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AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
-------------------------------------------------
OF
CYBERIAN OUTPOST, INC.
_______
The undersigned, for the purpose of restating the Amended and Restated
Certificate of Incorporation of Cyberian Outpost, Inc. (which was filed with the
Connecticut Secretary of the State on October 30, 1997), under the provisions of
the Connecticut Business Corporation Act, does hereby certify that:
FIRST: The name of the corporation is Cyberian Outpost, Inc.
-----
SECOND: The nature of the business to be transacted, or the purposes to be
------
promoted or carried out by the corporation, which shall be in addition to the
authority of the corporation to engage in any lawful act or activity for which
corporations may be formed under the Connecticut Business Corporation Act, are
as follows:
To carry on a general mercantile, industrial, investing, and trading
business in all its branches; to devise, invent, manufacture, fabricate,
assemble, install, service, maintain, alter, buy, sell, import, export, license
as licensor or licensee, lease as lessor or lessee, distribute, job, enter into,
negotiate, execute, acquire, and assign contracts in respect of, acquire,
receive, grant, and assign licensing arrangements, options, franchises, and
other rights in respect of, and generally deal in and with, at wholesale and
retail, as principal, and as sales, business, special, or general agent,
representative, broker, factor, merchant, distributor, jobber, advisor, and in
any other lawful capacity, goods, wares, merchandise, commodities, and
unimproved, improved, finished, processed, and other real, personal, and mixed
property of any and all kinds, together with the components, resultants, and by-
products thereof; to acquire by purchase or otherwise own, hold, lease,
mortgage, sell, or otherwise dispose of, erect, construct, make, alter, enlarge,
improve, and to aid or subscribe toward the construction, acquisition or
improvement or any factories, shops, storehouse, buildings, and commercial and
retail establishments of every character, including all equipment, fixtures,
machinery, implements, and supplies necessary, or incidental to, or connected
with, any of the purposes or business of the corporation; and generally to
perform any and all acts connected therewith or arising therefrom or incidental
thereto, and all acts proper or necessary for the purpose of the business.
To manufacture, develop, sell, and distribute computer software, computer
hardware, and related products and services.
To apply for, register, obtain, purchase, lease, take licenses in respect
of or otherwise acquire, and to hold, own, use, operate, develop, enjoy, turn to
account, grant licenses and
<PAGE>
immunities in respect of, manufacture under and to introduce, sell, assign,
mortgage, pledge, or otherwise dispose of, and, in any manner deal with and
contract with reference to:
<PAGE>
(a) inventions, devices, formulae, processes, and any improvements and
modifications thereof;
(b) letters patent, patent rights, patented processes, copyrights,
designs, and similar rights, trade-marks, trade symbols and other indications of
origin and ownership granted by or recognized under the laws of the United
States of America or of any state or subdivision thereof, or of any foreign
country or subdivision thereof, and all rights connected therewith or
appertaining thereunto;
(c) franchises, licenses, grants, and concessions.
To have and to exercise all powers granted by law and by the Connecticut
Business Corporation Act and all legal powers necessary or convenient to effect
any or all of the purposes stated in this Certificate of Incorporation or to
transact the stated business of the Corporation.
THIRD: The authorized number of shares of the corporation is 15,000,000,
-----
of which:
1. 10,000,000 shares are designated as shares of common stock, without
nominal or par value.
2. 5,000,000 shares are designated as shares of preferred stock,
without nominal or par value. There is hereby established a series of preferred
stock designated "Series A Convertible Preferred Stock", consisting of 700,000
shares of preferred stock, without nominal or par value, and having the relative
rights, designations, preferences, qualifications, privileges, limitations, and
restrictions applicable thereto as set forth on Exhibit A attached hereto and
---------
made a part hereof. There is hereby established a series of preferred stock
designated "Series B Convertible Preferred Stock", consisting of 500,000 shares
of preferred stock, without nominal or par value, and having the relative
rights, designations, preferences, qualifications, privileges, limitations, and
restrictions applicable thereto as set forth on Exhibit B attached hereto and
---------
made a part hereof. There is hereby established a series of preferred stock
designated "Series C Convertible Preferred Stock", consisting of 3,000,000
shares of preferred stock, without nominal or par value, and having the relative
rights, designations, preferences, qualifications, privileges, limitations, and
restrictions applicable thereto as set forth on Exhibit C attached hereto and
---------
made a part hereof.
3. The remaining 800,000 authorized shares of preferred stock are
hereby deemed to be shares of an undesignated series of preferred stock until
designated by the Board of Directors of Cyberian Outpost, Inc. as being part of
a series previously established or a new series then being established by the
Board of Directors of Cyberian Outpost, Inc. The Board of Directors of Cyberian
Outpost, Inc. is hereby authorized to establish one or more additional series of
preferred stock, and to the extent now or hereafter permitted by the Connecticut
Business Corporation Act the Board of Directors of Cyberian Outpost, Inc. is
authorized to fix and determine the preferences, voting powers, qualifications
and special or relative rights or
<PAGE>
privileges of each such series including, but not limited to:
(a) the number of shares to constitute such series and the
distinguishing designation thereof;
(b) the dividend rate on the shares of such series and the
preferences, if any, and the special and relative rights of such shares of such
series as to dividends;
(c) whether or not the shares of such series shall be redeemable, and,
if redeemable, the price, terms, and manner of redemption;
(d) the preferences, if any, and the special and relative rights of
the shares of such series upon liquidation of the corporation;
(e) whether or not the shares of such series shall be subject to the
operation of a sinking or purchase fund and, if so, the terms and provisions of
such fund;
(f) whether or not the shares of such series shall be convertible into
shares of any other class or of any other series of the same or any other class
of stock of the corporation and, if so, the conversion price or ratio and other
conversion rights;
(g) the conditions under which the shares of such series shall have
separate voting rights or no voting rights; and
(h) such other designations, preferences and relative, participating,
optional or other special rights and qualifications, limitations or restrictions
of such series to the full extent now or hereafter permitted by the laws of the
State of Connecticut.
Notwithstanding the fixing of the number of shares constituting a
particular series, the Board of Directors of Cyberian Outpost, Inc. may at any
time authorize the issuance of additional shares of the same series.
FOURTH: Except as may be otherwise set forth in this Certificate of
------
Incorporation, no holder of any of the shares of the corporation shall be
entitled as of right to purchase or subscribe for any unissued shares of any
class or any additional shares of any class to be issued by reason of any
increase of the authorized shares of the corporation, or bonds, certificates of
indebtedness, debentures, or other securities convertible into shares of the
corporation or carrying any right to purchase shares of any class, but any such
unissued shares or such additional authorized issue of any shares or of other
securities convertible into shares, or carrying any right to purchase shares,
may be issued and disposed of pursuant to resolution of the Board of Directors
to such persons, firms, corporations, or associations and upon such terms as may
be deemed advisable by the Board of Directors in the exercise of its discretion.
FIFTH: The minimum amount of stated capital with which the corporation
-----
shall
<PAGE>
commence business is one thousand dollars.
SIXTH: For the regulation and management of the affairs of the corporation,
-----
it is further provided:
1. Whenever any provision of the Connecticut Business Corporation Act
shall otherwise require for the approval of any specified corporate action the
authorization of at least two-thirds of the voting power of shareholders
entitled to vote, any such corporate action shall be approved by the
authorization of at least a majority of the voting power of the shareholders
entitled to vote; and whenever the corporation shall have one or more classes or
series of shares which are denied voting power under the Certificate of
Incorporation but the authorization of at least two-thirds of the voting power
of said class or series is otherwise required for the approval of any specified
corporate action under the Connecticut Business Corporation Act, any such
corporate action shall be approved by said class or series by the authorization
of at least a majority of the voting power of each such class and of each such
series.
2. To the extent permitted by the Connecticut Business Corporation Act,
and in conformity with the provisions thereof, any corporate action permitted to
be taken at a meeting of shareholders entitled to vote may be taken without a
meeting by a consent in writing signed by the holders of at least a majority of
the voting power of each class entitled to vote.
3. Whenever the corporation shall be engaged in the business of exploiting
natural resources, dividends may be declared and paid in cash or property and
charged against depletion reserves.
4. To the extent permitted by the Connecticut Business Corporation Act,
and in conformity with the provisions thereof, distributions in cash or property
may be made out of capital surplus available therefor without the authorization
of the shareholders of any class of the corporation, except as otherwise
provided herein.
5. To the extent permitted by the Connecticut Business Corporation Act,
and in conformity with the provisions thereof, acquisitions of its own shares
out of unreserved and unrestricted capital surplus may be made by the
corporation without the authorization of the shareholders of any class of the
corporation, except as otherwise provided herein.
6. One or more or all of the directors of the corporation may be removed
for cause or without cause by the shareholders entitled to vote for their
election. The Board of Directors shall have power to remove any director for
cause and to suspend any director pending a final determination that cause
exists, except as otherwise provided herein.
7. The personal liability of the directors of the corporation is limited
to the fullest extent permitted by the provisions of the Connecticut Business
Corporation Act, as the same may be amended and supplemented.
<PAGE>
8. The Corporation shall, to the fullest extent permitted by Section 33-
776(4) of the Connecticut Business Corporation Act, as the same may be amended
and supplemented, indemnify any and all persons whom it shall have power to
indemnify under said section from and against any and all of the expenses,
liabilities, or other matters referred to in or covered by said section.
I, the undersigned, do hereby declare under the penalties of false
statement that the statements contained in the foregoing document are true and
do hereby sign this document at Kent, Connecticut, on February 27, 1998.
/s/ Darryl Peck
_______________________________
Darryl Peck, President
<PAGE>
EXHIBIT A
TERMS OF SERIES A CONVERTIBLE PREFERRED STOCK
OF
CYBERIAN OUTPOST, INC.
Designation of Series A Convertible Preferred Stock. There is hereby
----------------------------------------------------
established a series of Preferred Stock designated "Series A Convertible
Preferred Stock" (the "Series A Preferred"), consisting of 700,000 shares,
------------------
without nominal or par value, and having the relative rights, designations,
preferences, qualifications, privileges, limitations, and restrictions
applicable thereto as follows:
1. Dividend Provisions. Except as may be otherwise approved in writing by
-------------------
the holders of a majority of the outstanding shares of Series A Preferred:
(a) The holders of the shares of Series A Preferred shall be entitled
to receive dividends, out of any assets legally available therefor, in an amount
per share of Series A Preferred which is equal to the product of (i) the number
of shares of common stock, no par value ("Common Stock") of Cyberian Outpost,
------------
Inc. (the "Corporation") into which one share of Series A Preferred is
-----------
convertible at the time of declaration of such dividend, multiplied by (ii) the
aggregate amount per share of Common Stock of all cash dividends and the
aggregate amount per share (payable, at the option of the holder, in kind or in
cash, based upon the fair market value at the time the non-cash dividend or
other distribution is declared or paid as determined in good faith by the Board
of Directors of the Corporation) of all non-cash dividends or other
distributions on the Common Stock, when, as and if a dividend is declared on the
shares of Common Stock. Such dividends shall accumulate and be declared and
paid contemporaneously with the declaration and payment of the related dividend
on the Common Stock, so that the Series A Preferred participates equally with
the Common Stock in such dividend or distribution with respect to the number of
shares of Common Stock into which the Series A Preferred is then convertible
pursuant to Section 3 hereof.
