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SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 5, 2000
eFax.com
(Exact name of registrant as specified in its charter)
Delaware 000-22561 77-0182451
(State or other jurisdiction (Commission File No.) (IRS Employer
of incorporation) Identification No.)
1378 Willow Road
Menlo Park, California 94025
(Address of principal executive offices and zip code)
Registrant's telephone number, including area code: (650) 324-0600
-------------------------
(Former name or former address, if changed since last report)
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Item 5. Other Events.
On April 5, 2000, the Company entered into a letter of intent and a loan
commitment letter with JFAX.COM, Inc., a unified Internet communications
company, in which:
- - The Company and JFAX.COM established the principal terms for a potential
merger of the Company and JFAX.COM.
- - JFAX.COM agreed to lend the Company $5 million. The loan will have an
interest rate of 13% and a maturity date of August 31, 2000, subject to
adjustment which could increase the maturity date by up to 60 days.
- - The Company agreed to grant to JFAX.COM a warrant to acquire 250,000 shares
of the Company's common stock. The warrant will have a term of two years
and will be exercisable at the market price of the Company's common stock
on the date of grant, but the exercise price will reset to $1.00 per share
if the proposed merger of the Company and JFAX.COM does not occur. The
warrant is expected to be granted prior to April 15, 2000.
- - The Company agreed to grant to JFAX.COM a warrant with a term of two years
and an exercise price of $1.00 per share of the Company's common stock. The
warrant will be granted if the merger between the Company and JFAX.COM does
not occur. The warrant will be for 750,000 shares of the Company's common
stock if JFAX.COM terminates the merger discussions, other than following a
material breach of the letter of intent by the Company, prior to the
execution of a definitive merger agreement, or if the definitive merger
agreement is terminated because JFAX.COM's shareholders fail to approve the
merger or JFAX.COM materially breaches the definitive merger agreement. The
warrant will be for 1,750,000 shares of the Company's common stock if the
merger does not occur for any reason not discussed in the preceding
sentence.
Prior to the execution of a definitive purchase agreement, neither the
Company nor JFAX.COM is required to complete the merger. In the merger,
approximately 18.5 million shares of JFAX.COM common stock will be issued to the
current holders of the Company's common and preferred stock. The number of
shares of JFAX.COM common stock to be received will be subject to downward
adjustment based on potential fluctuations in the price of JFAX.COM common
stock. The formula for determining the consideration to be received by the
Company's common and preferred stockholders is included in Exhibit 2.1 to this
report. JFAX.COM would be the surviving corporation in the merger.
On April 5, 2000, the Company and the current holders of all of its shares
of Series A Convertible Preferred Stock entered into an exchange agreement under
which the holders agreed to exchange all of their outstanding shares of Series A
Convertible Preferred Stock for a new Series B Convertible Preferred Stock. The
Series B shares have a stated value which reflects the 25% premium that the
holders would have had the right, under the Series A Convertible Preferred
Stock, to receive in cash at the time of the Company's merger with JFAX.COM. The
Company has the right to require the Series B stockholders to accept JFAX.COM
common stock at the closing of the merger in return for any shares of Series B
Convertible Preferred Stock which they then own. The Series B Convertible
Preferred Stock will be convertible into shares of the Company's common stock
based on the average closing bid price of the Company's common stock for the 20
trading days beginning on April 7, 2000.
Item 7. Financial Statements and Exhibits
(c) Exhibits
2.1 Letter of Intent, dated April 5, 2000, from JFAX.COM, Inc. to the
Registrant.
3.1 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of the Registrant.
3.2 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of the Registrant.
4.1 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of the Registrant (Filed as Exhibit 3.1
hereto).
4.2 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of the Registrant (Filed as Exhibit 3.2
hereto).
10.1 Exchange Agreement, dated as of April 5, 2000, between the Registrant
and the current holders of the Registrant's Series A Preferred Stock.
99.1 Press release, dated April 5, 2000, relating to the proposed merger of
the Registrant and JFAX.COM.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EFAX.COM, INC.
