconverted portion of any other securities of the
Corporation (including the Warrants) subject to a limitation on conversion or
exercise analogous to the limitation contained herein beneficially owned by the
Holder or any of its affiliates.  Except as set forth in the preceding
sentence, for purposes of this Section 6(c), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Exchange Act.  To the extent that the limitation contained
in this Section 6(c) applies, the determination of whether the Preferred
Stock is convertible (in relation to other securities owned by the Holder
together with any affiliates) and of which shares of Preferred Stock is
convertible shall be in the sole discretion of such Holder, and the submission
of a Notice of Conversion shall be deemed to be such Holder’s determination of
whether the shares of Preferred Stock may be converted (in relation to other
securities owned by such Holder) and which shares of the Preferred Stock is
convertible, in each case subject to such aggregate percentage limitations. To
ensure compliance with this restriction, the Holder will be deemed to represent
to the Corporation each time it delivers a Notice of Conversion that such
Notice of Conversion has not violated the restrictions set forth in this
paragraph and the Corporation shall have no obligation to verify or confirm the
accuracy of such determination.  For
purposes of this Section 6(c), in determining the number of outstanding
shares of Common Stock, the Holder may rely on the number of outstanding shares
of Common Stock as reflected in the most recent of the following: (A) the
Corporation’s most recent Form 10-Q or Form 10-K, as the case may be, (B) a
more recent public announcement by the Corporation or (C) any other notice by
the Corporation or the Corporation’s transfer agent setting forth the number of
shares of Common Stock outstanding.  Upon the written or oral request of
the Holder, the Corporation shall within two Trading Days confirm orally and in
writing to the Holder the number of shares of Common Stock then
outstanding.  In any case, the number of outstanding shares of Common
Stock shall be determined after giving effect to

 

 

10

 

the conversion or exercise of securities of the Corporation, including
the Preferred Stock, by the Holder or its affiliates since the date as of which
such number of outstanding shares of Common Stock was reported.  The provisions of this Section 6(c) may
be waived by the Holder, at the election of the Holder, upon not less than 61
days’ prior notice to the Corporation, and the provisions of this Section 6(c)
shall continue to apply until such 61st day (or such
later date, as determined by the Holder, as may be specified in such notice of
waiver).  Notwithstanding any of the
foregoing, the foregoing provisions of this Section 6(c) shall not apply
to any Holder who is an officer or director of the Corporation as of the
Closing Date or as of the date of conversion. In addition, if the Holder is an
officer or director of the Company as of the Original Issue Date, such Holder
may not convert any of his shares of Preferred Stock into shares of Common
Stock or receive any shares of Common Stock in connection with a Triggering
Event unless and until the issuance of such shares is approved by the Company’s
stockholders, to the extent required by the rules and regulations of the Nasdaq
Stock Market.

 

d)                                     Limitation on
Number of Shares Issuable. 
Notwithstanding anything herein to the contrary, the Corporation shall
not issue to any Holder any shares of Common Stock, including pursuant to any
rights herein, including, without limitation, any conversion rights, to the
extent such shares, when added to the number of shares of Common Stock issued
(A) upon conversion of any shares of Preferred Stock pursuant to Section 6(a)
and (B) upon exercise of those certain warrants issued pursuant to that certain
Purchase Agreement would exceed 1,211,605 shares of Common Stock immediately
prior to the Closing Date, or such greater number of shares of Common Stock
permitted pursuant to the corporate governance rules of the Nasdaq Stock Market
that is at the time the principal trading exchange or market for the Common
Stock, based upon share volume, as confirmed in writing by counsel to the
Corporation (the “Maximum Aggregate Share Amount”), unless the
Corporation first obtains shareholder approval permitting such issuances in
accordance with the Nasdaq Market Place Rule 4350 (“Shareholder Approval”).  Each Holder shall be entitled to a portion of
the Maximum Aggregate Share Amount equal to the quotient obtained by dividing
(x) such the number of shares of Preferred Stock initially purchased by such
Holder by (y) the aggregate number of
shares purchased by all Holders. 
Such portions shall be adjusted upward ratably in the event all of the
shares of Preferred Stock of any Holder are no longer outstanding.  If at any time the number of shares of Common
Stock which could, notwithstanding the limitation set forth herein, be issuable
and sold to all Holders during the following 12 months equals or exceeds the
Maximum Aggregate Share Amount, then the Corporation shall, subject to any
requirements in the Purchase Agreement to act sooner, obtain the Shareholder
Approval applicable to such issuance as soon as is possible, but in any event
not later than the 75th day after the date in which the Corporation determines
(or is notified by any Holder) that the Maximum Aggregate Share Amount could be
exceeded and shall continue to seek to obtain Shareholder Approval every 75
days until such Shareholder Approval is obtained.