<PAGE>
(b) So long as any Series A Preferred shall remain outstanding, no
deposit, payment, dividend or other distribution shall be paid or made on any
other class of stock of the Corporation and no shares of any other class of
stock of the Corporation shall be purchased or otherwise acquired by the
Corporation or any subsidiary of the Corporation other than, (i) except as may
be otherwise provided in the Certificate of Incorporation, including in any
class or series designation concerning any capital stock of the Corporation (as
such may be amended from time to time), or (ii) upon exercise of the
Corporation's rights or a stockholder's rights under any restricted stock
purchase agreement (or any similar agreement pursuant to which the Corporation
is obligated to redeem its stock) in effect as of the Original Issuance Date (as
defined below in Section 3(k)) or otherwise pursuant to incentive stock plans of
the Corporation in effect as of the Original Issuance Date, or as may be
approved from time to time by the Corporation and the holders of the Series A
Preferred in accordance with Section 6(c) hereof, or (iii) upon the exercise of
a stockholder's put rights in effect as of the Original Issuance Date, or as may
be approved from time to time by the Corporation and the holders of the Series A
Preferred in accordance with Section 6(c) hereof, or (iv) by exchange therefor
of shares of the stock of the Corporation.
Subject to the above limitations and to the provisions of Section 6,
dividends may be paid on any class of stock of the Corporation out of any funds
legally available for such purpose when and as declared by the Board of
Directors.
2. Liquidation Preference. Except as may be otherwise approved in writing
----------------------
by the holders of a majority of the outstanding shares of Series A Preferred:
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of shares of Series A
Preferred shall be entitled to receive out of the assets of the Corporation
available for distribution to shareholders, (i) before any distribution or
payment shall be made in respect of the holders of shares of Common Stock but
pari passu with holders of Series B Convertible Preferred Stock of the
Corporation (the "Series B Preferred") and Series C Convertible Preferred Stock
------------------
of the Corporation (the "Series C Preferred"), a liquidation distribution in an
------------------
amount equal to the Original Issuance Price (as defined below in Section 3(k))
per share, plus an amount equal to all declared dividends thereon to the date
fixed for such distribution or payment, and then (ii) to share with the holders
of shares of Common Stock, Series B Preferred and Series C Preferred as if the
shares of Series A Preferred, Series B Preferred and Series C Preferred were
then converted into shares of Common Stock. If, upon any such liquidation,
dissolution or winding up of the affairs of the Corporation, the assets of the
Corporation available for distribution to shareholders shall be insufficient to
permit the payment in full to the holders of Series A Preferred, Series B
Preferred and Series C Preferred of the amounts to which they are each entitled
in preference to holders of shares of Common Stock, then all of such available
assets shall be distributed to the holders of shares of Series A Preferred,
Series B Preferred and Series C Preferred ratably in proportion to the
liquidation payment otherwise due pursuant to clause (i) above to each such
holder.
<PAGE>
(b) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or the consolidation or merger of any other
corporation or corporations into the Corporation, or the sale or transfer by the
Corporation of all or substantially all of its assets or the effectuation by the
Corporation or any holders of its capital stock of a transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of the Corporation is sold, transferred or otherwise disposed of, shall be
deemed to be a liquidation, dissolution or winding up within the meaning of this
Section 2.
3. Conversion. The holders of the shares of Series A Preferred shall have
----------
conversion rights as follows:
(a) Optional Conversion. The holder of any shares of Series A
-------------------
Preferred shall have the right, at such holder's option, at any time or from
time to time by the giving of written notice thereof to the Corporation (the
"Conversion Date") to convert all or any of such shares of Series A Preferred
----------------
into such number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series A Preferred being converted, and dividing the product thereof by the
Series A Conversion Price (as hereinafter defined) (as last adjusted and then in
effect) for the shares of Series A Preferred then being converted. The
conversion price per share (the "Series A Conversion Price") at which shares of
-------------------------
Common Stock shall be issuable shall be Three Dollars and Forty Cents ($3.40)
per share; provided, however, that the Series A Conversion Price shall be
--------
subject to adjustment as set forth in Section 3(e) hereof. The holder of any
shares of Series A Preferred converted into shares of Common Stock pursuant to
this Section 3(a) shall be entitled to payment of all declared but unpaid
dividends, if any, payable with respect to such shares being converted up to and
including the Conversion Date.
(b) Mandatory Conversion. Upon the consummation of a public offering
--------------------
of shares of Common Stock of the Corporation registered pursuant to the
Securities Act of 1933, as amended, in which the gross proceeds to the
Corporation exceed Ten Million Dollars ($10,000,000) as the result of which
shares of Common Stock are traded on either the New York Stock Exchange, the
American Stock Exchange or the NASDAQ National Market System (an "Event of
--------
Conversion"), all shares of Series A Preferred then outstanding shall, by virtue
----------
of and simultaneously with the occurrence of the Event of Conversion and without
any action on the part of the holder thereof, be deemed automatically converted
into such whole number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series A Preferred being converted, and dividing the product thereof by the
Series A Conversion Price (as last adjusted and then in effect) for the shares
of Series A Preferred being converted (such Series A Conversion Price being
subject to adjustment as set forth in Section 3(e) hereof). The holder of any
shares of Series A Preferred converted into shares of Common Stock pursuant to
this Section 3(b) shall be entitled to payment of all declared but unpaid
dividends, if any, payable with respect to such shares of Series A Preferred up
to and including the Conversion Date.
<PAGE>
(c) Procedure for Conversion. Upon conversion of the shares of Series
------------------------
A Preferred pursuant to Section 3(a) hereof, the holder of any shares of Series
A Preferred shall deliver to the Corporation during regular business hours, at
the office of any transfer agent of the Corporation for the Series A Preferred,
or at such other place as may be designated by the Corporation, the certificate
or certificates for the shares to be converted, duly endorsed or assigned in
blank or to the Corporation (if required by it), accompanied by written notice
stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued. As promptly as
practicable thereafter, the Corporation shall issue and deliver to or upon the
written order of such holder, to the place designated by such holder, a
certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled, a check or cash in respect of any fractional
interest in a share of Common Stock as provided in Section 3(d) hereof and a
check or cash in payment of all declared but unpaid dividends, if any (to the
extent permissible under law), payable with respect to the shares of Series A
Preferred so converted up to and including the Conversion Date. The person in
whose names the certificate or certificates for Common Stock are to be issued
shall be deemed to have become a shareholder of record on the applicable
Conversion Date unless the transfer books of the Corporation are closed on that
date, in which event he shall be deemed to have become a shareholder of record
on the next succeeding date on which the transfer books are open, but the Series
A Conversion Price for the Series A Preferred shall be that in effect on the
Conversion Date.
(d) Additional Conversion Provisions. The following additional terms
--------------------------------
shall apply upon any conversion of the Series A Preferred:
(i) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series A Preferred. If more than one share
of Series A Preferred shall be surrendered for conversion at any one time by the
same holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series A Preferred so surrendered. In lieu of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of Series
A Preferred the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to the then Current Market Price (as
defined below) of a share of Common Stock as of the date of conversion,
multiplied by such fractional interest. Fractional interests shall not be
entitled to dividends, and the holders of fractional interests shall not be
entitled to any rights as shareholders of the Corporation in respect of such
fractional interest.
(ii) For the purpose of any computation pursuant to this Section
3(d), the Current Market Price at any date of one share of Common Stock shall be
deemed to be the closing price as of the day before the day in question. If the
Common Stock is not traded in such manner that the closing price is readily
available, the Current Market Price shall be determined in good faith by the
Directors of the Corporation.
<PAGE>
(e) Adjustments to Series A Conversion Price. The Series A Conversion
----------------------------------------
Price for the Series A Preferred shall be subject to adjustment from time to
time as follows:
(i) Stock Dividends, Split-Ups, Etc. If, at any time after the
-------------------------------
Original Issuance Date, the number of shares of Common Stock outstanding is
increased by a stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, then, following the record
date fixed for the determination of holders of Common Stock entitled to receive
such stock dividend, subdivision or split-up, the Series A Conversion Price of
the Series A Preferred shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of Series A
Preferred shall be increased in proportion to such increase in outstanding
shares.
(ii) Combinations. If, at any time after the Original Issuance
------------
Date, the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date for such combination, the Series A Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of Series A Preferred shall be decreased in proportion
to such decrease in outstanding shares.
(iii) Reorganizations, Reclassifications, Etc. In case, at any
---------------------------------------
time after the Original Issuance Date, of any Capital Events (as defined below
in Section 3(k)) each share of Series A Preferred shall after such Capital Event
be (unless, in the case of a consolidation, merger, sale or other disposition,
payment shall have been made to the holders of all shares of Series A Preferred
of the full amount to which they respectively shall have been entitled pursuant
to Section 2 hereof) convertible into the kind and number of shares of stock or
other securities or property of the Corporation or of the corporation resulting
from such consolidation or surviving such merger or to which such properties and
asset shall have been sold or otherwise disposed to which the holder of the
number of shares of Common Stock deliverable (immediately prior to the time of
such Capital Event) upon conversion of such shares would have been entitled upon
such Capital Event. The provisions of this Section 3(e)(iii) shall similarly
apply to successive Capital Events.
(iv) Dilutive Issuances.
------------------
(1) If the Corporation shall at any time or from time to
time after the Original Issuance Date issue any shares of Common Stock other
than Excluded Stock (as defined below in Section 3(k)) without consideration or
for a consideration per share less than the Series A Conversion Price then in
effect (such issuance being referred to in this clause (iv) as a "Dilutive
--------
Issuance"), the Series A Conversion Price in effect immediately prior to such
--------
Dilutive Issuance shall be reduced with effect from the first to occur of (A)
the record date for the issuance of the securities or (B) the date of original
issuance (as the case may be the "Issue Date"), so that it shall equal the price
----------
determined by multiplying the Series A Conversion Price by a fraction (i) the
numerator of which shall be (X) the number of shares of Common Stock outstanding
at the close of business on the day next preceding the Issue Date, plus (Y) the
<PAGE>
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the Dilutive Issuance would purchase at the Series A
Conversion Price, and (ii) the denominator of which shall be the number of
shares of Common Stock outstanding at the close of business on the Issue Date
after giving effect to such Dilutive Issuance.
