AMENDMENT
Exhibit
99.1
AMENDMENT
Amendment
(this “Amendment”) dated as of this 23rd
day of
May, 2007 to a certain Securities Purchase Agreement (the “Agreement”)
is
made and entered into as of May 8, 2007 by and among China
Education Alliance, Inc.,
a North
Carolina corporation (the “Company”), and Xxxxxx
Partners LP, a
North
Carolina limited partnership (“Xxxxxx”),
and
any other investors named on the signature page of this Amendment (together
with
Xxxxxx, the “Investors”
and
each an “Investor”).
RECITALS:
WHEREAS,
pursuant to the Agreement, the Investors purchased from the Company convertible
notes (the “Notes”)
in the
aggregate principal amount of two million four hundred thousand dollars
($2,400,000), which Notes are convertible into either (a) an aggregate of (i)
six million four hundred eighty six thousand four hundred eighty six (6,486,486)
shares of the Company’s Series A Convertible Preferred Stock, par value $.001
per share (“Series
A Preferred Stock”),
with
each share of Series A Preferred Stock being initially convertible into one
(1)
share of the Company’s common stock, par value $.001 per share (“Common Stock”),
subject to adjustment, (ii) common stock purchase warrants (the “Warrants”) to
purchase six million (6,000,000) shares of Common Stock at sixty nine cents
($.69) per share, (iii) Warrants to purchase three million (3,000,000) shares
of
Common Stock at eighty cents ($.80) per share, and (iv) Warrants to purchase
three million (3,000,000) shares of Common Stock at one dollar ($1.00) per
share, and or (b) an aggregate of (i) six million four hundred eighty six
thousand four hundred eighty six (6,486,486) shares of Common Stock, (ii)
Warrants to purchase six million (6,000,000) shares of Common Stock at sixty
nine cents ($.69) per share, (iii) Warrants to purchase three million
(3,000,000) shares of Common Stock at eighty cents ($.80) per share, and (iv)
Warrants to purchase three million (3,000,000) shares of Common Stock at one
dollar ($1.00) per share or (c) if the Certificate of Amendment and the
Certificate of Designation, as hereinafter defined, shall not have been filed
as
required by this Amendment and the Note, eighteen million four hundred eighty
six thousand four hundred eighty six (18,486,486) shares of Common Stock; and
WHEREAS,
Xxxxxx
desires to purchase from the Company, upon the terms and subject to the
conditions of this Amendment, for a purchase price of one million dollars
($1,000,000), a note (the “New Note”) in the principal amount of one million
dollars ($1,000,000) which New Note is convertible into either (a) an aggregate
of (i) two million seven hundred two thousand seven hundred two (2,702,702)
shares of Series A Preferred Stock, with each share of Series A Preferred Stock
being initially convertible into one (1) share of the Company’s common stock,
par value $.001 per share (“Common Stock”), subject to adjustment, (ii) common
stock purchase warrants (the “Warrants”) to purchase two million five hundred
thousand (2,500,000) shares of Common Stock at sixty nine cents ($.69) per
share, and (iii) Warrants to purchase one million two hundred fifty thousand
(1,250,000) shares of Common Stock at eighty cents ($.80) per share or (b)
an
aggregate of (i) two million seven hundred two thousand seven hundred two
(2,702,702) shares of Common Stock, (ii) Warrants to purchase two million five
hundred thousand (2,500,000) shares of Common Stock at sixty nine cents ($.69)
per share, and (iii) Warrants to purchase one million two hundred fifty thousand
(1,250,000) shares of Common Stock at eighty cents ($.80) per share or (c)
if
the Certificate of Amendment and the Certificate of Designation shall not have
been filed as required by this Amendment and the Note, six million four hundred
fifty two thousand seven hundred two (6,452,702) shares of Common Stock; and
WHEREAS,
the
parties intend to memorialize the terms on which the Company will sell to the
Xxxxxx and the Xxxxxx will purchase the New Note;
NOW,
THEREFORE,
in
consideration of the mutual covenants and premises contained herein, and for
other good and valuable consideration, the receipt and adequacy of which are
hereby conclusively acknowledged, the parties hereto, intending to be legally
bound, agree as follows:
Article
1
DEFINITIONS
1.1 Certain
Definitions.
For
purposes of this Amendment, the following capitalized terms shall have the
following meanings (all capitalized terms used in this Amendment that are not
defined in this Article 1 shall have the meanings set forth in the
Agreement):
1.1.1 “Certificate
of Amendment”
means
the certificate of amendment which is in substantially the form of Exhibit
A
to this
Agreement.
1.1.2 “Certificate
of Designation”
means
the certificate of the rights, preferences and privileges, subject to the
limitations, with respect to the Series A Preferred Stock. The Certificate
of
Designation shall be in substantially the form of Exhibit
B
to this
Agreement.
1.1.3 “Closing” means
the
consummation of the transactions contemplated by this Amendment, all of which
transactions shall be consummated contemporaneously with the
Closing.
1.1.4 “Closing
Date”
means
the date on which the Closing occurs.
1.1.5 “Closing
Escrow Agreement”
shall
mean the agreement between the Company, the Investors and the Escrow Agent
pursuant to which securities are deposited into escrow to be held as provided
in
Section 6 of this Amendment. The Closing Escrow Agreement shall be in
substantially the form of Exhibit
B
to this
Amendment and shall supersede the Closing Escrow Agreement executed in
connection with the Agreement.
1.1.6 “New Note”
shall
have the meaning set forth in the introductory paragraph of this Amendment
and
shall be in substantially the form of Exhibit
D
to this
Amendment.
1.1.7 “New
Note Purchase Price”
shall
mean one million dollars ($1,000,000).
1.1.8 “Purchase
Price”
shall
mean three million four hundred thousand dollars ($3,400,000), with respect
to
the Notes and the New Note.