 

11

 

e)                                      Mechanics of
Conversion

 

i.                                          Delivery
of Certificate Upon Conversion. Not later than three Trading Days after
each Conversion Date (the “Share Delivery Date”), the Corporation shall
deliver or cause to be delivered to the Holder (A) a certificate or
certificates which, after the Effective Date, shall be free of restrictive
legends and trading restrictions (other than those required by the Purchase
Agreement) representing the number of shares of Common Stock being acquired
upon the conversion of shares of Preferred Stock, and (B) a bank check in the
amount of accrued and unpaid dividends. After the Effective Date, the
Corporation shall, upon request of the Holder, deliver any certificate or
certificates representing Common Stock required to be delivered by the Corporation
under this Section electronically through the Depository Trust Corporation
or another established clearing corporation performing similar functions. If in
the case of any Notice of Conversion such certificate or certificates are not
delivered to or as directed by the applicable Holder by the third Trading Day
after the Conversion Date, the Holder shall be entitled to elect by written
notice to the Corporation at any time on or before its receipt of such
certificate or certificates thereafter, to rescind such conversion, in which
event the Corporation shall immediately return the certificates representing
the shares of Preferred Stock tendered for conversion.

 

 

ii.                                       Obligation
Absolute; Partial Liquidated Damages. 
The Corporation’s obligations to issue and deliver the Conversion Shares
upon conversion of Preferred Stock in accordance with the terms hereof are
absolute and unconditional, irrespective of any action or inaction by the
Holder to enforce the same, any waiver or consent with respect to any provision
hereof, the recovery of any judgment against any Person or any action to
enforce the same, or any setoff, counterclaim, recoupment, limitation or
termination, or any breach or alleged breach by the Holder or any other Person
of any obligation to the Corporation or any violation or alleged violation of
law by the Holder or any other person, and irrespective of any other
circumstance which might otherwise limit such obligation of the Corporation to
the Holder in connection with the issuance of such Conversion Shares.  In the event a Holder shall elect to convert
any or all of the Stated Value of its Preferred Stock, the Corporation may not
refuse conversion based on any claim that such Holder or any one associated or
affiliated with the Holder of has been engaged in any violation of law,
agreement or for any other reason, unless, an injunction from a court, on
notice, restraining and or enjoining conversion of all or part of this
Preferred Stock shall have been sought and obtained and the Corporation posts a
surety bond for the benefit of the Holder in the amount of 150% of the Stated
Value of Preferred Stock outstanding, which is subject to the injunction, which
bond shall remain in effect until the completion of arbitration/litigation of
the dispute and the proceeds of which shall be payable to such Holder to the
extent it obtains judgment.  In the
absence of an injunction precluding the same, the Corporation shall issue
Conversion Shares or, if applicable, cash, upon a properly noticed conversion.
If the Corporation fails to deliver to the Holder such certificate or
certificates pursuant to Section 6(e)(i) within two Trading Days of the
Share Delivery Date applicable to such 

 

12

 

conversion, the Corporation shall pay to such Holder, in cash, as
liquidated damages and not as a penalty, for each $5,000 of Stated Value of
Preferred Stock being converted, $50 per Trading Day (increasing to $100 per
Trading Day after 3 Trading Days and increasing to $200 per Trading Day 6
Trading Days after such damages begin to accrue) for each Trading Day after the
Share Delivery Date until such certificates are delivered. Nothing herein shall
limit a Holder’s right to pursue actual damages for the Corporation’s failure
to deliver certificates representing shares of Common Stock upon conversion
within the period specified herein and such Holder shall have the right to
pursue all remedies available to it hereunder, at law or in equity including,
without limitation, a decree of specific performance and/or injunctive relief.

 

iii.                                    Compensation for
Buy-In on Failure to Timely Deliver Certificates Upon Conversion. If the
Corporation fails to deliver to the Holder such certificate or certificates
pursuant to Section 6(e)(i) by a Share Delivery Date, and if after such
Share Delivery Date the Holder purchases (in an open market transaction or
otherwise) Common Stock to deliver in satisfaction of a sale by such Holder of
the Conversion Shares which the Holder was entitled to receive upon the
conversion relating to such Share Delivery Date (a “Buy-In”), then the
Corporation shall pay in cash to the Holder the amount by which (x) the Holder’s
total purchase price (including brokerage commissions, if any) for the Common
Stock so purchased exceeds (y) the product of (1) the aggregate number of
shares of Common Stock that such Holder was entitled to receive from the
conversion at issue multiplied by (2) the price at which the sell order giving
rise to such purchase obligation was executed. For example, if the Holder
purchases Common Stock having a total purchase price of $11,000 to cover a
Buy-In with respect to an attempted conversion of shares of Preferred Stock
with respect to which the aggregate sale price giving rise to such purchase
obligation is $10,000, under clause (A) of the immediately preceding sentence
the Corporation shall be required to pay the Holder $1,000. The Holder shall
provide the Corporation written notice indicating the amounts payable to the
Holder in respect of the Buy-In, together with applicable confirmations and
other evidence reasonably requested by the Corporation. Nothing herein shall
limit a Holder’s right to pursue any other remedies available to it hereunder,
at law or in equity including, without limitation, a decree of specific
performance and/or injunctive relief with respect to the Corporation’s failure
to timely deliver certificates representing shares of Common Stock upon
conversion of the shares of Preferred Stock as required pursuant to the terms
hereof.