(2) For the purposes of any adjustment of the Series A
Conversion Price pursuant to this clause (iv), the following provisions shall
apply:
(A) In the case of the issuance of Common Stock for cash,
the consideration shall be deemed to be the amount of cash paid therefor after
deducting therefrom any discounts or commissions allowed or paid by the
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(B) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair market value thereof to the Corporation as
determined in good faith by the Board of Directors, irrespective of any
accounting treatment.
(C) In the case of the issuance of (i) options to purchase
or rights to subscribe for Common Stock, (ii) securities by their terms
convertible into or exchangeable for Common Stock, or (iii) options to purchase
or rights to subscribe for such convertible or exchangeable securities:
(I) the shares of Common Stock deliverable upon
exercise of such options to purchase or rights to subscribe for Common Stock
shall be deemed to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration (determined in the
manner provided in subclauses (A) and (B), above), if any, received by the
Corporation upon the issuance of such options or rights plus the minimum
purchase price provided in such options or rights for the Common Stock covered
thereby;
(II) the shares of Common Stock deliverable upon
conversion of or in exchange for any such convertible or exchangeable securities
or upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration, if any, to be
received by the Corporation upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration in each case
to be determined in the manner provided in subclauses (A) and (B), above);
(III) on any change in the number of shares or exercise
price of Common Stock deliverable upon exercise of any such options or rights or
upon
<PAGE>
conversion of or in exchange for such convertible or exchangeable securities,
other than a change resulting from the antidilution provisions thereof, the
Series A Conversion Price shall forthwith be readjusted to such Series A
Conversion Price as would have obtained had the adjustment made upon the
issuance of such options, rights or securities not converted prior to such
change or options or rights related to such securities not converted prior to
such change been made upon the basis of such change; and
(IV) on the expiration of any such options or rights,
the termination of any such rights to convert or exchange or the expiration of
any options or rights related to such convertible or exchangeable securities,
the Series A Conversion Price shall forthwith be readjusted to such Series A
Conversion Price as would have obtained had such options, rights, securities or
options or rights related to such securities not been issued.
(v) All calculations under this paragraph (e) shall be made to
the nearest one-tenth (1/10) of a share or to the nearest one tenth (1/10) of a
cent, as the case may be.
(vi) In any case in which the provisions of this Section 3(e)
shall require that an adjustment shall become effective immediately after a
record date for an event the Corporation may defer until the occurrence of such
event (1) issuing to the holder of any share of Series A Preferred converted
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such conversion by reason of the
adjustment required by such event over and above the shares of capital stock
issuable upon such conversion before giving effect to such adjustment and (2)
paying to such holder any amount in cash in lieu of a fractional share of
capital stock pursuant to Section 3(d) hereof; provided, however, that the
-------- -------
Corporation shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares, and
such cash, immediately upon the occurrence of the event requiring such
adjustment.
(vii) The Corporation will not voluntarily, by amendment of its
Certificate of Incorporation, as amended, or through any reorganization,
transfer of assets, merger, dissolution, issuance or sale or securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all of the
provisions of this Section 3 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of the Series A Preferred against impairment.
(f) Whenever the Series A Conversion Price of the Series A Preferred
shall be adjusted as provided in Section 3(e), the Corporation shall forthwith
file, at the office of the transfer agent for the Series A Preferred or at such
other place as may be designated by the Corporation, a statement showing in
detail the facts requiring such adjustment and the Series A Conversion Price of
the Series A Preferred that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by mail, first-
class certified mail,
<PAGE>
return receipt requested, postage prepaid, to each holder of shares of any
series of preferred stock in respect of which an adjustment to the Series A
Conversion Price was required to be made at his address appearing on the
Corporation's records. Where appropriate, such copy may be given in advance and
may be included as part of a notice required to be mailed under the provisions
of Section 4(g) hereof.
(g) If the Corporation shall propose to take any action of the types
described in clauses (i), (ii), (iii) or (iv) of Section 3(e), the Corporation
shall give notice to each holder of shares of Series A Preferred in the manner
set forth in Section 3(f) hereof, which notice shall specify the record date, if
any, with respect to any such action and the date on which such action is to
take place. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Series A
Conversion Price and the number, kind or series of shares or other securities or
property which shall be deliverable or purchasable upon the occurrence of such
action or deliverable upon conversion of shares of each such series of Series A
Preferred. In the case of any action which would require the fixing of a record
date, such notice shall be given at least twenty (20) days prior to the date so
fixed, and in case of all other actions, such notice shall be given at least
thirty (30) days prior to the taking of such proposed action. Failure to give
such notice, or any defect therein, shall not affect the legality or validity of
any such action.
(h) The Corporation shall pay all documentary, stamp or other
transaction taxes attributable to the issuance or delivery of shares of capital
stock of the Corporation upon conversion of shares of Series A Preferred;
provided, however, that the Corporation shall not be required to pay any taxes
-----------------
which may be payable in respect of any transfer involved in the issuance of
delivery of any certificate for such shares in a name other than that of the
holder of the shares of Series A Preferred in respect of which such shares are
being issued.
(i) The Corporation shall reserve and at all times from and after such
date keep reserved, free from preemptive rights, out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series A Preferred and shall take all action as may
be necessary to enable the Corporation lawfully to issue such Common Stock upon
the conversion of shares of Series A Preferred.
(j) All shares of Common Stock which may be issued in connection with
the conversion provisions set forth herein will, upon issuance by the
Corporation, be validly issued, fully paid and nonassessable with no personal
liability attaching to the ownership thereof and free from all taxes, liens or
charges with respect thereto.
(k) Definitions. As used herein, the following terms have the
-----------
following meanings:
(i) "Capital Events" means any capital reorganization,
--------------
recapitalization,
<PAGE>
or any reclassification of the stock of the Corporation (other than a change in
par value, or from par value to no par value, or from no par value to par value,
or as a result of a stock dividend or subdivision, split-up or combination of
shares), or the consolidation or merger of the Corporation with or into another
person (other than a consolidation or merger in which the Corporation is the
continuing corporation and which does not result in any change in the Common
Stock), or the sale or other disposition of all or substantially all of the
properties and assets of the Corporation to any person or third party.
(ii) "Excluded Stock" means shares of Common Stock issued by the
--------------
Corporation: (A) as a stock dividend payable in shares of Common Stock or upon
any subdivision or split-up of the outstanding shares of Common Stock, (B) upon
conversion of the shares of Series A Preferred, Series B Preferred or Series C
Preferred at any time outstanding, (C) to officers, employees or directors of,
or consultants to, the Corporation (whether as an issuance of Common Stock,
options to purchase or rights to subscribe for such Common Stock, or options to
purchase or rights to subscribe for such convertible or exchangeable
securities), in each case approved by the Board of Directors of the
Corporation; provided, however, that the maximum number of shares of Common
-----------------
Stock issued or issuable to officers, employees or directors of, or consultants
to, the Corporation to which this clause (C) shall apply shall not exceed the
number of shares issuable under the incentive stock option plans of the
Corporation presently in effect or as may be approved from time to time by the
Corporation and the holders of the Series A Preferred in accordance with Section
6(c)(ix) hereof (including any Common Stock issued pursuant to the exercise of
any such options), and (D) pursuant to any options (other than those described
in (C), above), warrants or other rights outstanding on the Original Issuance
Date.
(iii) "Original Issuance Date" means the date of original issuance
----------------------
by the Corporation of the first share of Series A Preferred.
(iv) "Original Issuance Price" means Three Dollars and Forty
-----------------------
Cents ($3.40), the price of the first share of Series A Preferred issued by the
Corporation.
(v) "Person" means any corporation, general or limited partner-
------
ship, limited liability partnership, limited liability company, joint venture,
estate, trust, association, organization, labor union, or other entity.
(vi) "Subsidiary" means with respect to any Person (the "Owner"),
----------
any corporation or other Person of which securities or other interests having
the power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having such power only upon the happening of a contingency
that has not occurred), are held by the Owner or one or more of its
Subsidiaries; when used without reference to a particular Person, "Subsidiary"
means a Subsidiary of the Corporation.
<PAGE>
4. Status of Converted Stock. If any shares of Series A Preferred shall
-------------------------
be converted pursuant to Section 3 hereof, the shares so converted shall be
canceled and shall not be reissuable by the Corporation.
5. Redemption. Shares of Series A Preferred are not redeemable.
----------
6. Voting Rights.
-------------
(a) General. Except as otherwise provided below, on all matters
-------
submitted to a vote of the holders of shares of Common Stock, the holder of each
share of Series A Preferred shall have the right to one vote for each Common
Share into which such Series A Preferred could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share), and with respect to such vote, such holder shall have
full voting rights and powers equal to the voting rights and powers of the
holders of such shares of Common Stock, and shall be entitled, notwithstanding
any provision hereof, to notice of any shareholders' meeting in accordance with
the by-laws of the Corporation and shall be entitled to vote, together with
holders of shares of Common Stock with respect to any question upon which
holders of shares of Common Stock have the right to vote.
(b) Election of Directors. Except as may be otherwise approved by
---------------------
vote or by the written consent of the holders of a majority of the shares of
Series A Preferred then outstanding, the Board of Directors shall consist of up
to 7 members. The holders of the Series A Preferred, voting as a separate class,
shall have the right to elect one (1) director. Except as may otherwise be
provided by law or in the Certificate of Incorporation of the Corporation
(including the Certificate of Designation for the Series C Preferred), the
holders of the Common Stock shall have the right to elect the remaining members
of the Board of Directors and the Series A Preferred shall not be entitled to
vote in the election of the remaining members of the Board of Directors. Each
director shall be elected at the annual meeting of shareholders and shall serve
until his successor is elected and qualified or until his earlier resignation or
removal. Any director who shall have been elected by the holders of Series A
Preferred may be removed during his term of office, either for or without cause,
by and only by, the affirmative vote of the holders of a majority of the shares
of Series A Preferred then outstanding, given at a special meeting of such
shareholders duly called for that purpose, and any vacancy thereby created may
be filled by the holders of the Series A Preferred represented at that meeting.