1.1.9 “Total
Shares”
means
the number of shares of Common Stock as are issuable upon conversion of the
Notes and the New Notes, such number to be determined as if the Notes and New
Notes are never converted into shares of Series A Preferred Stock and shall
be
based on the calculation which excludes any computation based on the issuance
of
Common Stock referred to in clause (c) of the first and second introductory
paragraphs of this Amendment. Based on the initial conversion price, as defined
in the Note and the New Note, which is thirty seven cents ($.37), the Total
Shares shall be twenty four million nine hundred thirty nine thousand one
hundred eighty eight (24,939,188) shares of Common Stock. The number of Total
Shares shall be adjusted to reflect any change in the conversion price of the
Notes, the New Notes or Series A Preferred Stock and the exercise price of
the
Warrants and the expiration of any Warrants.
-2-
1.1.10 “Transaction
Documents”
means
this Amendment, all Schedules and Exhibits attached hereto, the Notes, the
New
Note, the Certificate of Designation, the Warrants, the Registration Rights
Agreement, the Closing Escrow Agreement and all other documents and instruments
to be executed and delivered by the parties in order to consummate the
transactions contemplated hereby.
1.1.11 “Warrants”
means
the common stock purchase warrants in substantially the forms of Exhibits
F-1 and F-2 to
the
Agreement, except that the date of issue shall be the Closing Date.
1.2 All
references in this Amendment to “herein” or words of like effect, when referring
to preamble, recitals, article and section numbers, schedules and exhibits
shall
refer to this Amendment unless otherwise stated.
Article
2
SALE
AND PURCHASE OF NEW NOTE
2.1 Sale
of New Note.
2.1.1 Upon
the
terms and subject to the conditions set forth herein, and in accordance with
applicable law, the Company agrees to sell to Xxxxxx, and Xxxxxx agrees to
purchase from the Company, on the Closing Date, a New Note in the principal
amount of one million dollars ($1,000,000). At or prior to the Closing each
Investor shall wire the New Note Purchase Price to the Escrow Agent, who shall
release the Purchase Price to the Company upon receipt of instructions from
Xxxxxx and the Company as provided in the Escrow Agreement. The Company shall
cause the New Note to be issued to Xxxxxx upon the release of the New Note
Purchase Price by the Escrow Agent in accordance with the disbursement
instructions signed by Xxxxxx and the Company.
2.1.2 The
4.9%
Limitation shall apply to the New Note and the Securities issuable upon
conversion of the New Note.
Article
3
CLOSING
DATE AND DELIVERIES AT CLOSING
3.1 Closing
Date.
The
Closing of the transactions contemplated by this Amendment, unless expressly
determined herein, shall be held at the offices of the Sichenzia Xxxx Xxxxxxxx
Xxxxxxx LLP, 00 Xxxxxxxx, Xxx Xxxx, Xxx Xxxx 00000, at 2:00 P.M. local time,
on
the Closing Date or on such other date and at such other place as may be
mutually agreed by the parties, including closing by facsimile with originals
to
follow.
3.2 Deliveries
by the Company.
In
addition to and without limiting any other provision of this Amendment, the
Company agrees to deliver, or cause to be delivered, to the escrow agent under
the Escrow Agreement, the following:
(a) At
or
prior to Closing, an executed Amendment;
(b) At
the
Closing, the New Note in the names of Xxxxxx;
(c) The
executed Closing Escrow Agreement;
-3-
(d) Evidence
of approval of the Board of Directors of the Company of the Transaction
Documents and the transactions contemplated hereby and thereby; and
(e) The
executed disbursement instructions.
3.3 Deliveries
by Investors.
In
addition to and without limiting any other provision of this Amendment, the
Investors agree to deliver, or cause to be delivered, to the Escrow Agent under
the Escrow Agreement, the following:
(a) A
deposit
from Xxxxxx the New Note Purchase Price;
(b) The
executed Amendment;
(c) The
executed Closing Escrow Agreement; and
(d) The
executed disbursement instructions pursuant to the Escrow
Agreement.
Article
4
REPRESENTATIONS
AND WARRANTIES
4.1 Representations
by the Company.
The
representation and warranties of the Company set forth in Article 4 of the
Agreement are in full force and effect in the same manner as if such
representations were made on and as of the date of this Amendment.
4.2 Representations
by Xxxxxx.
The
representation and warranties of Xxxxxx set forth in Article 5 of the Agreement
are in full force and effect in the same manner as if such representations
were
made on and as of the date of this Amendment.
Article
5
AMENDMENTS
5.1 Amendment
to Section 6.15.
Section
6.15 of the Agreement shall be amended to read as follows:
“6.15
Deliveries
from Escrow Based on Pre-Tax Earnings Per Share.
“6.15.1 At
the
Closing, pursuant to the Closing Escrow Agreement:
“6.15.1.1
The Company shall deliver to the Escrow Agent the 2,000,000 shares of Common
Stock and Xiqun Yu shall deliver to the Escrow Agent 2,000,000 shares of Common
Stock which are deliverable pursuant to the Agreement.
“6.15.1.1
The Company shall deliver to the Escrow Agent the 833,333 shares of Common
Stock
and Xiqun Yu shall deliver to the Escrow Agent 833,333 shares of Common Stock
which are deliverable pursuant to the Agreement.
“6.15.1.3
Upon the filing of the Certificate of Amendment and the Certificate of
Designation, the Company will deliver to the Escrow Agent a certificate for
2,833,333 shares of Series A Preferred Stock and the Escrow Agent shall return
the certificate(s) for 2,833,333 shares of Common Stock to the Company and
the
Company shall cancel such shares of Common Stock.
-4-
“6.15.2 In
the
event the Company’s consolidated Pre-Tax Income for the year ended December 31,
2007 is less than $0.06647 per share, on a fully-diluted basis (the
“Target
Number”)
the
percentage shortfall shall be determined by dividing the amount of the shortfall
by the Target Number.
“6.15.3 If
the
percentage shortfall is equal to or greater than thirty three and one-third
percent (33 1/3%), then the Escrow Agent shall (a) deliver the 2,833,333 shares
of Series A Preferred Stock to the Investors in the ratio of their initial
purchase of Notes and New Note, as the case may be, and (b) deliver the
2,833,333 shares of Common Stock to the Company, and the Company shall cancel
such shares.