 

iv.                                   Reservation of
Shares Issuable Upon Conversion. The Corporation covenants that it will at
all times reserve and keep available out of its authorized and unissued shares
of Common Stock solely for the purpose of issuance upon conversion of the
Preferred Stock, free from preemptive rights or any other actual contingent
purchase rights of persons other than the Holder (and the other Holders of the
Preferred Stock), not less than such number of shares of the Common Stock

 

13

 

as shall (subject to any additional requirements of the Corporation as
to reservation of such shares set forth in the Purchase Agreement) be issuable
(taking into account the adjustments and restrictions of Section 7) upon
the conversion of all outstanding shares of Preferred Stock.  The Corporation covenants that all shares of
Common Stock that shall be so issuable shall, upon issue, be duly and validly
authorized, issued and fully paid, nonassessable and, if the Conversion Shares
Registration Statement is then effective under the Securities Act, registered
for public sale in accordance with such Conversion Shares Registration
Statement.

 

v.                                      Fractional
Shares. Upon a conversion hereunder, the Corporation shall not be required
to issue stock certificates representing fractions of shares of the Common
Stock, but may if otherwise permitted, make a cash payment in respect of any
final fraction of a share based on the VWAP at such time.  If the Corporation elects not, or is unable,
to make such a cash payment, the Holder shall be entitled to receive, in lieu
of the final fraction of a share, one whole share of Common Stock.

 

vi.                                   Transfer Taxes.  The issuance of certificates for shares of
the Common Stock on conversion of this Preferred Stock shall be made without
charge to the Holder hereof for any documentary stamp or similar taxes that may
be payable in respect of the issue or delivery of such certificate, provided
that the Corporation shall not be required to pay any tax that may be payable
in respect of any transfer involved in the issuance and delivery of any such
certificate upon conversion in a name other than that of the Holder of such
shares of Preferred Stock so converted and the Corporation shall not be
required to issue or deliver such certificates unless or until the person or
persons requesting the issuance thereof shall have paid to the Corporation the
amount of such tax or shall have established to the satisfaction of the
Corporation that such tax has been paid.

 

Section 7.                                            Certain Adjustments.
 

a)                                      Stock
Dividends and Stock Splits.  If the
Corporation, at any time while this Preferred Stock is outstanding: (A) pays a
stock dividend or otherwise make a distribution or distributions on shares of
its Common Stock or any other equity or equity equivalent securities payable in
shares of Common Stock (which, for avoidance of doubt, shall not include any
shares of Common Stock issued by the Corporation pursuant to this Preferred
Stock) or any distribution made in connection with any liquidation, dissolution
or winding-up of the Corporation, whether voluntary or involuntary, including
any Liquidation under Section 5, (B) subdivides outstanding shares of
Common Stock into a larger number of shares, (C) combines (including by way of
reverse stock split) outstanding shares of Common Stock into a smaller number
of shares, or (D) issues by reclassification of shares of the Common Stock any
shares of capital stock of the Corporation, then the Conversion Price shall be
multiplied by a fraction of which the numerator shall be the number of shares
of Common Stock (excluding treasury shares, if

 

14

 

any) outstanding immediately before such event and of which the
denominator shall be the number of shares of Common Stock outstanding
immediately after such event.  Any
adjustment made pursuant to this Section 7(a) shall become effective
immediately after the record date for the determination of stockholders
entitled to receive such dividend or distribution and shall become effective
immediately after the effective date in the case of a subdivision, combination
or re-classification.

 

b)                                     [RESERVED].

 

c)                                      Subsequent
Rights Offerings.  If the
Corporation, at any time while the Preferred Stock is outstanding, shall issue
rights, options or warrants to all holders of Common Stock (and not to Holders)
entitling them to subscribe for or purchase shares of Common Stock at a price
per share less than the VWAP at the record date mentioned below, then the
Conversion Price shall be multiplied by a fraction, of which the denominator
shall be the number of shares of the Common Stock Outstanding on the date of
issuance of such rights or warrants plus the number of additional shares of
Common Stock offered for subscription or purchase, and of which the numerator
shall be the number of shares of the Common Stock Outstanding on the date of
issuance of such rights or warrants plus the number of shares which the
aggregate offering price of the total number of shares so offered (assuming
receipt by the Corporation in full of all consideration payable upon exercise
of such rights, options or warrants) would purchase at such VWAP.  Such adjustment shall be made whenever such
rights or warrants are issued, and shall become effective immediately after the
record date for the determination of stockholders entitled to receive such
rights, options or warrants.