/s/ TODD J. KENCK
-----------------------------
Todd J. Kenck
Vice President of Finance and
Chief Financial Officer
Dated: April 6, 2000
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EXHIBIT INDEX
2.1 Letter of Intent, dated April 5, 2000, from JFAX.COM, Inc. to the
Registrant.
3.1 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of the Registrant.
3.2 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of the Registrant.
4.1 Certificate of Designations, Preferences and Rights of Series B
Convertible Preferred Stock of the Registrant (Filed as Exhibit 3.1
hereto).
4.2 Certificate of Designations, Preferences and Rights of Series C
Convertible Preferred Stock of the Registrant (Filed as Exhibit 3.2
hereto).
10.1 Exchange Agreement, dated as of April 5, 2000, between the Registrant
and the current holders of the Registrant's Series A Preferred Stock.
99.1 Press release, dated April 5, 2000, relating to the proposed merger of
the Registrant and JFAX.COM.
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EXHIBIT 2.1
April 5, 2000
eFAX.com
1378 Willow Road
Menlo Park, California 94025
Re: Letter of Intent
Ladies and Gentlemen:
This letter sets forth the terms of the proposed two-step transaction (the
"Transactions") pursuant to which eFAX.com, Inc. ("eFAX") will borrow $5 million
from JFAX.COM, Inc. ("JFAX.COM") (the "Loan"), following which eFAX will be
merged into JFAX.COM or with a subsidiary of JFAX.COM (the "Merger") in exchange
for shares of JFAX.COM common stock in the amount described below. Such shares
will be distributed to the existing equityholders of eFAX. This letter
supersedes the terms of any other agreement that purports to forth the terms of
a proposed stock or asset purchase transaction between the parties.
The basic terms upon which the Transactions will be consummated are as follows:
1. Loan. JFAX.COM will lend eFAX $5 million. The terms of the Loan are as
follows:
(a) Maturity date: The later of (i) August 31, 2000 and (ii) the
date which is sixty (60) days following the date, if any, upon
which JFAX.COM terminates the Merger discussions (other than
following a material breach by eFAX hereunder) prior to the
execution of the Definitive Merger Agreement (defined below) or
upon which the Definitive Merger Agreement is terminated as a
result of a failure to obtain approval of the JFAX.COM
shareholders or as a result of a material breach by JFAX.COM
thereunder.
(b) Interest: 13% per annum.
(c) Warrants: 250,000 warrants to purchase eFAX common stock at an
exercise price equal to the market price for eFAX common stock
on the date of grant; provided, however, that the exercise price
will be automatically re-set to $1.00 per share in the event
that either party terminates the Merger discussions for any
reason prior to the execution of the Definitive Merger Agreement
or in the event the Definitive Merger Agreement is terminated
for any reason. The warrants will have a two-year term and will
contain standard anti-dilution protections and will be granted
upon delivery of the Loan commitment (and will be further
documented in a definitive warrant agreement executed and
delivered no later than the first funding under the Loan).
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(d) Security: All of the assets of eFAX (except for non-material
assets in which a security interest cannot be legally created).
(e) Funding: The Loan will be funded in 3 equal installments on or
about April 13, on May 10 and on June 10, 2000; provided that
eFAX may opt to not draw down any installment of the Loan or
eFax may require that any installment of the Loan be drawn down
at a later date within the term of the Loan upon providing prior
written notice to JFAX.COM.
(f) Covenants: The Loan documents will include standard
representations and warranties and loan covenants, including
covenants that, until the Loan is paid off in full, without the
prior written consent of Lender, (i) eFAX will not exceed a cash
burn rate (excluding any cash expenditures for Excluded
Professional Fees and Severance Payments (as hereinafter
defined) and without any credit being given for cash received
from asset sales) of greater than $1.25 million per month,
calculated on a two-month rolling average basis, (ii) eFAX
will not dispose of any of its assets other than a basket of
"non-core" assets which will not exceed $100,000 in aggregate
value (absent the approval of JFAX.COM, such approval not to be
unreasonably withheld), all the proceeds of which shall be
deposited in a segregated account (the "Asset Sales Account")
and shall not be used to fund eFAX operating expenses and (iii)
eFAX will deposit into the Asset Sales Account any proceeds
received by eFAX upon exercise of eFAX options or warrants.