(c) Protective Provisions. So long as twenty-five percent (25%) or
---------------------
more of the shares of Series A Preferred are outstanding, the Corporation shall
not, and shall not attempt to, without first obtaining the approval (by vote or
written consent) of the holders of at least a majority of the then outstanding
shares of Series A Preferred, voting as a separate class:
(i) authorize any additional shares of Series A Preferred, or
authorize and issue any shares of, (a) any class or series of equity security
having superior rights to the
<PAGE>
Series A Preferred as to dividends (except for the Series C Preferred),
redemptions, or as to payment upon liquidation, dissolution or a winding up of
the Corporation, or otherwise, or (b) any notes or debt securities convertible
into or exchangeable for any equity securities or containing profit
participation features;
(ii) redeem or repurchase outstanding Common Stock in excess of
an aggregate of 75,000 shares, provided that the Corporation may redeem shares
of Common Stock from persons having been granted and exercised stock options
pursuant to the Corporation's incentive stock plans as in effect as of the
Original Issuance Date, or as may be approved from time to time by the
Corporation and by the holders of the Series A Preferred pursuant to Section
6(c)(ix) below;
(iii) enter into any agreement that would restrict the
Corporation's ability to perform its obligations under any agreement to which
the Corporation is a party concerning the Corporation's original issuance of any
shares of the Series A Preferred (including the Certificate of Incorporation and
this Certificate of Designation);
(iv) amend the Certificate of Incorporation (including any
existing or new Certificate of Designation) or By-Laws of the Corporation in any
manner that adversely affects the powers, rights, privileges or restrictions or
relative preferences of the Series A Preferred or the holders thereof as a
class, or increase the powers, preferences, rights, privileges or restrictions
of any other class or series of preferred stock unless the Series A Preferred is
treated in the same manner;
(v) sell, transfer, convey or lease greater than twenty-five
percent (25%) of the assets of the Corporation in one or more of a series of
related transactions, except for the sale of inventory in the ordinary course of
the Corporation's business;
(vi) issue additional equity securities of any class or series
to the employees, officers or directors of the Corporation, except for such
equity securities as may be issuable upon the exercise of options or warrants
outstanding as of the Original Issuance Date (or as may be approved from time to
time by the Corporation and the holders of the Series A Preferred in accordance
with this Section 6(c)(vi)); provided that any such equity securities, including
any options or warrants for equity securities of the Corporation, shall be
granted at no less than the fair market value for such equity securities, as
determined in good faith by a majority of the independent directors residing on
the Board of Directors of the Corporation;
(vii) issue any equity securities of any class or series for a
price less than fair market value, as determined in good faith by the Board of
Directors of the Corporation, except as may be required pursuant to contractual
commitments of the Corporation existing as of the Original Issuance Date;
(viii) enter into any transaction or series of transactions or
any agreement
<PAGE>
or other arrangement, including, without limitation, any loan, with or to any
officer or director (or any family member or person affiliated with any officer
or director) or other affiliate (excluding any Subsidiary of the Corporation) of
the Corporation in excess of $100,000, individually, or $250,000, in the
aggregate, during any calendar year, except as may be required pursuant to
contractual commitments of the Corporation existing as of February 27, 1998
(except that such limitations shall not be applicable to any employment or other
compensatory arrangements on reasonable arms' length terms (including, without
limitation, the granting of stock options under any stock option plan in effect
as of the Original Issuance Date, or as may be approved from time to time by the
Corporation and the holders of the Series A Preferred in accordance with Section
6(c)(ix) below), as may be approved by the Board of Directors of the
Corporation);
(ix) adopt any stock option plans or increase the number of
shares available or reserved for issuance under any stock option plan or related
plan in effect as of the Original Issuance Date, or as may be approved from time
to time by the Corporation and by the holders of the Series A Preferred pursuant
to Section 6(c)(ix);
(x) engage in any transaction which would impair or reduce the
rights of the holders of shares of the Series A Preferred as a class (except
that the Corporation may effect a reverse-split of its Common Stock without the
consent of the holders of shares of the Series A Preferred);
(xi) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a Subsidiary that
is wholly-owned by the Corporation, directly or indirectly);
(xii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other non-
corporate entity which is treated as a partnership for federal income tax
purposes); or
(xiii) issue any dividends on any class or series of capital stock
of the Corporation (other than the Series A Preferred and the Series C Preferred
(as provided in the Certificate of Designation therefor)).
7. Preemptive Rights. Shares of Series A Preferred have no preemptive
-----------------
rights.
<PAGE>
EXHIBIT B
TERMS OF SERIES B CONVERTIBLE PREFERRED STOCK
OF
CYBERIAN OUTPOST, INC.
Designation of Series B Convertible Preferred Stock. There is hereby
---------------------------------------------------
established a series of Preferred Stock designated "Series B Convertible
Preferred Stock" (the "Series B Preferred"), consisting of 500,000 shares,
------------------
without nominal or par value, and having the relative rights, designations,
preferences, qualifications, privileges, limitations and restrictions applicable
thereto as follows:
1. Dividend Provisions. Except as may be otherwise approved in writing by
-------------------
the holders of a majority of the outstanding shares of Series B Preferred:
(a) The holders of the shares of Series B Preferred shall be entitled
to receive dividends, out of any assets legally available therefor, in an amount
per share of Series B Preferred which is equal to the product of (i) the number
of shares of common stock, no par value ("Common Stock") of Cyberian Outpost,
------------
Inc. (the "Corporation") into which one share of Series B Preferred is
-----------
convertible at the time of declaration of such dividend, multiplied by (ii) the
aggregate amount per share of Common Stock of all cash dividends and the
aggregate amount per share (payable, at the option of the holder, in kind or in
cash, based upon the fair market value at the time the non-cash dividend or
other distribution is declared or paid as determined in good faith by the Board
of Directors of the Corporation) of all non-cash dividends or other
distributions on the Common Stock, when, as and if a dividend is declared on the
shares of Common Stock. Such dividends shall accumulate and be declared and
paid contemporaneously with the declaration and payment of the related dividend
on the Common Stock, so that the Series B Preferred participates equally with
the Common Stock in such dividend or distribution with respect to the number of
shares of Common Stock into which the Series B Preferred is then convertible
pursuant to Section 3 hereof.
(b) So long as any Series B Preferred shall remain outstanding, no
deposit, payment, dividend or other distribution shall be paid or made on any
other class of stock of the Corporation and no shares of any other class of
stock of the Corporation shall be purchased or otherwise acquired by the
Corporation or any subsidiary of the Corporation other than, (i) except as may
be otherwise provided in the Certificate of Incorporation, including in any
class or series designation concerning any capital stock of the Corporation (as
such may be amended from time to time), or (ii) upon exercise of the
Corporation's rights or a stockholder's rights under any restricted stock
purchase agreement (or any similar agreement pursuant to which the Corporation
is obligated to redeem its stock) in effect as of the Original Issuance Date (as
defined below in Section 3(k)) or otherwise pursuant to incentive stock plans of
the Corporation in effect as of the Original Issuance Date, or as may be
approved from time to time by the Corporation and the holders of the Series B
Preferred in accordance with Section 6(b) hereof, or (iii) upon the
<PAGE>
exercise of a stockholder's put rights in effect as of the Original Issuance
Date, or as may be approved from time to time by the Corporation and the holders
of the Series B Preferred in accordance with Section 6(b) hereof, or (iv) by
exchange therefor of shares of the stock of the Corporation.
<PAGE>
Subject to the above limitations and to the provisions of Section 6,
dividends may be paid on any class of stock of the Corporation out of any funds
legally available for such purpose when and as declared by the Board of
Directors.
2. Liquidation Preference. Except as may be otherwise approved in writing
----------------------
by the holders of a majority of the outstanding shares of Series B Preferred:
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of shares of Series B
Preferred shall be entitled to receive out of the assets of the Corporation
available for distribution to shareholders, (i) before any distribution or
payment shall be made in respect of the holders of shares of Common Stock but
pari passu with holders of Series A Convertible Preferred Stock of the
Corporation (the "Series A Preferred") and Series C Convertible Preferred Stock
------------------
of the Corporation (the "Series C Preferred"), a liquidation distribution in an
------------------
amount equal to the Original Issuance Price (as defined below in Section 3(k))
per share, plus an amount equal to all declared dividends thereon to the date
fixed for such distribution or payment, and then (ii) to share with the holders
of shares of Common Stock, Series A Preferred and Series C Preferred as if the
shares of Series A Preferred, Series B Preferred and Series C Preferred were
then converted into shares of Common Stock. If, upon any such liquidation,
dissolution or winding up of the affairs of the Corporation, the assets of the
Corporation available for distribution to shareholders shall be insufficient to
permit the payment in full to the holders of Series A Preferred, Series B
Preferred and Series C Preferred of the amounts to which they are each entitled
in preference to holders of shares of Common Stock, then all of such available
assets shall be distributed to the holders of shares of Series A Preferred,
Series B Preferred and Series C Preferred ratably in proportion to the
liquidation payment otherwise due pursuant to clause (i) above to each such
holder.
(b) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or the consolidation or merger of any other
corporation or corporations into the Corporation, or the sale or transfer by the
Corporation of all or substantially all of its assets or the effectuation by the
Corporation or any holders of its capital stock of a transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of the Corporation is sold, transferred or otherwise disposed of, shall be
deemed to be a liquidation, dissolution or winding up within the meaning of this
Section 2.
3. Conversion. The holders of the shares of Series B Preferred shall have
----------
conversion rights as follows:
(a) Optional Conversion. The holder of any shares of Series B
-------------------
Preferred shall have the right, at such holder's option, at any time or from
time to time by the giving of written notice thereof to the Corporation (the
"Conversion Date") to convert all or any of such shares of Series B Preferred
----------------
into such number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series B
<PAGE>
Preferred being converted, and dividing the product thereof by the Series B
Conversion Price (as hereinafter defined) (as last adjusted and then in effect)
for the shares of Series B Preferred then being converted. The conversion price
per share (the "Series B Conversion Price") at which shares of Common Stock
-------------------------
shall be issuable shall be Four Dollars and Sixty Cents ($4.60) per share;
provided, however, that the Series B Conversion Price shall be subject to
-----------------
adjustment as set forth in Section 3(e) hereof. The holder of any shares of
Series B Preferred converted into shares of Common Stock pursuant to this
Section 3(a) shall be entitled to payment of all declared but unpaid dividends,
if any, payable with respect to such shares being converted up to and including
the Conversion Date.