 

d)                                     Pro Rata
Distributions. If the Corporation, at any time while Preferred Stock is
outstanding, shall distribute to all holders of Common Stock (and not to
Holders) evidences of its indebtedness or assets (including cash and cash
dividends) or rights or warrants to subscribe for or purchase any security,
then in each such case the Conversion Price shall be adjusted by multiplying
such Conversion Price in effect immediately prior to the record date fixed for
determination of stockholders entitled to receive such distribution by a
fraction of which the denominator shall be the VWAP determined as of the record
date mentioned above, and of which the numerator shall be such VWAP on such
record date less the then fair market value at such record date of the portion
of such assets or evidence of indebtedness so distributed applicable to one
outstanding share of the Common Stock as determined by the Board of Directors
in good faith.  In either case the
adjustments shall be described in a statement provided to the Holder of the
portion of assets or evidences of indebtedness so distributed or such
subscription rights applicable to one share of Common Stock.  Such adjustment shall be made whenever any
such distribution is made and shall become effective immediately after the
record date mentioned above.

 

e)                                      Fundamental
Transaction. If, at any time while this Preferred Stock is outstanding, (A)
the Corporation effects any merger or consolidation of the Corporation with or
into another Person (other than a merger or consolidation that does not result
in

 

15

 

any reclassification, conversion, exchange or cancellation of
outstanding shares of Common Stock of the Corporation), (B) the Corporation
effects any sale of all or substantially all of its assets in one or a series
of related transactions, (C) any tender offer or exchange offer (whether by the
Corporation or another Person) is completed pursuant to which holders of Common
Stock are permitted to tender or exchange their shares for other securities,
cash or property, or (D) the Corporation effects any reclassification of the
Common Stock or any compulsory share exchange pursuant to which the Common
Stock is effectively converted into or exchanged for other securities, cash or
property, in each case which does not otherwise constitute a Liquidation (in
any such case, a “Fundamental Transaction”), then upon any subsequent
conversion of this Preferred Stock, the Holder shall have the right to receive,
for each Conversion Share that would have been issuable upon such conversion
immediately prior to the occurrence of such Fundamental Transaction, the same
kind and amount of securities, cash or property as it would have been entitled
to receive upon the occurrence of such Fundamental Transaction if it had been,
immediately prior to such Fundamental Transaction, the holder of one share of
Common Stock (the “Alternate Consideration”).  For purposes of any such conversion, the
determination of the Conversion Price shall be appropriately adjusted to apply
to such Alternate Consideration based on the amount of Alternate Consideration
issuable in respect of one share of Common Stock in such Fundamental
Transaction, and the Corporation shall apportion the Conversion Price among the
Alternate Consideration in a reasonable manner reflecting the relative value of
any different components of the Alternate Consideration.  If holders of Common Stock are given any
choice as to the securities, cash or property to be received in a Fundamental
Transaction, then the Holder shall be given the same choice as to the Alternate
Consideration it receives upon any conversion of this Preferred Stock following
such Fundamental Transaction.  To the
extent necessary to effectuate the foregoing provisions, any successor to the
Corporation or surviving entity in such Fundamental Transaction, as the case
may be, shall make provisions in its certificate or articles of incorporation
or other constituent document to provide the Holder with new preferred stock or
other equity security consistent with the foregoing provisions and evidencing
the Holder’s right to convert such preferred stock into Alternate Consideration.
The terms of any agreement pursuant to which a Fundamental Transaction is
effected shall include terms requiring any such successor or surviving entity
to comply with the provisions of this Section 7(e) and insuring that this
Preferred Stock (or any such replacement security) will be similarly adjusted
upon any subsequent transaction analogous to a Fundamental Transaction.

 

f)                                        Calculations.  All calculations under this Section 7
shall be made to the nearest cent or the nearest 1/100th of a share, as the
case may be.  For purposes of this Section 7,
the number of shares of Common Stock deemed to be issued and outstanding as of
a given date shall be the sum of the number of shares of Common Stock
(excluding treasury shares, if any) issued and outstanding.

 

16

 

g)                                     Notice to
Holders.

 

i.                                          Adjustment
to Conversion Price.  Whenever the
Conversion Price is adjusted pursuant to any of this Section 7, the
Corporation shall promptly mail to each Holder a notice setting forth the
Conversion Price after such adjustment and setting forth a brief statement of
the facts requiring such adjustment.