As used herein, "Excluded Professional Fees and Severance
Payments" shall mean eFAX's cash expenditures for professional
fees and severance, which expenditures shall not exceed
$1,000,000 absent the approval of JFAX.COM (such approval not to
be unreasonably withheld).
(g) Conditions to close:
(i) Reasonably satisfactory lien search completed;
(ii) Delivery of opinion of counsel for eFAX (relating to due
incorporation, qualification, authorization, execution,
and delivery; enforceability; no conflicts of any
material eFAX agreement as determined by eFAX's
management as evidenced by an officer's certificate; no
required consents; usury; and creation of security
interest, in each case subject to standard
qualifications); and
(iii) Delivery of loan and security documents.
The Loan will NOT be conditioned on the execution of the
Definitive Merger Agreement or the closing of the Merger.
(h) Commitment letter: A signed commitment letter (the "Commitment
Letter") in respect of the Loan is being executed and delivered
by JFAX to eFAX concurrently with the execution of this letter.
Upon such execution and
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delivery, the Commitment Letter shall supercede in all respects
the provisions of this paragraph 1.
2. Merger. The consideration for the Merger Transaction will be a number of
shares of JFAX.COM common stock determined pursuant to the formula set
forth in (a) below, and otherwise subject to the following conditions:
(a) Consideration: The eFAX shareholders will receive a number of
shares of common stock of JFAX.COM ("JFAX.COM Shares")
determined by the following formula:
E = ((CS x FMV(E)) + P - LA + M)
----------------------------
FMV(J)
Where:
E = number of JFAX.COM Shares issuable to eFAX
CS = 13,184,072, the number of outstanding common shares
of eFAX, as of the date hereof, plus shares, if any,
issued upon exercise of eFAX options or warrants during
the period between the date hereof and the closing of
the Merger.
FMV(E) = $6.50, the deemed value for eFAX common stock
P = $16.2 million, the dollar value (principal and
accrued dividends only) of the outstanding eFAX Series A
Preferred Stock
LA = the amount disbursed under the Loan as of the
closing date of the Merger
FMV(J) = $5.50, the deemed value for JFAX.COM common
stock
M = the cash on hand at eFAX as of the closing date of
the Merger (but in no event will M exceed LA and in no
event will M include any cash deposited or required to
be deposited in the Asset Sales Account)
(b) Adjustment: FMV(J) (the assumed value for JFAX.COM common stock)
will be subject to adjustment in the event that, on or prior to
April 30, 2000, JFAX.COM announces a corporate transaction (the
"Announcement") involving the issuance of JFAX.COM common stock
having a fair market value, or the payment of other
consideration to JFAX.COM, in excess of $25 million. In such
event (and only upon the first such event), FMV(J) will be
re-determined as follows:
FMV(J) = $5.50 + D
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Where:
D = the excess (if any) of (i) the 5-trading-day average
of the closing price for JFAX.COM common stock
immediately following the Announcement, over (ii) the
5-trading-day trailing average of the closing price for
JFAX.COM common stock as of the Announcement; provided
that D will be no more than $2.75 in the event that the
Announcement occurs within 5 days of the announcement of
the Transactions.
(c) Conditions. The Merger will be subject to the satisfaction of
the following conditions:
(1) The negotiation and execution of a definitive merger
agreement (the "Definitive Merger Agreement") embodying
the terms of the transaction set forth herein and other
standard representations, warranties, and covenants,
including a covenant on the part of eFAX's officers and
directors to vote all of their outstanding shares of
common stock and all shares for which they hold an
affirmative proxy in favor of the Merger, as well as a
covenant on the part of eFAX to convert its outstanding
preferred stock to common stock prior to consummation of
the Merger.
(2) Satisfactory completion, prior to the execution of the
Definitive Merger Agreement, by each party and its
advisors, of all legal, business and accounting due
diligence investigations, including without limitation,
their investigation of the business and financial
records of the other party.