“6.15.4 If
the
percentage shortfall is less than thirty three and one-third percent (33 1/3%),
then the Escrow Agent shall (a) deliver to the Investors in the ratio of their
initial purchase of Notes and New Note the such number of shares of Series
A
Preferred Stock as is determined by multiplying the percentage shortfall by
2,833,333 shares, (b) deliver to the Company the balance of the 2,833,333 shares
of Series A Preferred Stock that were not transferred to the Investors, and
the
Company shall cancel such shares, (c) deliver to the Company such number of
shares of Common Stock as is determined by multiplying the percentage shortfall
by 2,833,333 shares, and the Company shall cancel such shares, and (d) deliver
to Xiqun
Yu
the
balance of the 2,833,333 shares that were not transferred to the
Company.
“6.15.5 If
the
Escrow Agent shall not have received the 2,833,333 shares of Series A Preferred
Stock from the Company, the 2,833,333 shares of Common Stock delivered to the
Escrow Agent by the Company shall be delivered in the same manner that the
2,833,333 shares of Series A Preferred Stock would have been delivered if the
Escrow Agent had received such shares.
“6.15.6 For
purpose of determining Pre-Tax Income Per Share on a fully-diluted basis, all
shares of Common Stock issuable upon conversion of convertible securities and
upon exercise of warrants and options (whether or not vested) shall be deemed
to
be outstanding, regardless of whether (i) such shares are treated as outstanding
for determining diluted earnings per share under GAAP, (ii) such securities
are
“in the money,” or (iii) such shares may be issued as a result of the 4.9%
Limitation; provided, however, that neither the 2,833,333 shares of Series
A
Preferred Stock held in escrow pursuant to Section 6.15.1 nor the shares of
Common Stock issuable upon conversion of such Series A Preferred Stock shall
be
deemed outstanding for purpose of this Section 6.15.
“6.15.7 The
distribution of shares of Series A Preferred Stock and Common Stock pursuant
to
this Section 6.15 shall be made within two (2) business days after the Company
files its Form 10-KSB with the SEC. In the event that the Company does not
file
its Form 10-KSB for the year ended December 31, 2007 with the SEC within thirty
(30) days after the date that filing was required, after giving effect to any
extension pursuant to Rule 12b-25 of the Exchange Act, all of the 2,833,333
shares of Series A Preferred Stock shall be delivered to the Investors and
all
of the 2,833,333 shares of Common Stock shall be transferred to the
Company.
“6.15.8 The
parties understand that, pursuant to the Closing Escrow Agreement, the Escrow
Agent will not make any deliveries of shares without the signed written
instructions from the Company, the Investors and Xx. Xx.”
-5-
5.2 Registration
Rights Agreement.
The
term “Registrable Securities,” as defined in the Registration Rights Agreement,
shall also include the shares of Common Stock issuable upon conversion of the
New Note, conversion of the Series A Preferred Stock issuable upon conversion
of
the New Note, and exercise of the Warrants issued upon conversion of the New
Note.
5.3 Transaction
Documents Remain in Effect.
Except
as amended by this Agreement, all of the Transaction Documents shall remain
in
full force and effect in accordance with their respective terms.
[SIGNATURES
ON FOLLOWING PAGE]
-6-
IN
WITNESS WHEREOF,
the
Investors and the Company have as of the date first written above executed
this
Amendment.
|
THE
COMPANY:
CHINA
EDUCATION ALLIANCE, INC.
|
|||
| By: /s/ Xiqun Yu | |||
|
Name: |
|||
|
Title:
|
|
INVESTORS:
XXXXXX
PARTNERS LP
By:
Xxxxxx Capital Advisors, LLC, its General Partner
|
|||
| /s/ Xxxxxx Xxxxxx Xxxxxx | |||
|
Xxxxxx Xxxxxx Xxxxxx, President |
| EOS HOLDINGS | |||
| By: /s/ Xxx X. Xxxxxx | |||
|
Xxx X.Xxxxxx, President |
| HUA-MEI 21ST CENTURY PARTNERS, LP | |||
| By: /s/ Xxxxx Xxxxx | |||
|
Xxxxx Xxxxx, CEO |
-7-
Exhibit
A
Certificate
of Amendment
1. Article
2
of the Articles of Incorporation shall be amended to read as
follows:
(a) The
total
number of shares of capital stock which this Corporation is authorized to issue
is one hundred sixty five million (170,000,000) shares, of which:
(i) twenty
million (20,000,000) shares shall be designated as Preferred Stock, and shall
have a par value of $.001 per share; and
(ii) one
hundred fifty million (150,000,000) shares shall be designated as Common Stock,
and shall have a par value of $.001 per share.
(b) The
Board
of Directors is expressly authorized at any time, and from time to time, to
provide for the issuance of shares of Preferred Stock in one or more series,
with such voting powers, full or limited, or without voting powers and with
such
designations, preferences and relative, participating, optional or other special
rights, qualifications, limitations or restrictions thereof, as shall be stated
and expressed in the resolution or resolutions providing for the issue thereof
adopted by the Board of Directors and as are not stated and expressed in these
Articles of Incorporation, or any amendment thereto, including (but without
limiting the generality of the foregoing) the following:
(i) the
designation of such series;
(ii) the
dividend rate of such series, the conditions and dates upon which such dividends
shall be payable, the preference or relation which such dividends shall bear
to
the dividends payable on any other class or classes or of any other series
of
capital stock, whether such dividends shall be cumulative or noncumulative,
and
whether such dividends may be paid in shares of any class or series of capital
stock or other securities of the Corporation;
(iii) whether
the shares of such series shall be subject to redemption by the Corporation,
and, if made subject to such redemption, the times, prices and other terms
and
conditions of such redemption;
(iv) the
terms
and amount of any sinking fund provided for the purchase or redemption of the
shares of such series;
(v) whether
or not the shares of such series shall be convertible into or exchangeable
for
shares of any other class or classes or series of capital stock or other
securities of the Corporation, and, if provision be made for conversion or
exchange, the times, prices, rates, adjustment and other terms and conditions
of
such conversion or exchange;
(vi) the
extent, if any, to which the holders of the shares of such series shall be
entitled to vote, as a class or otherwise, with respect to the election of
the
directors or otherwise, and the number of votes to which the holder of each
share of such series shall be entitled;
A-1
(vii) the
restrictions, if any, on the issue or reissue of any additional shares or series
of Preferred Stock; and
(viii) the
rights of the holders of the shares of such series upon the dissolution of,
or
upon the distribution of assets of, the Corporation.