 

ii.                                       Notice to
Allow Conversion by Holder.  If (A)
the Corporation shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Corporation shall declare a special nonrecurring cash dividend
on or a redemption of the Common Stock (other than repurchases of shares of Common Stock from
employees, officers, directors, consultants or other persons performing
services for the Corporation or any subsidiary pursuant to agreements under
which the Corporation has the option to repurchase such shares upon the
happening of certain events, such as termination in an aggregate amount not to
exceed $100,000); (C) the Corporation shall authorize the granting to
all holders of the Common Stock rights or warrants to subscribe for or purchase
any shares of capital stock of any class or of any rights; (D) the approval of
any stockholders of the Corporation shall be required in connection with any
reclassification of the Common Stock, any consolidation or merger to which the
Corporation is a party, any sale or transfer of all or substantially all of the
assets of the Corporation, of any compulsory share exchange whereby the Common
Stock is converted into other securities, cash or property; (E) the Corporation
shall authorize the voluntary or involuntary dissolution, liquidation or
winding up of the affairs of the Corporation; then, in each case, the
Corporation shall cause to be filed at each office or agency maintained for the
purpose of conversion of this Preferred Stock, and shall cause to be mailed to
the Holder at its last address as its shall appear upon the stock books of the
Corporation, at least 20 calendar days prior to the applicable record or
effective date hereinafter specified, a notice stating (x) the date on which a
record is to be taken for the purpose of such dividend, distribution,
redemption, rights or warrants, or if a record is not to be taken, the date as
of which the holders of the Common Stock of record to be entitled to such
dividend, distributions, redemption, rights or warrants are to be determined or
(y) the date on which such reclassification, consolidation, merger, sale,
transfer or share exchange is expected to become effective or close, and the
date as of which it is expected that holders of the Common Stock of record
shall be entitled to exchange their shares of the Common Stock for securities,
cash or other property deliverable upon such reclassification, consolidation,
merger, sale, transfer or share exchange; provided, that the failure to
mail such notice or any defect therein or in the mailing thereof shall not
affect the validity of the corporate action required to be specified in such
notice.  The Holder is entitled to
convert the Conversion Amount of this Preferred Stock (or any part hereof)
during the 20-day period commencing the date of such notice to the effective
date of the event triggering such notice.

 

17

 

Section 8.                                            Forced
Conversion

 

a)                                      Forced
Conversion.  Notwithstanding anything
herein to the contrary, if after the 12 month anniversary of the Original Issue
Date and after the Effective Date the VWAP for each of any 20 consecutive
Trading Days (“Threshold Period”), which 20 consecutive Trading Day
period shall have commenced only after the Effective Date, exceeds 200% of the
then effective Conversion Price, the Corporation may, within 1 Trading Day
after any such Threshold Period, deliver a notice to all Holders (a “Forced
Conversion Notice” and the date such notice is received by the Holders, the
“Forced Conversion Notice Date”) to cause each Holder to immediately
convert up to such Holder’s entire remaining number of shares of Preferred
Stock.  The Corporation may only effect a
Forced Conversion Notice if all of the Equity Conditions have been met during
the Threshold Period through the Forced Conversion Notice Date.  Any Forced Conversion Notices shall be applied
ratably to all of the Holders in proportion to each Holder’s initial purchases
of Preferred Stock hereunder, provided that any voluntary conversions by a
Holder shall be applied against such Holder’s pro-rata allocation thereby
decreasing the aggregate amount forcibly converted hereunder.  Immediately upon the Forced Conversion Notice
Date, each outstanding share of Preferred Stock shall be converted
automatically without any further action by the Holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Corporation or its transfer agent; provided, however, that the Corporation
shall not be obligated to issue certificates evidencing the shares of Common
Stock issuable upon such conversion unless the certificates evidencing such
shares of Preferred Stock are delivered to the Corporation in accordance with
the following sentence.  Upon Forced
Conversion Notice Date, the Holders of Preferred Stock shall surrender the
certificates representing such shares at the office of the Corporation in
accordance with Section 6(a); provided that the Holders shall have no
obligation to deliver a Notice of Conversion. 
Thereupon, there shall be issued and delivered to each Holder within
three (3) Trading Days and in its name as shown on such surrendered certificate
or certificates, a certificate or certificates for the number of shares of
Common Stock into which the shares of Preferred Stock surrendered were
convertible upon the Forced Conversion Notice Date.