(3) JFAX.COM's board shall have received an appropriate
fairness opinion from a reputable investment bank.
(4) Execution of definitive Loan documents.
(5) Agreement by the holders of eFAX's Series A Preferred
Stock to convert their preferred shares into a fixed
number of shares of eFAX's common stock on or prior to
the Merger.
(6) Agreement by the holders of eFAX's Series A Preferred
Stock to a lock-up of the shares of eFAX common stock,
and the shares of JFAX.COM common stock to be issued to
them upon consummation of the Merger, which lock-up will
include a prohibition against engaging in shorting or
hedging strategies both prior to and following the
consummation of the Merger. Between the date of
execution of the Definitive Merger Agreement and the
consummation of the Merger, the lock-up will permit the
net disposition of no more than
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400,000 shares of eFAX common stock per calendar month
(with partial months pro-rated) (subject to adjustment
for stock-splits, stock dividends, stock combinations,
and similar circumstances) and, from and after
consummation of the Merger, the lock-up will permit, on
a monthly basis, the disposition of 10% of the total
number of shares of JFAX common stock received by the
holders of eFAX's Series A Preferred Stock upon
consummation of the Merger.
(d) Definitive Merger Agreement: The Definitive Merger Agreement
will be subject to standard conditions to closing, including
without limitation the following:
(1) JFAX.COM's and eFAX's respective shareholders shall have
approved the Merger.
(2) The parties shall have filed, and all applicable waiting
period shall have expired on, the required notices under
the Hart-Scott-Rodino Act.
(3) The parties shall have obtained all other required
governmental consents including the filing and
effectiveness of registration statement on Form S-4 and
listing on NASDAQ for the shares of JFAX.COM common
stock issued upon consummation of the Merger.
(e) Board Seat: The Definitive Merger Agreement will include an
undertaking by JFAX.COM to nominate (for a period of three
years) a person designated by eFAX to serve on the JFAX.COM
board of directors.
(f) Options and Warrants: The Definitive Merger Agreement will
provide that JFAX.COM will assume all of eFAX's obligations
under outstanding eFAX options and warrants (with appropriate
adjustment to reflect the final conversion ratio of eFAX common
stock into JFAX common stock resulting upon consummation of the
Merger); provided that, the numbers of such warrants and options
and the exercise prices are those which eFAX has previously
disclosed to JFAX.COM as described on the option/warrant
disclosure schedule provided by eFAX to JFAX.COM on the date
hereof.
(g) Indemnification: The Definitive Merger Agreement will provide
that for six years after the consummation of the Merger (the
"Merger Date"), JFAX.COM will (i) indemnify and hold harmless to
the fullest extent permitted under applicable law, individuals
who, either prior to the date hereof, as of the date hereof, or
as of the Merger Date, are or were officers, directors and
employees of eFAX as of the Merger Date with respect to all acts
or omissions by them in their capacities as such at any time on
or prior to the Merger Date, (ii) will honor all indemnification
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obligations presently provided under eFAX's certificate of
incorporation and by-laws in effect on the date hereof, and (iii)
procure the provision of officers' and directors' liability
insurance in respect of acts or omissions occurring prior to the
Merger Date covering each person currently covered by eFAX's
officers' and directors' liability insurance policy on terms with
respect to coverage and in amounts no less favorable than those
of such policy in effect on the date hereof; provided, that if
the aggregate annual premiums for such insurance at any time
during such period shall exceed 150% of the per annum rate of
premium paid by eFAX as of the date hereof for such insurance,
then JFAX.COM shall provide only such coverage as shall then be
available at an annual premium equal to 150% of such rate.
3. Warrants. In the event that either party terminates the Merger
discussions for any reason prior to the execution of the Definitive
Merger Agreement or in the event the Definitive Merger Agreement is
terminated for any reason, JFAX.COM shall be granted 1,750,000 warrants
to purchase eFAX common stock at an exercise price of $1.00; provided,
that only 750,000 warrants at $1.00 will granted in the event that
JFAX.COM terminates the Merger discussions (other than following a
material breach by eFAX hereunder) prior to the execution of the
Definitive Merger Agreement or the Definitive Merger Agreement is
terminated as a result of a failure to obtain approval of the JFAX.COM
shareholders or as a result of a material breach by JFAX.COM thereunder.