(c) No
holder
of any stock of the Corporation of any class or series now or hereafter
authorized, shall, as such holder, be entitled as of right to purchase or
subscribe for any shares of stock of the Corporation of any class or any series
now or hereafter authorized, or any securities convertible into or exchangeable
for any such shares, or any warrants, options, rights or other instruments
evidencing rights to subscribe for, or purchase, any such shares, whether such
shares, securities, warrants, options, rights or other instruments be unissued
or issued and thereafter acquired by the Corporation.
(d) The
terms
and conditions of any rights, options and warrants approved by the Board of
Directors may provide that any or all of such terms and conditions may not
be
waived or amended or may be waived or amended only with the consent of the
holders of a designated percentage of a designated class or classes of capital
stock of the Corporation (or a designated group or groups of holders within
such
class or classes, including but not limited to disinterested holders), and
the
applicable terms and conditions of any such rights, options or warrants so
conditioned may not be waived or amended or may not be waived or amended absent
such consent.
A-2
Exhibit
B
Form
of Certificate of Deisgnation of Preferences, Rights and
Limitations
CHINA
EDUCATION ALLIANCE, INC.
Statement
of Designations
Section
1.
Definitions.
Capitalized terms used and not otherwise defined herein that are defined in
the
Purchase Agreement (as defined below) shall have the meanings given such terms
in the Purchase Agreement. For the purposes hereof, the following terms shall
have the following meanings:
“4.9%
Limitation”
shall
have the meaning set forth in the Purchase Agreement.
“Bankruptcy
Event”
means
any of the following events: (a) the Company 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 Company or any Significant
Subsidiary thereof; (b) there is commenced against the Company or any
Significant Subsidiary thereof any such case or proceeding that is not stayed
or
dismissed within 90 days after commencement; (c) the Company 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 Company
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 90 days; (e) the Company or any Significant
Subsidiary thereof makes a general assignment for the benefit of creditors;
(f)
the Company 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 Company 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.
“Closing
Date”
means
the Closing Date, as defined in the Purchase Agreement.
“Commission”
means
the Securities and Exchange Commission.
“Common
Stock”
means
the Company’s common stock, par value $.001 per share, and stock of any other
class into which such shares may hereafter have been reclassified or
changed.
“Common
Stock Equivalents”
means
any securities of the Company or the Subsidiaries which would entitle the holder
thereof to acquire at any time Common Stock, including without limitation,
any
debt, preferred stock, rights, options, warrants or other instrument that is
at
any time convertible into or exchangeable for, or otherwise entitles the holder
thereof to receive, Common Stock.
“Conversion
Date”
shall
have the meaning set forth in Section 6(a).
“Conversion
Ratio”
shall
mean the number of shares of Common Stock issuable upon conversion of one share
of Series A Preferred Stock. Each share of Series A Preferred Stock shall be
convertible into one (1) share of Common Stock (the “Conversion Ratio”), subject
to adjustment as provided in this Statement of Designations.
B-1
“Conversion
Price”
shall
mean thirty seven cents ($.37), subject to adjustment as provided in this
Statement of Designations.
“Conversion
Shares”
means,
collectively, the shares of Common Stock into which the shares of Series A
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 the Conversion Shares by the Holder,
who
shall be named as a “selling stockholder” thereunder, all as provided in the
Registration Rights Agreement.
“Conversion
Value”
means
an amount determined by multiplying the number of Conversion Shares as to which
a value is to be determined by the average of the closing prices of the Common
Stock on the principal market or exchange on which the Common Stock is traded
for the five days prior to the date as of which a Conversion Value is being
determined.
“Dilutive
Issuance”
shall
have the meaning set forth in Section 7(b) hereof.
“Effective
Date”
means
the date that the Conversion Shares Registration Statement is declared effective
by the Commission.
“Exchange
Act”
means
the Securities Exchange Act of 1934, as amended.
“Exempt
Issuance”
shall
have the meaning set forth in the Purchase Agreement.
“Fundamental
Transaction”
shall
have the meaning set forth in Section 7(f)(iv) hereof.
“Holder”
shall
have the meaning given such term in Section 2 hereof.
“Investors”
shall
mean the persons named in Schedule A to the Purchase Agreement.
“Net
Income”
shall
have the meaning set forth in the Purchase Agreement.
“Original
Issue Date”
shall
mean the date of the first issuance of any shares of the Series A Preferred
Stock regardless of the number of transfers of any particular shares of Series
A
Preferred Stock and regardless of the number of certificates which may be issued
to evidence such Series A Preferred Stock.
“Person”
means
a
corporation, an association, a partnership, a limited liability company, a
business association, an individual, a trust, a government or political
subdivision thereof or a governmental agency.
“Purchase
Agreement”
means
the Securities Purchase Agreement dated as of May 8, 2007, relating to the
issuance of the Company’s 3% Convertible Subordinated Notes due September 30,
2007 in the aggregate principal amount of $2,400,000, as amended, modified
or
supplemented from time to time in accordance with its terms, including an
amendment dated May , 2007, relating to the issuance of a New Note (as defined
therein) in the principal amount of $1,000,000, a copy of which is on file
at
the principal offices of the Company.
B-2
“Registration
Rights Agreement”
means
the Registration Rights Agreement, dated as of the Closing Date, to which the
Company and the original Holder are parties, as amended, modified or
supplemented from time to time in accordance with its terms.
“Securities”
shall
have the meaning set forth in Section 1.3.32 of the Purchase
Agreement.
“Securities
Act”
means
the Securities Act of 1933, as amended, and the rules and regulations
promulgated thereunder.