 

Section 9.                                            Redemption Upon Triggering Events.
 

a)                                      “Triggering
Event” means any one or more of the following events (whatever the reason
and whether it shall be voluntary or involuntary or effected by operation of
law or pursuant to any judgment, decree or order of any court, or any order,
rule or regulation of any administrative or governmental body):

 

i.                                                      the
failure of a Conversion Shares Registration Statement to be declared effective
by the Commission on or prior to the 230th day after the Original Issue Date;

 

ii.                                                   if,
during the Effectiveness Period, the effectiveness of the Conversion Shares
Registration Statement lapses for any reason for more than an aggregate of 90
calendar days (which need not be consecutive days) during any 12 month period,
or the Holder shall not be permitted to resell Registrable

 

18

 

Securities under the Conversion Shares
Registration Statement for more than an aggregate of 90 calendar days (which
need not be consecutive days) during any 12 month period;

 

iii.                                                the
Corporation shall fail to deliver certificates representing Conversion Shares
issuable upon a conversion hereunder that comply with the provisions hereof
prior to the 10th
Trading Day after such shares are required to be delivered hereunder, or the
Corporation shall provide written notice to any Holder, including by way of
public announcement, at any time, of its intention not to comply with requests
for conversion of any shares of Preferred Stock in accordance with the terms
hereof;

 

iv.                                               one of
the Events (as defined in the Registration Rights Agreement) described in
subsections (i), (ii) or (iii) of Section 2(b) of the Registration Rights
Agreement shall not have been cured to the satisfaction of the Holders prior to
the expiration of 60 days from the Event Date (as defined in the Registration
Rights Agreement) relating thereto (other than an Event resulting from a
failure of a Conversion Shares Registration Statement to be declared effective
by the Commission on or prior to the 230th day after the Original Issue Date,
which shall be covered by Section 9(a)(i));

 

v.                                                  the
Corporation shall fail for any reason to pay in full the amount of cash due
pursuant to a Buy-In within 10 days after notice therefor is delivered
hereunder or shall fail to pay all amounts owed on account of an Event within
five days of the date due;

 

vi.                                               the
Corporation shall fail to have available a sufficient number of authorized and
unreserved shares of Common Stock to issue to such Holder upon a conversion
hereunder;

 

vii.                                            the
Corporation shall fail to observe or perform any other covenant, agreement or
warranty contained in, or otherwise commit any breach of the Transaction
Documents, and such failure or breach shall not, if subject to the possibility
of a cure by the Corporation, have been remedied within 45 calendar days after
the date on which written notice of such failure or breach shall have been
given;

 

viii.                                         the
Corporation shall redeem more than a de minimis number of Junior Securities
other than as a result of the conversion into or exchange for Junior Securities
or in connection with repurchases of shares of Common Stock from employees,
officers, directors, consultants or other persons performing services for the
Corporation or any subsidiary pursuant to agreements under which the
Corporation has the option to repurchase such shares upon the happening of
certain events, such as termination, in an aggregate amount not to exceed
$100,000 per calendar year;

 

19

 

ix.                                                 the
Corporation shall be party to a Change of Control Transaction;

 

x.                                                    there
shall have occurred a Bankruptcy Event;

 

xi.                                                 the
Common Stock shall fail to be listed or quoted for trading on a Trading Market
for more than 10 Trading Days, which need not be consecutive Trading Days; or

 

xii.                                              any breach
of the agreements delivered to the initial Holders at the Closing pursuant to Section 2.2(a)(vii)
of the Purchase Agreement.

 

b)                                     Upon the
occurrence of a Triggering Event, each Holder shall (in addition to all other
rights it may have hereunder or under applicable law) have the right,
exercisable at the sole option of such Holder, to require the Corporation to,
(i) with respect to the Triggering Events set forth in Sections 9(a) (iii),
(v), (vii), (ix) and (x)(as to voluntary filings only)), redeem all of the
Preferred Stock then held by such Holder for a redemption price, in cash, equal
to the Triggering Redemption Amount; or, (ii) at the option of the Holder and
with respect to the Triggering Events set forth in Sections 9(a)(i), (ii),
(iv), (vi), (viii), (x)(as to involuntary filings only), (xi) and (xii), either
(A) redeem all of the Preferred Stock then held by such Holder for a redemption
price, in shares of Common Stock, equal to a number of shares of Common Stock
equal to the Triggering Redemption Amount divided by 75% of the average of the
10 VWAPs immediately prior to the date of election hereunder or (B) increase
the dividend on all of the outstanding Preferred Stock held by such Holder to
equal 18% per annum thereafter; provided, however, the Holder
shall only have the option of Section 9(b)(ii)(A) after the Corporation
has obtained Shareholder Approval as required by Section 6(d) and, if the
Corporation has not obtained such Shareholder Approval), Section 9(b)(ii)(B)
shall automatically apply irrespective of such Holder’s option.  The Triggering Redemption Amount, if in cash
or in shares, shall be due and payable or issuable, as the case may be, within
5 Trading Days of the date on which the notice for the payment therefor is
provided by a Holder (the “Triggering Redemption Payment Date”).  If the Corporation fails to pay the
Triggering Redemption Amount hereunder in full pursuant to this Section on
the date such amount is due in accordance with this Section (whether in
cash or shares of Common Stock), the Corporation will pay interest thereon at a
rate of 18% per annum (or such lesser amount permitted by applicable law),
accruing daily from such date until the Triggering Redemption Amount, plus all
such interest thereon, is paid in full. 
For purposes of this Section, a share of Preferred Stock is outstanding
until such date as the Holder shall have received Conversion Shares upon a
conversion (or attempted conversion) thereof that meets the requirements hereof
or has been paid the Triggering Redemption Amount plus all accrued but unpaid
dividends and all accrued but unpaid liquidated damages in cash.