The warrants will have a two-year term and will contain standard
anti-dilution protections and will be further documented in a form
warrant agreement to be agreed to prior to the first funding under the
Loan. The parties agree that it will be the responsibility of eFAX to
obtain, within two weeks following the date hereof, the agreements from
the holders of its Series A Preferred Stock necessary to satisfy the
conditions set forth in paragraphs 2(c)(5) and 2(c)(6) above and that
any termination of Merger discussions by JFAX.COM upon failure of either
such condition shall be deemed to be a termination of such discussions
by eFAX.com. eFAX.com further agrees (i) prior to eFAX.com's executing
agreements with the holders of its Series A Preferred Stock satisfying
the conditions set forth in paragraphs 2(c)(5) and 2(c)(6) above, to
notify JFAX.COM in writing of the terms of such proposed agreements and
(ii) to notify JFAX.COM immediately after such agreements have been
executed by the parties.
4. Exclusivity. It is anticipated that the Definitive Merger Agreement will
be executed by May 8, 2000. In consideration of the substantial
expenditure of time, effort and expense to be undertaken by JFAX.COM and
its representatives, following the execution and delivery of this
letter, eFAX will undertake and agree that without the prior written
consent of JFAX.COM, during the period from March 31, 2000 through the
earlier of May 8, 2000, or such earlier date as JFAX.COM may deliver a
Notice of Termination as described below (the "Termination Date"),
neither eFAX nor any of its authorized representatives or agents will
directly or indirectly take any action to initiate, assist, solicit,
negotiate,
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encourage, accept or otherwise pursue any offer or inquiry from any
person or entity (a) to engage in any Business Combination (as defined
below) other than the transactions contemplated hereby, or (b) to reach
any agreement or understanding (whether or not such agreement or
understanding is absolute, revocable, contingent or conditional) for, or
otherwise attempt to consummate, any Business Combination other than the
transaction contemplated hereby. For purposes hereof, "Business
Combination" means (i) any merger, consolidation, business combination,
sale, lease or similar transaction relating to eFAX; (ii) any sale or
other disposition of capital stock of, or other equity interests in,
eFAX, (iii) any sale, dividend or other disposition of any or all of the
assets or properties of eFAX, and/or (iv) any other transaction
involving eFAX or its assets (other than sales of "non-core" assets
permitted under the Loan documents ) that is inconsistent with the
transactions contemplated hereby. If at any time JFAX.COM determines
that it has no intention to proceed with the transactions contemplated
by this letter, JFAX.COM shall give prompt written notice (the "Notice
of Termination") to eFAX of such decision not to proceed.
5. Access to Information. Each party and its employees, representatives and
agents shall afford, and shall use reasonable efforts to induce others
to afford, to the other party and its representatives and agents
reasonable access to its properties, business, personnel, advisors and
financial, legal, tax and other data and information, in each case as
may be reasonably requested by the other party.
6. Expenses. eFAX and JFAX.COM shall each be responsible for its own
expenses incurred in connection with the Merger Transaction; provided
that eFAX will reimburse JFAX.COM for such out-of-pocket expenses in the
event that eFAX terminates the Merger discussions prior to the execution
of the Definitive Merger Agreement or the Definitive Merger Agreement is
terminated as a result of a failure to obtain approval of the eFAX
shareholders or an action on the part of the eFAX board or as a result
of a material breach by eFAX thereunder. eFAX and JFAX.COM agree to
split the Hart-Scott-Rodino filing fee.
7. Publicity and Disclosure. The parties shall jointly produce and mutually
agree on the substance of public press releases and announcements
regarding the Transactions, the first of which will be made on
Thursday, April 6, 2000; provided, that either party shall have the
right in its sole and absolute discretion (after consultation with the
other party) to make whatever public press releases or announcements
which it deems necessary in order to comply with applicable federal and
state securities or other laws, and the rules and regulations
promulgated by the NASDAQ; provided, further, that JFAX.COM shall make
no such announcement prior to the initial announcement on Thursday,
April 6, 2000.