“Series
A Preferred Stock”
shall
have the meaning set forth in Section 2.
“Subsidiary”
shall
mean a corporation, limited liability company, partnership, joint venture or
other business entity of which the Company owns beneficially or of record more
than a majority of the equity interest.
“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.
“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 primary 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. EST to 4:02 p.m. Eastern Time) using the VAP
function; (b) if the Common Stock is not then listed or quoted on the
Trading Market and if prices for the Common Stock are then reported in the
“Pink
Sheets” published by the National Quotation Bureau Incorporated (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 (c) in
all other cases, the fair market value of a share of Common Stock as determined
by a nationally recognized-independent appraiser selected in good faith by
Purchasers holding a majority of the principal amount of Series A Preferred
Stock then outstanding.
“Warrants”
shall
have the meaning set forth in the Purchase Agreement.
Rank
of Series.
For
purposes of this Statement of Designations, any stock of any series or class
of
the Corporation shall be deemed to rank:
(a)
senior to the shares of Series A Preferred Stock, as to dividends or upon
liquidation, dissolution or winding up, as the case may be, if the holders
of
such class or classes shall be entitled to the receipt of dividends or of
amounts distributable upon dissolution, liquidation or winding up of the
Corporation, as the case may be, in preference or priority to the holders of
shares of Series A Preferred Stock;
B-3
(b)
on a
parity with shares of Series A Preferred Stock, as to dividends or upon
liquidation, dissolution or winding up, as the case may be, whether or not
the
dividend rates, dividend payment dates or redemption or liquidation prices
per
share or sinking fund provisions, if any, be different from those of Series
A
Preferred Stock, if the holders of such stock shall be entitled to the receipt
of dividends or of amounts distributable upon dissolution, liquidation or
winding up of the Corporation, as the case may be, in proportion to their
respective dividend rates or liquidation prices, without preference or priority,
one over the other, as between the holders of such stock and the holders of
shares of Series A Preferred Stock;
(c)
junior to shares of Series A Preferred Stock as to dividends or upon
liquidation, dissolution or winding up, as the case may be, if such class shall
be Common Stock or if the holders of shares of Series A Preferred Stock shall
be
entitled to receipt of dividends or of amounts distributable upon dissolution,
liquidation or winding up of the Corporation, as the case may be, in preference
or priority to the holders of shares of such class or classes.
Section
2.
Designation
and Amount.
The
series of preferred stock, par value $.001 per share (“Preferred Stock”)
consisting of twenty million (20,000,000) shares shall be designated as the
Company’s Series A Convertible Preferred Stock (the “Series
A Preferred Stock”)
and
the number of shares so designated shall be (which shall not be subject to
increase without the consent of all of the holders of 75% of the then
outstanding shares of Series A Preferred Stock (each a “Holder”
and
collectively, the “Holders”).
In
the event of the conversion of shares of Series A Preferred Stock into this
Company’s Common Stock, pursuant to Section 6 hereof, or in the event that the
Company shall otherwise acquire and cancel any shares of Series A Preferred
Stock, the shares of Series A Preferred Stock so converted or otherwise acquired
and canceled shall have the status of authorized but unissued shares of
preferred stock, without designation as to series until such stock is once
more
designated as part of a particular Series by the Company’s Board of Directors.
In addition, if the Company shall not issue the maximum number of shares of
Series A Preferred Stock, the Company may, from time to time, by resolution
of
the Board of Directors and the approval of the holders of a majority of the
outstanding shares of Series A Preferred Stock, reduce the number of shares
of
Series A Preferred Stock authorized, provided, that no such reduction shall
reduce the number of authorized shares to a number which is less than the number
of shares of Series A Preferred Stock then issued or reserved for issuance.
The
number of shares by which the Series A Preferred Stock is reduced shall have
the
status of authorized but unissued shares of Preferred Stock, without designation
as to series, until such stock is once more designated as part of a particular
Series by the Company’s Board of Directors. The Board of Directors shall cause
to be filed with the Secretary of State of the State of North Carolina such
certificate as shall be necessary to reflect any reduction in the number of
shares constituting the Series A Preferred Stock.
Section
3.
Dividends
and Other Distributions.
No
dividends shall be payable with respect to the Series A Preferred Stock. No
dividends shall be declared or payable with respect to the Common Stock while
the Series A Preferred Stock is outstanding. The Company shall not redeem or
purchase any shares of Common Stock or any other class or series of capital
stock which is junior to or on a parity with the Series A Preferred Stock while
the Series A Preferred Stock is outstanding.
B-4
Section
4.
Voting
Rights.
The
Series A Preferred Stock shall have no voting rights except as required by
law.
However, so long as any shares of Series A Preferred Stock are outstanding,
the
Company shall not, without the affirmative approval of the Holders of 75% of
the
shares of the Series A Preferred Stock then outstanding, (a) alter or change
adversely the powers, preferences or rights given to the Series A Preferred
Stock or alter or amend this Statement of Designations, (b) authorize or create
any class of stock ranking as to dividends or distribution of assets upon a
Liquidation (as defined in Section 5) senior to or otherwise pari passu with
the
Series A Preferred Stock, or any of preferred stock possessing greater voting
rights or the right to convert at a more favorable price than the Series A
Preferred Stock, (c) amend its certificate of incorporation or other charter
documents in breach of any of the provisions hereof, (d) increase the authorized
number of shares of Series A Preferred Stock or the number of authorized shares
of Preferred Stock, or (e) enter into any agreement with respect to the
foregoing. Notwithstanding any other provision of the Statement of Designations;
the provisions of Section 6(c) of this Statement of Designations may not be
amended or waived.
Section
5.
Liquidation.