 

20

 

Section 10.                                      Miscellaneous.

 

a)                                      Notices.  Any and all notices or other communications
or deliveries to be provided by the Holder hereunder, including, without
limitation, any Notice of Conversion, shall be in writing and delivered
personally, by facsimile, sent by a nationally recognized overnight courier
service, addressed to the Corporation, at 1101
E. Arapaho Road, Richardson, Texas 75081, facsimile number 972.301.3892, Attn:
Corporate Secretary or such other address or facsimile number as the
Corporation may specify for such purposes by notice to the Holders delivered in
accordance with this Section.  Any and
all notices or other communications or deliveries to be provided by the
Corporation hereunder shall be in writing and delivered personally, by
facsimile, sent by a nationally recognized overnight courier service addressed
to each Holder at the facsimile telephone number or address of such Holder
appearing on the books of the Corporation, or if no such facsimile telephone
number or address appears, at the principal place of business of the
Holder.  Any notice or other
communication or deliveries hereunder shall be deemed given and effective on
the earliest of (i) the date of transmission, if such notice or communication
is delivered via facsimile at the facsimile telephone number specified in this Section prior
to 5:30 p.m. (New York City time), (ii) the date after the date of
transmission, if such notice or communication is delivered via facsimile at the
facsimile telephone number specified in this Section later than 5:30 p.m.
(New York City time) on any date and earlier than 11:59 p.m. (New York City
time) on such date, (iii) the second Business Day following the date of
mailing, if sent by nationally recognized overnight courier service, or (iv)
upon actual receipt by the party to whom such notice is required to be given.

 

b)                                     Absolute
Obligation. Except as expressly provided herein, no provision of this
Certificate of Designation shall alter or impair the obligation of the
Corporation, which is absolute and unconditional, to pay the liquidated damages
(if any) on, the shares of Preferred Stock at the time, place, and rate, and in
the coin or currency, herein prescribed.

 

c)                                      Lost or
Mutilated Preferred Stock Certificate. 
If a Holder’s Preferred Stock certificate shall be mutilated, lost,
stolen or destroyed, the Corporation shall execute and deliver, in exchange and
substitution for and upon cancellation of a mutilated certificate, or in lieu
of or in substitution for a lost, stolen or destroyed certificate, a new
certificate for the shares of Preferred Stock so mutilated, lost, stolen or
destroyed but only upon receipt of evidence of such loss, theft or destruction
of such certificate, and of the ownership hereof, and indemnity, if requested,
all reasonably satisfactory to the Corporation.

 

d)                                     Governing Law.  All questions concerning the construction,
validity, enforcement and interpretation of this Certificate of Designation
shall be governed by and construed and enforced in accordance with the internal
laws of the State of Delaware, without regard to the principles of conflicts of
law thereof.  Each party agrees that all
legal proceedings concerning the interpretations, enforcement and defense of
the transactions contemplated by any of the Transaction Documents (whether
brought against a party hereto or its respective affiliates, directors, officers,
shareholders, employees or

 

21

 

agents) shall be commenced in the state and federal courts sitting in
the City of New York, Borough of Manhattan (the “New York Courts”).  Each party hereto hereby irrevocably submits
to the exclusive jurisdiction of the New York Courts for the adjudication of
any dispute hereunder or in connection herewith or with any transaction
contemplated hereby or discussed herein (including with respect to the
enforcement of any of the Transaction Documents), and hereby irrevocably
waives, and agrees not to assert in any suit, action or proceeding, any claim
that it is not personally subject to the jurisdiction of any such court, or
such New York Courts are improper or inconvenient venue for such
proceeding.  Each party hereby
irrevocably waives personal service of process and consents to process being
served in any such suit, action or proceeding by mailing a copy thereof via
registered or certified mail or overnight delivery (with evidence of delivery)
to such party at the address in effect for notices to it under this Certificate
of Designation and agrees that such service shall constitute good and
sufficient service of process and notice thereof.  Nothing contained herein shall be deemed to
limit in any way any right to serve process in any manner permitted by law.
Each party hereto hereby irrevocably waives, to the fullest extent permitted by
applicable law, any and all right to trial by jury in any legal proceeding
arising out of or relating to this Certificate of Designation or the
transactions contemplated hereby. If either party shall commence an action or
proceeding to enforce any provisions of this Certificate of Designation, then
the prevailing party in such action or proceeding shall be reimbursed by the
other party for its attorneys fees and other costs and expenses incurred with
the investigation, preparation and prosecution of such action or proceeding.