(b) Mandatory Conversion. Upon the consummation of a public offering
--------------------
of shares of Common Stock of the Corporation registered pursuant to the
Securities Act of 1933, as amended, in which the gross proceeds to the
Corporation exceed Ten Million Dollars ($10,000,000) as the result of which
shares of Common Stock are traded on either the New York Stock Exchange, the
American Stock Exchange or the NASDAQ National Market System (an "Event of
--------
Conversion"), all shares of Series B Preferred then outstanding shall, by virtue
----------
of and simultaneously with the occurrence of the Event of Conversion and without
any action on the part of the holder thereof, be deemed automatically converted
into such whole number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series B Preferred being converted, and dividing the product thereof by the
Series B Conversion Price (as last adjusted and then in effect) for the shares
of Series B Preferred being converted (such Series B Conversion Price being
subject to adjustment as set forth in Section 3(e) hereof). The holder of any
shares of Series B Preferred converted into shares of Common Stock pursuant to
this Section 3(b) shall be entitled to payment of all declared but unpaid
dividends, if any, payable with respect to such shares of Series B Preferred up
to and including the Conversion Date.
(c) Procedure for Conversion. Upon conversion of the shares of Series
------------------------
B Preferred pursuant to Section 3(a) hereof, the holder of any shares of Series
B Preferred shall deliver to the Corporation during regular business hours, at
the office of any transfer agent of the Corporation for the Series B Preferred,
or at such other place as may be designated by the Corporation, the certificate
or certificates for the shares to be converted, duly endorsed or assigned in
blank or to the Corporation (if required by it), accompanied by written notice
stating the name or names (with address) in which the certificate or
certificates for the shares of Common Stock are to be issued. As promptly as
practicable thereafter, the Corporation shall issue and deliver to or upon the
written order of such holder, to the place designated by such holder, a
certificate or certificates for the number of full shares of Common Stock to
which such holder is entitled, a check or cash in respect of any fractional
interest in a share of Common Stock as provided in Section 3(d) hereof and a
check or cash in payment of all declared but unpaid dividends, if any (to the
extent permissible under law), payable with respect to the shares of Series B
Preferred so converted up to and including the Conversion Date. The person in
whose names the certificate or certificates for Common Stock are to be issued
shall be deemed to have become a shareholder of record on the applicable
Conversion Date unless the transfer books
<PAGE>
of the Corporation are closed on that date, in which event he shall be deemed to
have become a shareholder of record on the next succeeding date on which the
transfer books are open, but the Series B Conversion Price for the Series B
Preferred shall be that in effect on the Conversion Date.
(d) Additional Conversion Provisions. The following additional terms
--------------------------------
shall apply upon any conversion of the Series B Preferred:
(i) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series B Preferred. If more than one share
of Series B Preferred shall be surrendered for conversion at any one time by the
same holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series B Preferred so surrendered. In lieu of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of Series
B Preferred the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to the then Current Market Price (as
defined below) of a share of Common Stock as of the date of conversion,
multiplied by such fractional interest. Fractional interests shall not be
entitled to dividends, and the holders of fractional interests shall not be
entitled to any rights as shareholders of the Corporation in respect of such
fractional interest.
(ii) For the purpose of any computation pursuant to this Section
3(d), the Current Market Price at any date of one share of Common Stock shall be
deemed to be the closing price as of the day before the day in question. If the
Common Stock is not traded in such manner that the closing price is readily
available, the Current Market Price shall be determined in good faith by the
Directors of the Corporation.
(e) Adjustments to Series B Conversion Price. The Series B Conversion
----------------------------------------
Price for the Series B Preferred shall be subject to adjustment from time to
time as follows:
(i) Stock Dividends, Split-Ups, Etc. If, at any time after the
-------------------------------
Original Issuance Date, the number of shares of Common Stock outstanding is
increased by a stock dividend payable in shares of Common Stock or by a
subdivision or split-up of shares of Common Stock, then, following the record
date fixed for the determination of holders of Common Stock entitled to receive
such stock dividend, subdivision or split-up, the Series B Conversion Price of
the Series B Preferred shall be appropriately decreased so that the number of
shares of Common Stock issuable on conversion of each share of Series B
Preferred shall be increased in proportion to such increase in outstanding
shares.
(ii) Combinations. If, at any time after the Original Issuance
------------
Date, the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date for such combination, the Series B Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of Series B Preferred shall be decreased in proportion
to such decrease in outstanding shares.
<PAGE>
(iii) Reorganizations, Reclassifications, Etc. In case, at any
---------------------------------------
time after the Original Issuance Date, of any Capital Events (as defined below
in Section 3(k)) each share of Series B Preferred shall after such Capital Event
be (unless, in the case of a consolidation, merger, sale or other disposition,
payment shall have been made to the holders of all shares of Series B Preferred
of the full amount to which they respectively shall have been entitled pursuant
to Section 2 hereof) convertible into the kind and number of shares of stock or
other securities or property of the Corporation or of the corporation resulting
from such consolidation or surviving such merger or to which such properties and
asset shall have been sold or otherwise disposed to which the holder of the
number of shares of Common Stock deliverable (immediately prior to the time of
such Capital Event) upon conversion of such shares would have been entitled upon
such Capital Event. The provisions of this Section 3(e)(iii) shall similarly
apply to successive Capital Events.
(iv) Dilutive Issuances.
------------------
(1) If the Corporation shall at any time or from time to
time after the Original Issuance Date issue any shares of Common Stock other
than Excluded Stock (as defined below in Section 3(k)) without consideration or
for a consideration per share less than the Series B Conversion Price then in
effect (such issuance being referred to in this clause (iv) as a "Dilutive
--------
Issuance"), the Series B Conversion Price in effect immediately prior to such
--------
Dilutive Issuance shall be reduced with effect from the first to occur of (A)
the record date for the issuance of the securities or (B) the date of original
issuance (as the case may be the "Issue Date"), so that it shall equal the price
----------
determined by multiplying the Series B Conversion Price by a fraction (i) the
numerator of which shall be (X) the number of shares of Common Stock outstanding
at the close of business on the day next preceding the Issue Date, plus (Y) the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the Dilutive Issuance would purchase at the Series B
Conversion Price, and (ii) the denominator of which shall be the number of
shares of Common Stock outstanding at the close of business on the Issue Date
after giving effect to such Dilutive Issuance.
(2) For the purposes of any adjustment of the Series B
Conversion Price pursuant to this clause (iv), the following provisions shall
apply:
(A) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
after deducting therefrom any discounts or commissions allowed or paid by the
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(B) In the case of the issuance of Common Stock for a
consideration in whole or in part other than cash, the consideration other than
cash shall be deemed to be the fair market value thereof to the Corporation as
determined in good faith by the Board of Directors, irrespective of any
accounting treatment.
<PAGE>
(C) In the case of the issuance of (i) options to
purchase or rights to subscribe for Common Stock, (ii) securities by their terms
convertible into or exchangeable for Common Stock, or (iii) options to purchase
or rights to subscribe for such convertible or exchangeable securities:
(I) the shares of Common Stock deliverable upon
exercise of such options to purchase or rights to subscribe for Common Stock
shall be deemed to have been issued at the time such options or rights were
issued and for a consideration equal to the consideration (determined in the
manner provided in subclauses (A) and (B), above), if any, received by the
Corporation upon the issuance of such options or rights plus the minimum
purchase price provided in such options or rights for the Common Stock covered
thereby;
(II) the shares of Common Stock deliverable upon
conversion of or in exchange for any such convertible or exchangeable securities
or upon the exercise of options to purchase or rights to subscribe for such
convertible or exchangeable securities and subsequent conversion or exchange
thereof shall be deemed to have been issued at the time such securities were
issued or such options or rights were issued and for a consideration equal to
the consideration received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration, if any, to be
received by the Corporation upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration in each case
to be determined in the manner provided in subclauses (A) and (B), above);
(III) on any change in the number of shares or
exercise price of Common Stock deliverable upon exercise of any such options or
rights or upon conversion of or in exchange for such convertible or exchangeable
securities, other than a change resulting from the antidilution provisions
thereof, the Series B Conversion Price shall forthwith be readjusted to such
Series B Conversion Price as would have obtained had the adjustment made upon
the issuance of such options, rights or securities not converted prior to such
change or options or rights related to such securities not converted prior to
such change been made upon the basis of such change; and
(IV) on the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Series B Conversion Price shall forthwith be readjusted to such
Series B Conversion Price as would have obtained had such options, rights,
securities or options or rights related to such securities not been issued.
(v) All calculations under this paragraph (e) shall be made to
the nearest one-tenth (1/10) of a share or to the nearest one tenth (1/10) of a
cent, as the case may be.
(vi) In any case in which the provisions of this Section 3(e)
shall require that an adjustment shall become effective immediately after a
record date for an event the
<PAGE>
Corporation may defer until the occurrence of such event (1) issuing to the
holder of any share of Series B Preferred converted after such record date and
before the occurrence of such event the additional shares of capital stock
issuable upon such conversion by reason of the adjustment required by such event
over and above the shares of capital stock issuable upon such conversion before
giving effect to such adjustment and (2) paying to such holder any amount in
cash in lieu of a fractional share of capital stock pursuant to Section 3(d)
hereof; provided, however, that the Corporation shall deliver to such holder a
-------- -------
due bill or other appropriate instrument evidencing such holder's right to
receive such additional shares, and such cash, immediately upon the occurrence
of the event requiring such adjustment.
(vii) The Corporation will not voluntarily, by amendment of its
Certificate of Incorporation, as amended, or through any reorganization,
transfer of assets, merger, dissolution, issuance or sale or securities or any
other voluntary action, avoid or seek to avoid the observance or performance of
any of the terms to be observed or performed hereunder by the Corporation, but
will at all times in good faith assist in the carrying out of all of the
provisions of this Section 3 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of the Series B Preferred against impairment.
(f) Whenever the Series B Conversion Price of the Series B Preferred
shall be adjusted as provided in Section 3(e), the Corporation shall forthwith
file, at the office of the transfer agent for the Series B Preferred or at such
other place as may be designated by the Corporation, a statement showing in
detail the facts requiring such adjustment and the Series B Conversion Price of
the Series B Preferred that shall be in effect after such adjustment. The
Corporation shall also cause a copy of such statement to be sent by mail, first-
class certified mail, return receipt requested, postage prepaid, to each holder
of shares of any series of preferred stock in respect of which an adjustment to
the Series B Conversion Price was required to be made at his address appearing
on the Corporation's records. Where appropriate, such copy may be given in
advance and may be included as part of a notice required to be mailed under the
provisions of Section 4(g) hereof.
(g) If the Corporation shall propose to take any action of the types
described in clauses (i), (ii), (iii) or (iv) of Section 3(e), the Corporation
shall give notice to each holder of shares of Series B Preferred in the manner
set forth in Section 3(f) hereof, which notice shall specify the record date, if
any, with respect to any such action and the date on which such action is to
take place. Such notice shall also set forth such facts with respect thereto as
shall be reasonably necessary to indicate the effect of such action (to the
extent such effect may be known at the date of such notice) on the Series B
Conversion Price and the number, kind or series of shares or other securities or
property which shall be deliverable or purchasable upon the occurrence of such
action or deliverable upon conversion of shares of each such series of Series B
Preferred. In the case of any action which would require the fixing of a record
date, such notice shall be given at least twenty (20) days prior to the date so
fixed, and in case of all other actions, such notice shall be given at least
thirty (30) days prior to the taking of such proposed
<PAGE>
action. Failure to give such notice, or any defect therein, shall not affect the
legality or validity of any such action.