Upon
any liquidation, dissolution or winding-up of the Company, whether voluntary
or
involuntary (a “Liquidation”),
the
Holders shall be entitled to receive out of the assets of the Company, whether
such assets are capital or surplus, for each share of Series A Preferred Stock
an amount equal to thirty seven cents ($.37) per share of Series A Preferred
Stock, which amount is referred to as the “Liquidation
Value,”
before
any distribution or payment shall be made to the holders of any securities
which
are junior to the Series A Preferred Stock upon voluntary or involuntary
liquidation, dissolution or winding up and after any distributions or payments
made to holders of any class or series of securities which are senior to the
Series A Preferred Stock upon voluntary or involuntary liquidation, dissolution
or winding up, and if the assets of the Company 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. In the event the assets of the Company available for distribution
to the holders of shares of Series A Preferred Stock upon dissolution,
liquidation or winding up of the Company, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 5, no such distribution shall be made on account
of
any shares of any other class or series of capital stock of the Company ranking
on a parity with the shares of Series A Preferred Stock upon such dissolution,
liquidation or winding up unless proportionate distributive amounts shall be
paid on account of the shares of Series A Preferred Stock, ratably, in
proportion to the full distributable amounts for which holders of all such
parity shares are respectively entitled upon such dissolution, liquidation
or
winding up. At the election of a Holder made by written notice delivered to
the
Company at least two (2) business days prior to the effective date of the
subject transaction, as to the shares of Series A Preferred Stock held by such
Holder, a Fundamental Transaction (excluding for purposes of this Section 5
any
Fundamental Transaction described in Section 7(f)(iv)(A) or 7(f)(iv)(B)) or
Change of Control shall be treated as a Liquidation as to such Holder.
Section
6. Conversion.
(a) Conversions
at Option of Holder.
Each
share of Series A Preferred Stock shall be initially convertible (subject to
the
limitations set forth in Section 6(c)), into such number of shares of Common
Stock based on the Conversion Ratio at the option of the Holders, at any time
and from time to time from and after the Original Issue Date. Holders shall
effect conversions by providing the Company with the form of conversion notice
attached hereto as Annex
A
(a
“Notice
of Conversion”)
as
fully and originally executed by the Holder, together with the delivery by
the
Holder to the Company of the stock certificate(s) representing the number of
shares of Series A Preferred Stock so converted, with such stock certificates
being duly endorsed in full for transfer to the Company or with an applicable
stock power duly executed by the Holder in the manner and form as deemed
reasonable by the transfer agent of the Common Stock. Each Notice of Conversion
shall specify the number of shares of Series A Preferred Stock to be converted,
the number of shares of Series A Preferred Stock owned prior to the conversion
at issue, the number of shares of Series A Preferred Stock owned subsequent
to
the conversion at issue, the stock certificate number and the shares of Series
A
Preferred Stock represented thereby which are accompanying the Notice of
Conversion, 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
and
the applicable stock certificates to the Company by overnight delivery service
(the “Conversion
Date”).
If no
Conversion Date is specified in a Notice of Conversion, the Conversion Date
shall be the Trading Day immediately following the date that such Notice of
Conversion and applicable stock certificates are received by the Company. The
calculations and entries set forth in the Notice of Conversion shall control
in
the absence of manifest or mathematical error. Shares of Series A Preferred
Stock converted into Common Stock in accordance with the terms hereof shall
be
canceled and may not be reissued. If the Conversion Price is adjusted pursuant
to Section 7 or as otherwise provided in this Statement of Designations, the
Conversion Ratio shall likewise be adjusted and the new Conversion Ratio shall
determined by multiplying the Conversion Ratio in effect by a fraction, the
numerator of which is the Conversion Price in effect before the adjustment
and
the denominator of which is the new Conversion Price. Thereafter, subject to
any
further adjustments in the Conversion Price, each share of Series A Preferred
Stock shall be initially convertible into Common Stock based on the new
Conversion Ratio.
B-5
(b) Automatic
Conversion Upon Change of Control.
Subject
to Section 5, all of the outstanding shares of Series A Preferred Stock shall
be
automatically converted into the Conversion Shares upon the close of business
on
the business day immediately preceding the date fixed for consummation of any
transaction resulting in a Change of Control of the Company (an “Automatic
Conversion Event”). A “Change in Control” means a consolidation or merger of the
Company with or into another company or entity in which the Company is not
the
surviving entity or the sale of all or substantially all of the assets of the
Company to another company or entity not controlled by the then existing
stockholders of the Company in a transaction or series of transactions. The
Company shall not be obligated to issue certificates evidencing the Conversion
Shares unless certificates evidencing the shares of Series A Preferred Stock
so
converted are either delivered to the Company or its transfer agent or the
holder notifies the Company or its transfer agent in writing that such
certificates have been lost, stolen or destroyed and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred
by
it in connection therewith. Upon the conversion of the Series A Preferred Stock
pursuant to this Section 6(b), the Company shall promptly send written notice
thereof, by hand delivery or by overnight delivery, to the holders of record
of
all of the Series A Preferred Stock at their addresses then shown on the records
of the Company, which notice shall state that certificates evidencing shares
of
Series A Preferred Stock must be surrendered at the office of the Company (or
of
its transfer agent for the Common Stock, if applicable).
(c) Beneficial
Ownership Limitation.
Except
as provided in Section 6(b) of this Statement of Designations, which shall
apply
as stated therein if an Automatic Conversion Event shall occur, the right of
the
Holder to convert the Series A Preferred Stock shall be subject to the 4.9%
Limitation, with the result that Company shall not effect any conversion of
the
Series A Preferred Stock, and the Holder shall not have the right to convert
any
portion of the Series A 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 4.9% of the number of shares of the Common Stock outstanding immediately
after giving effect to such conversion. For
the
purposes of this Amendment beneficial ownership shall be determined in
accordance with Section 13(d) of the Exchange Act, and Regulation 13d-3
thereunder. 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 Company’s
most recent quarterly reports (Form 10-Q or Form 10-QSB), Annual Reports (Form
10-K or Form 10-KSB), or definitive proxy statement or information statement
as
filed with the Commission under the Exchange Act, (B) a more recent public
announcement by the Company, or (C) any other written notice by the Company
or
the Company’s transfer agent setting forth the number of shares of Common Stock
outstanding. Upon the written or oral request of the Holder, the Company
shall within two (2) 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 the conversion or exercise of securities of the Company, including
the
Series A Preferred Stock, by the Holder or its affiliates since the date as
of
which such number of outstanding shares of Common Stock was publicly reported
by
the Company. The 4.9% Limitation may be not be waived or amended.