In addition, the parties agree to continue to be bound by the terms and
conditions of the confidentiality agreement, dated March 26, 2000,
between eFAX and JFAX.COM.
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8. No Brokers. Both eFAX and JFAX.COM represent and warrant to the other
that neither it nor any of its employees, affiliates, representatives or
agents has entered into any agreement regarding any transaction
involving eFAX or its stock or assets that could result in the other
party hereto (or any of its affiliates or representatives) having any
liability to any third party as a result of entering into this letter or
consummating the transactions contemplated hereby. Both eFAX and
JFAX.COM shall indemnify, defend, save and hold harmless the other (and
its affiliates, partners and representatives) from any and all claims or
liabilities resulting from any breach of the foregoing representations
and warranties, including any legal or other expenses incurred in
connection with the defense of any such claims.
9. Termination. Paragraph 2 of this letter will terminate automatically and
be of no further force and effect upon the earliest of (a) the execution
of the Definitive Merger Agreement, (b) the mutual agreement of eFAX and
JFAX.COM, or (c) the Termination Date. All of the other provisions of
this letter (except paragraph 5) shall survive and shall remain binding
following any such termination . Any termination of this letter shall
not affect any rights that any party has with respect to the breach of
any terms hereof by the other party prior to such termination.
10. Legal Effect. This letter of intent is intended to constitute an
expression of JFAX.COM's and eFAX's mutual intent regarding the subject
matter of Paragraph 2 herein. Except as referred to or set forth in
paragraphs 3, 4, 5, 6, 7, 8, 9 and this paragraph 10, neither eFAX,
JFAX.COM, nor any of their respective employees, affiliates,
representatives or agents shall have any legally binding obligations,
rights, or liabilities of any nature whatsoever to each other or to any
other persons or entities, whether pursuant to the terms of this letter,
relating in any manner to the transactions contemplated hereby, or the
consideration hereof. Neither this letter of intent nor any person's
execution hereof shall constitute an obligation or commitment of any
party to enter into the Definitive Merger Agreement or give any party
any rights or claim against the other in the event any party for any
reason terminates negotiations to effect the transactions contemplated
hereby, other than in respect of claimed breaches of paragraphs 3, 4, 5,
6, 7, 8, or 9 or this paragraph 10. All obligations or commitments to
proceed with the Merger contemplated hereby shall be contained only in
the Definitive Merger Agreement.
The Loan Commitment is a separate agreement binding on the parties
hereto and enforceable in accordance with its terms. The covenants and
agreements in the Loan Commitment and those set forth herein are
separate and independent covenants and in no event shall any covenant or
agreement set forth in this letter be subject to any counterclaim,
set-off or deduction whatsoever based upon any alleged breach of the
Loan Commitment.
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This letter shall be governed by and construed in accordance with the
laws of the state of California without regard to principles of
conflicts of laws as would cause the application of the laws of any
jurisdiction other than the state of California.
If you are in agreement with the terms set forth above and intend to proceed
with transaction on that basis, please execute this letter of intent in the
space provided below and return an executed copy by facsimile to the
undersigned.
Very truly yours,
JFAX.COM, INC.
By: /s/ STEVEN J. HAMERSLAG
-------------------------------
Steven J. Hamerslag
President and CEO
ACCEPTED AND AGREED as of the date first set forth above,
EFAX.COM
By: /s/ RONALD BROWN
-------------------------------
Ronald Brown
President
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EXHIBIT 3.1
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES B CONVERTIBLE PREFERRED STOCK
OF
EFAX.COM
eFax.com (formerly known as eFax.com, Inc.) (the "COMPANY"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware, does hereby certify that, pursuant to authority conferred
upon the Board of Directors of the Company by the Certificate of Incorporation,
as amended, of the Company, and pursuant to Section 151 of the General
Corporation Law of the State of Delaware, the Board of Directors of the Company
at a meeting duly held, adopted resolutions (i) authorizing a series of the
Company's previously authorized preferred stock, par value $.01 per share, and
(ii) providing for the designations, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof, of One Thousand Five Hundred (1,500) shares of Series B Convertible
Preferred Stock of the Company, as follows:
RESOLVED, that the Company is authorized to issue 1,500 shares of
Series B Convertible Preferred Stock (the "PREFERRED SHARES"), par value $.01
per share, which shall have the following powers, designations, preferences and
other special rights:
(1) Dividends. The Preferred Shares shall not bear any dividends.