(h) The Corporation shall pay all documentary, stamp or other
transaction taxes attributable to the issuance or delivery of shares of capital
stock of the Corporation upon conversion of shares of Series B Preferred;
provided, however, that the Corporation shall not be required to pay any taxes
-----------------
which may be payable in respect of any transfer involved in the issuance of
delivery of any certificate for such shares in a name other than that of the
holder of the shares of Series B Preferred in respect of which such shares are
being issued.
(i) The Corporation shall reserve and at all times from and after such
date keep reserved, free from preemptive rights, out of its authorized but
unissued shares of Common Stock, solely for the purpose of effecting the
conversion of the shares of Series B Preferred, sufficient shares to provide for
the conversion of all outstanding shares of Series B Preferred and all
outstanding shares of Series B Preferred issuable upon conversion of the
Debentures issued with respect to that certain Securities Purchase Agreement of
the Corporation entered into with Winfield Capital Corp. (the "Securities
----------
Purchase Agreement"), and shall take all action as may be necessary to enable
------------------
the Corporation lawfully to issue such Common Stock upon the conversion of
shares of Series B Preferred.
(j) All shares of Common Stock which may be issued in connection with
the conversion provisions set forth herein will, upon issuance by the
Corporation, be validly issued, fully paid and nonassessable with no personal
liability attaching to the ownership thereof and free from all taxes, liens or
charges with respect thereto.
(k) Definitions. As used herein, the following terms have the
-----------
following meanings:
(i) "Capital Events" means any capital reorganization,
--------------
recapitalization, or any reclassification of the stock of the Corporation (other
than a change in par value, or from par value to no par value, or from no par
value to par value, or as a result of a stock dividend or subdivision, split-up
or combination of shares), or the consolidation or merger of the Corporation
with or into another person (other than a consolidation or merger in which the
Corporation is the continuing corporation and which does not result in any
change in the Common Stock), or the sale or other disposition of all or
substantially all of the properties and assets of the Corporation to any person
or third party.
(ii) "Excluded Stock" means shares of Common Stock issued by the
--------------
Corporation: (A) as a stock dividend payable in shares of Common Stock or upon
any subdivision or split-up of the outstanding shares of Common Stock, (B) upon
conversion of the shares of Series A Preferred, Series B Preferred or Series C
Preferred at any time outstanding, (C) to officers, employees or directors of,
or consultants to, the Corporation (whether as an issuance of Common Stock,
options to purchase or rights to subscribe for such Common Stock,
<PAGE>
or options to purchase or rights to subscribe for such convertible or
exchangeable securities), in each case approved by the Board of Directors of the
Corporation; provided, however, that the maximum number of shares of Common
-----------------
Stock issued or issuable to officers, employees or directors of, or consultants
to, the Corporation to which this clause (C) shall apply shall not exceed the
number of shares issuable under the incentive stock option plans of the
Corporation presently in effect or as may be approved from time to time by the
Corporation and the holders of the Series B Preferred in accordance with Section
6(b)(ix) hereof (including any Common Stock issued pursuant to the exercise of
any such options), and (D) pursuant to any options (other than those described
in (C), above), warrants or other rights outstanding on the Original Issuance
Date.
(iii) "Original Issuance Date" means the date of original issuance
----------------------
by the Corporation of the first share of Series B Preferred.
(iv) "Original Issuance Price" means Four Dollars and Sixty Cents
-----------------------
($4.60), the price of the first share of Series B Preferred issued by the
Corporation.
(v) "Person" means any corporation, general or limited
------
partnership, limited liability partnership, limited liability company, joint
venture, estate, trust, association, organization, labor union, or other entity.
(vi) "Subsidiary" means with respect to any Person (the "Owner"),
---------- -----
any corporation or other Person of which securities or other interests having
the power to elect a majority of that corporation's or other Person's board of
directors or similar governing body, or otherwise having the power to direct the
business and policies of that corporation or other Person (other than securities
or other interests having such power only upon the happening of a contingency
that has not occurred), are held by the Owner or one or more of its
Subsidiaries; when used without reference to a particular Person, "Subsidiary"
means a Subsidiary of the Corporation.
4. Status of Converted Stock. If any shares of Series B Preferred shall
-------------------------
be converted pursuant to Section 3 hereof, the shares so converted shall be
canceled and shall not be reissuable by the Corporation.
5. Redemption. Shares of Series B Preferred are not redeemable.
----------
6. Voting Rights.
-------------
(a) General. Except as otherwise provided below, on all matters
-------
submitted to a vote of the holders of shares of Common Stock, the holder of each
share of Series B Preferred shall have the right to one vote for each Common
Share into which such Series B Preferred could then be converted (with any
fractional share determined on an aggregate conversion basis being rounded to
the nearest whole share), and with respect to such vote, such holder shall have
full
<PAGE>
voting rights and powers equal to the voting rights and powers of the holders of
such shares of Common Stock, and shall be entitled, notwithstanding any
provision hereof, to notice of any shareholders' meeting in accordance with the
by-laws of the Corporation and shall be entitled to vote, together with holders
of shares of Common Stock with respect to any question upon which holders of
shares of Common Stock have the right to vote.
(b) Protective Provisions. So long as twenty-five percent (25%) or
---------------------
more of the shares of Series B Preferred are outstanding, the Corporation shall
not, and shall not attempt to, without first obtaining the approval (by vote or
written consent) of the holders of at least a majority of the then outstanding
shares of Series B Preferred, voting as a separate class:
(i) authorize any additional shares of Series B Preferred, or
authorize and issue any shares of, (a) any class or series of equity security
having superior rights to the Series B Preferred as to dividends (except for the
Series C Preferred), redemptions, or as to payment upon liquidation, dissolution
or a winding up of the Corporation, or otherwise, or (b) any notes or debt
securities convertible into or exchangeable for any equity securities or
containing profit participation features;
(ii) redeem or repurchase outstanding Common Stock in excess of
an aggregate of 75,000 shares, provided that the Corporation may redeem shares
of Common Stock from persons having been granted and exercised stock options
pursuant to the Corporation's incentive stock plans as in effect as of the
Original Issuance Date, or as may be approved from time to time by the
Corporation and by the holders of the Series B Preferred pursuant to Section
6(b)(ix) below;
(iii) enter into any agreement that would restrict the
Corporation's ability to perform its obligations under any agreement to which
the Corporation is a party concerning the Corporation's original issuance of any
shares of the Series B Preferred (including the Certificate of Incorporation and
this Certificate of Designation);
(iv) amend the Certificate of Incorporation (including any
existing or new Certificate of Designation) or By-Laws of the Corporation in any
manner that adversely affects the powers, rights, privileges or restrictions or
relative preferences of the Series B Preferred or the holders thereof as a
class, or increase the powers, preferences, rights, privileges or restrictions
of any other class or series of preferred stock unless the Series B Preferred is
treated in the same manner;
(v) sell, transfer, convey or lease greater than twenty-five
percent (25%) of the assets of the Corporation in one or more of a series of
related transactions, except for the sale of inventory in the ordinary course of
the Corporation's business;
(vi) issue additional equity securities of any class or series to
the employees, officers or directors of the Corporation, except for such equity
securities as may be
<PAGE>
issuable upon the exercise of options or warrants outstanding as of the Original
Issuance Date (or as may be approved from time to time by the Corporation and
the holders of the Series B Preferred in accordance with this Section 6(b)(vi));
provided that any such equity securities, including any options or warrants for
equity securities of the Corporation, shall be granted at no less than the fair
market value for such equity securities, as determined in good faith by a
majority of the independent directors residing on the Board of Directors of the
Corporation;
(vii) issue any equity securities of any class or series for a
price less than fair market value, as determined in good faith by the Board of
Directors of the Corporation, except as may be required pursuant to contractual
commitments of the Corporation existing as of the Original Issuance Date;
(viii) enter into any transaction or series of transactions or any
agreement or other arrangement, including, without limitation, any loan, with or
to any officer or director (or any family member or person affiliated with any
officer or director) or other affiliate (excluding any Subsidiary of the
Corporation) of the Corporation in excess of $100,000, individually, or
$250,000, in the aggregate, during any calendar year, except as may be required
pursuant to contractual commitments of the Corporation existing as of February
27, 1998 (except that such limitations shall not be applicable to any employment
or other compensatory arrangements on reasonable arms' length terms (including,
without limitation, the granting of stock options under any stock option plan in
effect as of the Original Issuance Date, or as may be approved from time to time
by the Corporation and the holders of the Series B Preferred in accordance with
Section 6(b)(ix) below), as may be approved by the Board of Directors of the
Corporation);
(ix) adopt any stock option plans or increase the number of
shares available or reserved for issuance under any stock option plan or related
plan in effect as of the Original Issuance Date, or as may be approved from time
to time by the Corporation and by the holders of the Series B Preferred pursuant
to Section 6(b)(ix);
(x) engage in any transaction which would impair or reduce the
rights of the holders of shares of the Series B Preferred as a class (except
that the Corporation may effect a reverse-split of its Common Stock without the
consent of the holders of shares of the Series B Preferred);
(xi) merge or consolidate with any Person or permit any
Subsidiary to merge or consolidate with any Person (other than a Subsidiary that
is wholly-owned by the Corporation, directly or indirectly);
(xii) liquidate, dissolve or effect a recapitalization or
reorganization in any form of transaction (including, without limitation, any
reorganization into a limited liability company, a partnership or any other non-
corporate entity which is treated as a partnership for federal income tax
purposes); or
<PAGE>
(xiii) issue any dividends on any class or series of capital stock
of the Corporation (other than the Series B Preferred and the Series C Preferred
(as provided in the Certificate of Designation therefor)).
7. Preemptive Rights. Shares of Series B Preferred have no preemptive
-----------------
rights.
<PAGE>
EXHIBIT C
TERMS OF SERIES C CONVERTIBLE PREFERRED STOCK
OF
CYBERIAN OUTPOST, INC.