B-6
(d) Mechanics
of Conversion
(i) Delivery
of Certificate Upon Conversion.
Except
as otherwise set forth herein, not later than three Trading Days after each
Conversion Date (the “Share
Delivery Date”),
the
Company shall deliver 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 Series A Preferred Stock, and (B) a bank check in the amount of
accrued and unpaid dividends (if the Company has elected or is required to
pay
accrued dividends in cash). After the Effective Date, the Company shall, upon
request of the Holder, deliver any certificate or certificates required to
be
delivered by the Company under this Section electronically through the
Depository Trust Company or another established clearing Company performing
similar functions if the Company’s transfer agent has the ability to deliver
shares of Common Stock in such manner. 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 Company at any time
on or before its receipt of such certificate or certificates thereafter, to
rescind such conversion, in which event the Company shall immediately return
the
certificates representing the shares of Series A Preferred Stock tendered for
conversion.
(ii) Obligation
Absolute; Partial Liquidated Damages.
The
Company’s obligations to issue and deliver the Conversion Shares upon conversion
of Series A 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 Company 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 Company 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 its Series A Preferred Stock, the Company 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 (other than the inability of the Company
to
issue shares of Common Stock as a result of the limitation set forth in Section
6(c) hereof) unless an injunction from a court, on notice, restraining and
or
enjoining conversion of all or part of this Series A Preferred Stock shall
have
been sought and obtained and the Company posts a surety bond for the benefit
of
the Holder in the amount of 150% of the Conversion Value of Series A Preferred
Stock 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 Company shall issue
Conversion Shares or, if applicable, cash, upon a properly noticed conversion.
If the Company fails to deliver to the Holder such certificate or certificates
pursuant to Section 6(d)(i) within two Trading Days of the Share Delivery Date
applicable to such conversion, the Company shall pay to such Holder, in cash,
as
liquidated damages and not as a penalty, for each $5,000 of Conversion Value
of
Series A Preferred Stock being converted, $50 per Trading Day (increasing to
$100 per Trading Day after three (3) Trading Days and increasing to $200 per
Trading Day six (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
Company’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.
B-7
(iii) Compensation
for Buy-In on Failure to Timely Deliver Certificates Upon
Conversion.
If the
Company fails to deliver to the Holder such certificate or certificates pursuant
to Section 6(d)(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 Company 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 Series A 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 Company
shall be required to pay the Holder $1,000. The Holder shall provide the Company
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 Company. 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 Company’s failure to timely deliver certificates
representing shares of Common Stock upon conversion of the shares of Series
A
Preferred Stock as required pursuant to the terms hereof.
(iv) Reservation
of Shares Issuable Upon Conversion.
The
Company 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 Series A Preferred Stock, each as herein
provided, free from preemptive rights or any other actual contingent purchase
rights of persons other than the Holders, not less than such number of shares
of
the Common Stock as shall (subject to any additional requirements of the Company
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 Series A Preferred Stock.
The
Company 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 provided that the holder
or
its broker delivers confirmation to the Company or its transfer agent to the
effect that the Conversion Shares have been sold pursuant to such registration
statement.
B-8
(v) Fractional
Shares.
Upon a
conversion of the Series A Preferred Stock, the Company shall not be required
to
issue stock certificates representing fractional shares of Common Stock. All
fractional shares shall be carried forward and any fractional shares which
remain after a Holder converts all of his or her Series A Preferred Stock shall
be dropped and eliminated.
(vi) Transfer
Taxes.
The
issuance of certificates for shares of the Common Stock on conversion of the
Series A Preferred Stock shall be made without charge to the Holders thereof
for
any documentary stamp or similar taxes that may be payable in respect of the
issue or delivery of such certificate, provided that the Company 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 Series A Preferred Stock so
converted and the Company 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 Company the amount of such tax or shall have
established to the satisfaction of the Company that such tax has been
paid.
(vii) Absolute
Obligation.
Except
as expressly provided herein, no provision of this Statement of Designations
shall alter or impair the obligation of the Company, which is absolute and
unconditional, to pay the liquidated damages (if any) on, the shares of Series
A
Preferred Stock at the time, place, and rate, and in the coin or currency,
herein prescribed.
Section
7.
Certain
Adjustments.
(a) Stock
Dividends and Stock Splits.
If the
Company, at any time subsequent to the Closing Date as long as the Series A
Preferred Stock is outstanding: (i) shall pay 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 Company pursuant to this Series A Preferred Stock), (ii) subdivide
outstanding shares of Common Stock into a larger number of shares, (iii) combine
(including by way of reverse stock split) outstanding shares of Common Stock
into a smaller number of shares, or (iv) issue by reclassification of shares
of
the Common Stock any shares of capital stock of the Company, 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 any) outstanding
before such event and of which the denominator shall be the number of shares
of
Common Stock outstanding after such event. Any adjustment made pursuant to
this
Section 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-9
(b) Price
Adjustment.
From
and after the Closing Date and until such time as the Investors hold no
Securities, except for (i) Exempt Issuances, (ii) issuances
covered by Sections 7(a) and 7(c) hereof or (iii) an issuance of Common Stock
upon exercise or upon conversion of warrants, options or other convertible
securities for which an adjustment has already been made pursuant to this
Section 7,
as to
all of which this Section 7(b) does not apply, if the Company closes on the
sale
or issuance of Common Stock at a price, or issues warrants, options, convertible
debt or equity securities with a exercise price per share or conversion price
which is less than the Conversion Price then in effect (such lower sales price,
conversion or exercise price, as the case may be, being referred to as the
“Lower Price”), the Conversion Price in effect from and after the date of such
transaction shall be reduced to the Lower Price. For purpose of determining
the
exercise price of warrants issued by the Company, the price, if any, paid per
share for the warrants shall be added to the exercise price of the
warrants.
(c) Pro
Rata Distributions.