 

e)                                      Waiver.  Any waiver by the Corporation or the Holder
of a breach of any provision of this Certificate of Designation shall not
operate as or be construed to be a waiver of any other breach of such provision
or of any breach of any other provision of this Certificate of
Designation.  The failure of the
Corporation or the Holder to insist upon strict adherence to any term of this
Certificate of Designation on one or more occasions shall not be considered a
waiver or deprive that party of the right thereafter to insist upon strict
adherence to that term or any other term of this Certificate of
Designation.  Any waiver must be in
writing.

 

f)                                        Severability.  If any provision of this Certificate of
Designation is invalid, illegal or unenforceable, the balance of this
Certificate of Designation shall remain in effect, and if any provision is
inapplicable to any person or circumstance, it shall nevertheless remain
applicable to all other persons and circumstances.  If it shall be found that any interest or
other amount deemed interest due hereunder violates applicable laws governing
usury, the applicable rate of interest due hereunder shall automatically be
lowered to equal the maximum permitted rate of interest.

 

g)                                     Next Trading
Day.  Whenever any payment or other
obligation hereunder shall be due on a day other than a Trading Day, such
payment shall be made on the next succeeding Trading Day.

 

22

 

h)                                     Headings.  The headings contained herein are for
convenience only, do not constitute a part of this Certificate of Designation
and shall not be deemed to limit or affect any of the provisions hereof.

 

*********************

 

23

 

RESOLVED, FURTHER, that the Chairman, the president or any
vice-president, and the secretary or any assistant secretary, of the
Corporation be and they hereby are authorized and directed to prepare and file
a Certificate of Designation of Preferences, Rights and Limitations in
accordance with the foregoing resolution and the provisions of the Delaware
General Corporation Law.

 
IN WITNESS WHEREOF, the undersigned have executed this Certificate this 24th day of March, 2005.
 
 

	
  /s/ G. Ward Paxton

  	
   

  	
   

  	
  /s/ Michael Paxton

  	
   

  
	
   

  	
  Name: G. Ward Paxton

  	
   

  	
   

  	
  Name: Michael Paxton

  
	
   

  	
  Title: President

  	
   

  	
   

  	
  Title: Secretary

  
							

 
24

 
ANNEX A
 
NOTICE OF CONVERSION
 
(TO BE EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF PREFERRED STOCK)
 
The undersigned hereby elects to convert the number of shares of Series 2 5% Convertible Preferred Stock indicated below, into shares of common stock, par value $0.01 per share (the “Common Stock”), of Intrusion Inc., a Delaware corporation (the “Corporation”), according to the conditions hereof, as of the date written below. If shares are to be issued in the name of a person other than undersigned, the undersigned will pay all transfer taxes payable with respect thereto and is delivering herewith such certificates and opinions as reasonably requested by the Corporation in accordance therewith. No fee will be charged to the Holder for any conversion, except for such transfer taxes, if any.
 
Conversion calculations:
 

	Date to Effect Conversion: 
	 
	 
	 

	 
	 

	Number of shares of Preferred Stock owned prior to Conversion:
	 
	 
	 

	 
	 

	Number of shares of Preferred Stock to be Converted:
	 
	 
	 

	 
	 

	Stated Value of shares of Preferred Stock to be Converted:
	 
	 
	 

	 
	 

	Number of shares of Common Stock to be Issued:
	 
	 
	 

	 
	 

	Applicable Conversion Price:
	 
	 
	 

	 
	 

	Number of shares of Preferred Stock subsequent to Conversion:
	 
	 
	 

	 
	 

	Name(s) in which shares of Common Stock will be registered (if different than 
	 

	the undersigned):
	 
	 
	 

	 
	 

	If the Holder wants the shares of Common Stock to be issued via DWAC, please provide:
	 

	 
	 

	 
	(a)  Broker DTC:
	 
	 
	 

	 
	(b)  Investor Account Number:
	 
	 
	 

	 
	 

	 
	[HOLDER]
	 

	 
	 
	 

	 
	By:
	 
	 
	 

	 
	 
	Name:
	 

	 
	 
	Title:
	 

																	

 

25

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