Designation of Series C Convertible Preferred Stock. There is hereby
---------------------------------------------------
established a series of Preferred Stock designated "Series C Convertible
Preferred Stock" (the "Series C Preferred"), consisting of 3,000,000 shares,
------------------
without nominal or par value, and having the relative rights, designations,
preferences, qualifications, privileges, limitations and restrictions applicable
thereto as follows:
1. Dividend Provisions. Except as may be otherwise approved in writing by
-------------------
the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of Series C Preferred:
(a) (i) The holders of the shares of Series C Preferred shall be
entitled to receive, when and as declared by the Board of Directors of the
Corporation, cumulative annual dividends, out of any assets of Cyberian
Outpost, Inc. (the "Corporation") legally available therefor, in an amount per
-----------
share of Series C Preferred equal to 7.0% per annum of the Original Issuance
Price (as defined below in Section 3(k)) (the "Cumulative Annual Dividend")
--------------------------
which shall be declared by the Board of Directors of the Corporation (in the
case of clause (z) below) and be payable to said holders (in the case of clauses
(x), (y) and (z) below) upon the first of the following events to occur: (x) the
liquidation of the Corporation (including a deemed liquidation of the
Corporation pursuant to Section 2(b) hereof), (y) the Corporation's redemption
of any shares of Series C Preferred pursuant to Section 5 hereof, or (z) the
conversion of any shares of Series C Preferred into shares of common stock, no
par value, of the Corporation ("Common Stock") pursuant to Section 3(a) or
------------
Section 3(b) hereof. Notwithstanding the foregoing, no holder of shares of
Series C Preferred shall be entitled to Cumulative Annual Dividends and no
Cumulative Annual Dividends shall be payable to such holder of shares of Series
C Preferred upon and after the conversion of any shares of Series C Preferred
held by such holder into shares of Common Stock pursuant to Section 3(a) or
Section 3(b) hereof, if such conversion occurs prior to the third anniversary
of the Original Issuance Date.
(ii) Cumulative Annual Dividends shall accrue on a daily basis
commencing as of the date of issuance of the shares of Series C Preferred to the
holder of said shares, whether or not earned or declared, and will be cumulative
so that if at any time the entire amount of such Cumulative Annual Dividend has
not been paid, or declared or set apart for payment as required pursuant to this
Section 1(a), the deficiency shall be fully paid or declared and set apart for
payment, before any dividend is paid on, declared or set apart for payment on
any other class or series of stock, including without limitation, Common Stock,
Series A Preferred (as defined below) and Series B Preferred (as defined below).
Cumulative Annual Dividends shall be payable in preference and priority to any
payment of dividends on any other
<PAGE>
class or series of capital stock of the Corporation, including, without
limitation, the Common Stock, Series A Preferred and Series B Preferred.
Cumulative Annual Dividends shall be subject to proportionate adjustment in the
event of any stock dividend, stock split, reverse stock split, combination of
shares, reorganization, recapitalization, reclassification or other similar
event affecting the Series C Preferred which occurs after the Original Issuance
Date (as defined below in Section 3(k)).
(b) The holders of the shares of Series C Preferred shall be entitled
to receive dividends, out of any assets legally available therefor, in an amount
per share of Series C Preferred which is equal to the product of (i) the number
of shares of Common Stock into which one share of Series C Preferred is
convertible at the time of declaration of such dividend, multiplied by (ii) the
aggregate amount per share of Common Stock of all cash dividends and the
aggregate amount per share (payable, at the option of the holder, in kind or in
cash, based upon the fair market value at the time the non-cash dividend or
other distribution is declared or paid (the fair market value of any in-kind
dividend shall be deemed to be equal to the amount agreed to by the Corporation
and the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of Series C Preferred) of all non-cash dividends or other
distributions on the Common Stock, when, as and if a dividend is declared on the
shares of Common Stock. Such dividends shall accumulate and be declared and
paid contemporaneously with the declaration and payment of the related dividend
on the Common Stock, so that the Series C Preferred participates equally with
the Common Stock in such dividend or distribution with respect to the number of
shares of Common Stock into which the Series C Preferred is then convertible
pursuant to Section 3 hereof. Any dividends declared and paid to the holders of
Series C Preferred pursuant to this Section 1(b) shall be in addition to (and
not in lieu of) any dividends paid to the holders of Series C Preferred pursuant
to Section 1(a) hereof.
(c) So long as any Series C Preferred shall remain outstanding, no
deposit, payment, dividend or other distribution shall be paid or made on any
other class of stock of the Corporation and no shares of any other class of
stock of the Corporation shall be purchased or otherwise acquired by the
Corporation or any subsidiary of the Corporation other than, (i) except as may
be otherwise provided in the Certificate of Incorporation, including in any
class or series designation concerning any capital stock of the Corporation (as
such may be amended from time to time), or (ii) upon exercise of the
Corporation's rights or a stockholder's rights under any restricted stock
purchase agreement (or any similar agreement pursuant to which the Corporation
is obligated to redeem its stock) in effect as of the Original Issuance Date or
otherwise pursuant to incentive stock plans of the Corporation in effect as of
the Original Issuance Date, or as may be approved from time to time by the
Corporation and the holders of the Series C Preferred in accordance with Section
6(c) hereof, or (iii) upon the exercise of a stockholder's put rights in effect
as of the Original Issuance Date, or as may be approved from time to time by the
Corporation and the holders of the Series C Preferred in accordance with Section
6(c) hereof, or (iv) by exchange therefor of shares of the stock of the
Corporation.
-33-
<PAGE>
Subject to the above limitations and to the provisions of Section 6,
dividends may be paid on any class of stock of the Corporation out of any funds
legally available for such purpose when and as declared by the Board of
Directors.
2. Liquidation Preference. Except as may be otherwise approved in writing
----------------------
by the holders of at least sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of Series C Preferred:
(a) In the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of shares of Series C
Preferred shall be entitled to receive out of the assets of the Corporation
available for distribution to shareholders, (i) before any distribution or
payment shall be made in respect of the holders of shares of Common Stock but
pari passu with holders of Series A Convertible Preferred Stock of the
Corporation (the "Series A Preferred") and Series B Convertible Preferred Stock
------------------
of the Corporation (the "Series B Preferred"), a liquidation distribution in an
------------------
amount equal to the Original Issuance Price per share, plus an amount equal to
all accrued but unpaid dividends thereon to the date fixed for such distribution
or payment, and then (ii) to share with the holders of shares of Common Stock,
Series A Preferred and Series B Preferred as if the shares of Series A
Preferred, Series B Preferred and Series C Preferred were then converted into
shares of Common Stock. In the case of the distribution of assets other than
cash, the value of such assets shall be deemed to be the fair market value
thereof (which shall be the amount agreed to by the Corporation and the holders
of at least sixty-six and two-thirds percent (66 2/3%) of the shares of Series C
Preferred). If, upon any such liquidation, dissolution or winding up of the
affairs of the Corporation, the assets of the Corporation available for
distribution to shareholders shall be insufficient to permit the payment in full
to the holders of Series A Preferred, Series B Preferred and Series C Preferred
of the amounts to which they are each entitled in preference to holders of
shares of Common Stock, then all of such available assets shall be distributed
to the holders of shares of Series A Preferred, Series B Preferred and Series C
Preferred ratably in proportion to the liquidation payment otherwise due
pursuant to clause (i) above to each such holder.
(b) A consolidation or merger of the Corporation with or into any
other corporation or corporations, or the consolidation or merger of any other
corporation or corporations into the Corporation, or the sale or transfer by the
Corporation of all or substantially all of its assets or the effectuation by the
Corporation or any holders of its capital stock of a transaction or series of
related transactions in which more than fifty percent (50%) of the voting power
of the Corporation is sold, transferred or otherwise disposed of, shall be
deemed to be a liquidation, dissolution or winding up within the meaning of this
Section 2.
3. Conversion. The holders of the shares of Series C Preferred shall have
----------
conversion rights as follows:
(a) Optional Conversion. The holder of any shares of Series C
-------------------
Preferred
-34-
<PAGE>
shall have the right, at such holder's option, at any time or from time to time
by the giving of written notice thereof to the Corporation (the "Conversion
----------
Date") to convert all or any of such shares of Series C Preferred into such
----
number of fully paid and nonassessable shares of Common Stock as obtained by
multiplying the Original Issuance Price by the number of shares of Series C
Preferred being converted, and dividing the product thereof by the Series C
Conversion Price (as hereinafter defined) (as last adjusted and then in effect)
for the shares of Series C Preferred then being converted. The conversion price
per share (the "Series C Conversion Price") at which shares of Common Stock
-------------------------
shall be issuable shall be Eight Dollars ($8.00) per share; provided, however,
-----------------
that the Series C Conversion Price shall be subject to adjustment as set forth
in Section 3(e) hereof. Subject to the last sentence of Section 1(a)(i), above,
the holder of any shares of Series C Preferred converted into shares of Common
Stock pursuant to this Section 3(a) shall be entitled to payment of all accrued
but unpaid dividends on such shares being converted up to and including the
Conversion Date.
(b) Mandatory Conversion. Upon (i) the consummation of a public
--------------------
offering of shares of Common Stock of the Corporation registered pursuant to the
Securities Act of 1933, as amended, in which the gross proceeds to the
Corporation exceed Twenty Million Dollars ($20,000,000) and at an offering price
per share greater than or equal to (x) 200% of the then applicable Series C
Conversion Price if said offering occurs within twelve (12) months of the
Original Issuance Date, or (y) 250% of the then applicable Series C Conversion
Price if said offering occurs more than twelve (12) months after the Original
Issuance Date, and as the result of which shares of Common Stock are traded on
either the New York Stock Exchange, the American Stock Exchange or the NASDAQ
National Market System (a "Qualified Public Offering"), or (ii) upon the
-------------------------
approval (by vote or written consent) of holders of at least seventy-five
percent (75%) of the then outstanding shares of Series C Preferred (each such
event referred to in clauses (i) and (ii) is referred to herein as an "Event of
--------
Conversion"), all shares of Series C Preferred then outstanding shall, by virtue
----------
of and simultaneously with the occurrence of the Event of Conversion and without
any action on the part of the holder thereof, be deemed automatically converted
into such whole number of fully paid and nonassessable shares of Common Stock as
obtained by multiplying the Original Issuance Price by the number of shares of
Series C Preferred being converted, and dividing the product thereof by the
Series C Conversion Price (as last adjusted and then in effect) for the shares
of Series C Preferred being converted (such Series C Conversion Price being
subject to adjustment as set forth in Section 3(e) hereof). Subject to the last
sentence of Section 1(a)(i), above, the holder of any shares of Series C
Preferred converted into shares of Common Stock pursuant to this Section 3(b)
shall be entitled to payment of all accrued but unpaid dividends on such shares
of Series C Preferred up to and including the Conversion Date.