If the
Company, at any time from and after the Closing Date and as long as the Series
A
Preferred Stock is outstanding, shall distribute to all holders of Common Stock
(and not to Holders) evidences of its indebtedness or assets or rights or
warrants to subscribe for or purchase any security, then in each such case
the
Conversion Price shall be determined 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 Holders 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.
(d) 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. The number of shares of Common
Stock outstanding at any given time shall not include shares owned or held
by or
for the account of the Company or any of its subsidiaries. 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 and shares owned by subsidiaries, if
any) actually issued and outstanding.
(e) Notice
to Holders.
(i) Adjustment
to Conversion Price.
Whenever the Conversion Price is adjusted pursuant to any of this Section 7,
the
Company 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. If the Company issues a variable rate security,
despite the prohibition thereon in the Purchase Agreement, the Company shall
be
deemed to have issued Common Stock or Common Stock Equivalents at the lowest
possible conversion or exercise price at which such securities may be converted
or exercised in the case of a Variable Rate Transaction (as defined in the
Purchase Agreement), or the lowest possible adjustment price in the case of
an
MFN Transaction (as defined in the Purchase Agreement).
(ii) Notices
of Other Events.
If (A)
the Company shall declare a dividend (or any other distribution) on the Common
Stock; (B) the Company shall declare a redemption of the Common Stock; (C)
the
Company 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 Company
shall be required in connection with any reclassification of the Common Stock
or
any Fundamental Transaction, (E) the
Company shall authorize the voluntary or involuntary dissolution, liquidation
or
winding up of the affairs of the Company; then in each case, the Company shall
cause to be filed at each office or agency maintained for the purpose of
conversion of the Series A Preferred Stock, and shall cause to be mailed
to
the Holders at their last addresses as they shall appear upon the stock
books of
the
Company, at least 30 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 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 or Fundamental Transaction; 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.
B-10
(f) Exempt
Issuance.
Notwithstanding the foregoing, no adjustment in the Conversion Price will be
made in respect of an Exempt Issuance.
(g) Fundamental
Transaction.
If, at
any time while this Series A Preferred Stock is outstanding, (i) the Company
effects any merger or consolidation of the Company with or into another Person,
(ii) the Company effects any sale of all or substantially all of its assets
in
one or a series of related transactions, (iii) any tender offer or exchange
offer (whether by the Company 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 (iv) the Company 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 any such case, a “Fundamental
Transaction”),
then
upon any subsequent conversion of this Series A Preferred Stock, the Holder
shall have the right to receive, for each Conversion Share that would have
been
issuable upon such conversion absent 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 Company 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 Series A Preferred Stock following such
Fundamental Transaction. To the extent necessary to effectuate the foregoing
provisions, any successor to the Company or surviving entity in such Fundamental
Transaction shall file a new Statement of Designations with the same terms
and
conditions and issue to the Holder new preferred stock 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 paragraph
(f)(iv) and insuring that this Series A Preferred Stock (or any such replacement
security) will be similarly adjusted upon any subsequent transaction analogous
to a Fundamental Transaction. Notwithstanding the foregoing or any other
provisions of this Statement of Designations, in the event that the agreement
relating to a Fundamental Transaction provides for the conversion or exchange
of
the Series A Preferred Stock into equity or debt securities, cash or other
consideration and the agreement is approved by the holders of a majority of
the.
then-outstanding shares of Series A Preferred Stock, then the holders of the
Series A Preferred Stock shall have only the rights set forth in such
agreement.
B-11
Section
8.
Miscellaneous.
(a) Notices.
Any and
all notices or other communications or deliveries to be provided by the Holders
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 Company, at its principal address
as
reflected in its most recent filing with the Commission. Any and all notices
or
other communications or deliveries to be provided by the Company 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
Company, 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 when received, and any notice by
telecopier shall be effective if confirmation of receipt is given by the party
to whom the notice is transmitted.
(b) Lost
or Mutilated Preferred Stock Certificate.
If a
Holder’s Series A Preferred Stock certificate shall be mutilated, lost, stolen
or destroyed, the Company 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 Series A 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 thereof, and indemnity,
if
requested, all reasonably satisfactory to the Company.
(c) Next
Business Day.
Whenever any payment or other obligation hereunder shall be due on a day other
than a Business Day, such payment shall be made on the next succeeding Business
Day.
(d) Headings.
The
headings contained herein are for convenience only, do not constitute a part
of
this Statement of Designations and shall not be deemed to limit or affect any
of
the provisions hereof.
(e) Amendment.
This
Statement of Designations may be amended with the approval of the Company’s
board of directors and the consent of the holders of seventy-five percent (75%)
of the outstanding shares of Series A Preferred Stock, except that the 4.9%
Limitation may not be waived.
B-12
ANNEX
A
NOTICE
OF
CONVERSION
(TO
BE
EXECUTED BY THE REGISTERED HOLDER IN ORDER TO CONVERT SHARES OF SERIES A
PREFERRED STOCK)
The
undersigned hereby elects to convert the number of shares of Series A
Convertible Preferred Stock indicated below, into shares of common stock, par
value $0.01 per share (the “Common
Stock”),
of
China Education Alliance, Inc., a North Carolina corporation (the “Company”),
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 Company
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 Common Stock owned prior to Conversion:
_______________
|
|
Number
of shares of Series A Preferred Stock to be Converted:
________________
|
|
Value
of shares of Series A Preferred Stock to be Converted:
____________________
|
|
Number
of shares of Common Stock to be Issued:
___________________________
|
|
Certificate
Number of Series A Preferred Stock attached
hereto:_________________
|
|
Number
of Shares of Series A Preferred Stock represented by attached
certificate:_________
|
|
Number
of shares of Series A Preferred Stock subsequent to Conversion:
________________
|
| [HOLDER] | ||
| |
|
|
| By: | ||
|
Name: |
||
|
Title:
|
||
B-13
Exhibit
C
Closing
Escrow Agreement
See
Exhibit 99.3
C-1
Exhibit
D
Form
of New Note
See
Exhibit 99.2
D-1