(c) Procedure for Conversion. Upon conversion of the shares of Series
------------------------
C Preferred pursuant to Section 3(a) hereof, the holder of any shares of Series
C Preferred shall deliver to the Corporation during regular business hours, at
the office of any transfer agent of the Corporation for the Series C Preferred,
or at such other place as may be designated by the
-35-
<PAGE>
Corporation, the certificate or certificates for the shares to be converted,
duly endorsed or assigned in blank or to the Corporation (if required by it),
accompanied by written notice stating the name or names (with address) in which
the certificate or certificates for the shares of Common Stock are to be issued.
As promptly as practicable thereafter, the Corporation shall issue and deliver
to or upon the written order of such holder, to the place designated by such
holder, a certificate or certificates for the number of full shares of Common
Stock to which such holder is entitled, a check or cash in respect of any
fractional interest in a share of Common Stock as provided in Section 3(d)
hereof and a check or cash in payment of all accrued but unpaid dividends, if
any, payable with respect to the shares of Series C Preferred so converted up to
and including the Conversion Date. The person in whose names the certificate or
certificates for Common Stock are to be issued shall be deemed to have become a
shareholder of record on the applicable Conversion Date unless the transfer
books of the Corporation are closed on that date, in which event he shall be
deemed to have become a shareholder of record on the next succeeding date on
which the transfer books are open, but the Series C Conversion Price for the
Series C Preferred shall be that in effect on the Conversion Date.
(d) Additional Conversion Provisions. The following additional terms
--------------------------------
shall apply upon any conversion of the Series C Preferred:
(i) No fractional shares of Common Stock or scrip shall be
issued upon conversion of shares of Series C Preferred. If more than one share
of Series C Preferred shall be surrendered for conversion at any one time by the
same holder, the number of full shares of Common Stock issuable upon conversion
thereof shall be computed on the basis of the aggregate number of shares of
Series C Preferred so surrendered. In lieu of any fractional shares of Common
Stock which would otherwise be issuable upon conversion of any shares of Series
C Preferred the Corporation shall pay a cash adjustment in respect of such
fractional interest in an amount equal to the then Current Market Price (as
defined below) of a share of Common Stock as of the date of conversion,
multiplied by such fractional interest. Fractional interests shall not be
entitled to dividends, and the holders of fractional interests shall not be
entitled to any rights as shareholders of the Corporation in respect of such
fractional interest.
(ii) For the purpose of any computation pursuant to this Section
3(d), the Current Market Price at any date of one share of Common Stock shall be
deemed to be the closing price as of the day before the day in question. If the
Common Stock is not traded in such manner that the closing price is readily
available, the Current Market Price shall be determined in good faith by the
Directors of the Corporation.
(e) Adjustments to Series C Conversion Price. The Series C Conversion
----------------------------------------
Price for the Series C Preferred shall be subject to adjustment from time to
time as follows:
(i) Stock Dividends, Split-Ups, Etc. If, at any time after the
-------------------------------
Original Issuance Date, the number of shares of Common Stock outstanding is
increased by a stock
-36-
<PAGE>
dividend payable in shares of Common Stock or by a subdivision or split-up of
shares of Common Stock, then, following the record date fixed for the
determination of holders of Common Stock entitled to receive such stock
dividend, subdivision or split-up, the Series C Conversion Price of the Series C
Preferred shall be appropriately decreased so that the number of shares of
Common Stock issuable on conversion of each share of Series C Preferred shall be
increased in proportion to such increase in outstanding shares.
(ii) Combinations. If, at any time after the Original Issuance
------------
Date, the number of shares of Common Stock outstanding is decreased by a
combination of the outstanding shares of Common Stock, then, following the
record date for such combination, the Series C Conversion Price shall be
appropriately increased so that the number of shares of Common Stock issuable on
conversion of each share of Series C Preferred shall be decreased in proportion
to such decrease in outstanding shares.
(iii) Reorganizations, Reclassifications, Etc. In case, at any
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time after the Original Issuance Date, of any Capital Events (as defined below
in Section 3(k)) each share of Series C Preferred shall after such Capital Event
be (unless, in the case of a consolidation, merger, sale or other disposition,
payment shall have been made to the holders of all shares of Series C Preferred
of the full amount to which they respectively shall have been entitled pursuant
to Section 2 hereof) convertible into the kind and number of shares of stock or
other securities or property of the Corporation or of the corporation resulting
from such consolidation or surviving such merger or to which such properties and
asset shall have been sold or otherwise disposed to which the holder of the
number of shares of Common Stock deliverable (immediately prior to the time of
such Capital Event) upon conversion of such shares would have been entitled upon
such Capital Event. The provisions of this Section 3(e)(iii) shall similarly
apply to successive Capital Events.
(iv) Dilutive Issuances.
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(1) If the Corporation shall at any time or from time to
time after the Original Issuance Date issue any shares of Common Stock other
than Excluded Stock (as defined below in Section 3(k)) without consideration or
for a consideration per share less than the Series C Conversion Price then in
effect (such issuance being referred to in this clause (iv) as a "Dilutive
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Issuance"), the Series C Conversion Price in effect immediately prior to such
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Dilutive Issuance shall be reduced with effect from the first to occur of (A)
the record date for the issuance of the securities or (B) the date of original
issuance (as the case may be the "Issue Date"), so that it shall equal the price
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determined by multiplying the Series C Conversion Price by a fraction (i) the
numerator of which shall be (X) the number of shares of Common Stock outstanding
at the close of business on the day next preceding the Issue Date, plus (Y) the
number of shares of Common Stock which the aggregate consideration received by
the Corporation for the Dilutive Issuance would purchase at the Series C
Conversion Price, and (ii) the denominator of which shall be the number of
shares of Common Stock outstanding at the
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close of business on the Issue Date after giving effect to such Dilutive
Issuance.
(2) For the purposes of any adjustment of the Series C
Conversion Price pursuant to this clause (iv), the following provisions shall
apply:
(A) In the case of the issuance of Common Stock for
cash, the consideration shall be deemed to be the amount of cash paid therefor
after deducting therefrom any discounts or commissions allowed or paid by the
Corporation for any underwriting or otherwise in connection with the issuance
and sale thereof.
(B) In the case of the issuance of Common Stock for
a consideration in whole or in part other than cash, the consideration other
than cash shall be deemed to be the fair market value thereof (which shall be
the amount agreed to by the Corporation and the holders of at least sixty-six
and two-thirds percent (66 2/3%) of the shares of Series C Preferred),
irrespective of any accounting treatment.
(C) In the case of the issuance of (i) options to
purchase or rights to subscribe for Common Stock, (ii) securities by their terms
convertible into or exchangeable for Common Stock, or (iii) options to purchase
or rights to subscribe for such convertible or exchangeable securities:
(I) the shares of Common Stock deliverable
upon exercise of such options to purchase or rights to subscribe for Common
Stock shall be deemed to have been issued at the time such options or rights
were issued and for a consideration equal to the consideration (determined in
the manner provided in subclauses (A) and (B), above), if any, received by the
Corporation upon the issuance of such options or rights plus the minimum
purchase price provided in such options or rights for the Common Stock covered
thereby;
(II) the shares of Common Stock deliverable
upon conversion of or in exchange for any such convertible or exchangeable
securities or upon the exercise of options to purchase or rights to subscribe
for such convertible or exchangeable securities and subsequent conversion or
exchange thereof shall be deemed to have been issued at the time such securities
were issued or such options or rights were issued and for a consideration equal
to the consideration received by the Corporation for any such securities and
related options or rights (excluding any cash received on account of accrued
interest or accrued dividends), plus the additional consideration, if any, to be
received by the Corporation upon the conversion or exchange of such securities
or the exercise of any related options or rights (the consideration in each case
to be determined in the manner provided in subclauses (A) and (B), above);
(III) on any change in the number of shares or
exercise price of Common Stock deliverable upon exercise of any such options or
rights or upon conversion of or in exchange for such convertible or exchangeable
securities, other than a change
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resulting from the antidilution provisions thereof, the Series C Conversion
Price shall forthwith be readjusted to such Series C Conversion Price as would
have obtained had the adjustment made upon the issuance of such options, rights
or securities not converted prior to such change or options or rights related to
such securities not converted prior to such change been made upon the basis of
such change; and
(IV) on the expiration of any such options or
rights, the termination of any such rights to convert or exchange or the
expiration of any options or rights related to such convertible or exchangeable
securities, the Series C Conversion Price shall forthwith be readjusted to such
Series C Conversion Price as would have obtained had such options, rights,
securities or options or rights related to such securities not been issued.
(v) Special Adjustment. If at any time after the Original
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Issuance Date, (1) the Corporation is subject to liquidation (including a deemed
liquidation), dissolution or winding up as contemplated by Section 2 herein, or
(2) the Corporation completes a public offering of any class or series of
capital stock of the Corporation other than a Qualified Public Offering, then
the Series C Conversion Price for the Series C Preferred shall be appropriately
decreased so that the number of shares of Common Stock issuable upon the
conversion of each share of Series C Preferred shall be increased such that the
percentage ownership of the Corporation, on an as-converted basis (and on a
diluted basis to the extent of any "at" or "in the money" options or warrants
that are vested at the time of such determination), by the holders of the Series
C Preferred before giving effect to the Common Stock issued or issuable (A)
pursuant to warrants granted on January 13, 1998 to Winfield Capital Corp. (or
any successor or replacement warrants issued with respect to said warrant), and
(B) pursuant to warrants issued to BT Alex. Brown Incorporated (and its
nominees) and any other broker or investment banker in connection with the
issuance of shares of Series C Preferred, shall be the same after giving effect
to the issuance or deemed issuance of such Common Stock.
(vi) All calculations under this paragraph (e) shall be made to
the nearest one-tenth (1/10) of a share or to the nearest one tenth (1/10) of a
cent, as the case may be.
(vii) In any case in which the provisions of this Section 3(e)
shall require that an adjustment shall become effective immediately after a
record date for an event the Corporation may defer until the occurrence of such
event (1) issuing to the holder of any share of Series C Preferred converted
after such record date and before the occurrence of such event the additional
shares of capital stock issuable upon such conversion by reason of the
adjustment required by such event over and above the shares of capital stock
issuable upon such conversion before giving effect to such adjustment and (2)
paying to such holder any amount in cash in lieu of a fractional share of
capital stock pursuant to Section 3(d) hereof; provided, however, that the
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Corporation shall deliver to such holder a due bill or other appropriate
instrument evidencing such holder's right to receive such additional shares, and
such cash, immediately upon the occurrence of the event requiring such
adjustment.
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(viii) The Corporation will not voluntarily, by amendment of its
Certificate of Incorporation, as amended, or through any reorganization,
transfer of assets, merger, dissolution, issuance or sale or securities or any
other voluntary action, avoid or seek to avoid the observan