(2) Conversion of Preferred Shares. Preferred Shares shall be
convertible into shares of the Company's common stock, par value $.01 per share
(the "COMMON STOCK"), on the terms and conditions set forth in this Section 2.
(a) Certain Defined Terms. For purposes of this Certificate of
Designations, the following terms shall have the following meanings:
(i) "ACCRETION RATE" means, with respect to any Preferred
Share, 8.0%.
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(ii) "ADDITIONAL AMOUNT" means, on a per share basis, the
result of the following formula: (the Accretion Rate)(N/365)(the Stated Value
minus $2,500).
(iii) "BUSINESS DAY" means a day on which the Principal
Market or, if the Principal Market is not the principal trading market for the
Common Stock, the principal trading market for the Common Stock is open for
general trading of securities.
(iv) "CLOSING BID PRICE" means, for any security as of
any date, the last closing bid price for such security on the Principal Market
(as defined below) as reported by Bloomberg Financial Markets ("BLOOMBERG"), or,
if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price of such security on the
principal securities exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing do not apply, the last
closing bid price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
closing bid price is reported for such security by Bloomberg, the last closing
trade price of such security as reported by Bloomberg, or, if no last closing
trade price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as mutually determined by the Company and the holders of Preferred Shares. If
the Company and the holders of Preferred Shares are unable to agree upon the
fair market value of the Common Stock, then such dispute shall be resolved
pursuant to Section 2(d)(iii) below with the term "Closing Bid Price" being
substituted for the term "Market Price." All such determinations to be
appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period.
(v) "CLOSING SALE PRICE" means, for any security as of
any date, the last closing trade price for such security on the Principal Market
as reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last closing trade
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg, or if the
foregoing do not apply, the last closing trade price of such security in the
over-the-counter market on the electronic bulletin board for such security as
reported by Bloomberg, or, if no last closing trade price is reported for such
security by Bloomberg, the last closing ask price of such security as reported
by Bloomberg, or, if no last closing ask price is reported for such security by
Bloomberg, the average of the ask prices of any market makers for such security
as reported in the "pink sheets" by the National Quotation Bureau, Inc. If the
Closing Sale Price cannot be calculated for such security on such date on any of
the foregoing bases, the Closing Sale Price of such security on such date shall
be the fair market value as mutually determined by the Company and the holders
of Preferred Shares. If the Company and the holders of the Preferred Shares are
unable to agree upon the fair market value of the Common Stock, then such
dispute shall be resolved pursuant to Section 2(d)(iii) below with the term
"Closing Sale Price" being substituted for the term "Market Price". All such
determinations to be appropriately adjusted for any stock dividend, stock split
or other similar transaction during such period.
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(vi) "CONVERSION AMOUNT" means the sum of (A) the
Additional Amount and (B) the Stated Value.
(vii) "CONVERSION PRICE" means (A) as of any Conversion
Date (as defined in Section 2(d)) or other date of determination prior to May
13, 2002, the average of the Closing Bid Prices of the Common Stock on the
twenty (20) consecutive Business Days beginning on and including the first
Business Day after the date on which the Company files a Form 8-K or its Form
10-K with the Securities and Exchange Commission (the "SEC") describing the
terms of the transactions contemplated by the Exchange Agreement (as defined
below) in accordance with Section 4(h) of the Exchange Agreement, subject to
adjustment as provided herein, provided that in no event shall the Conversion
Price exceed $8.50 (subject to adjustment for stock splits, stock dividends,
stock combinations or other similar transactions) and (B) on and after May 13,
2002, the Market Price as of such date, each in effect as of such date and
subject to adjustment as provided herein.
(viii) "EXCHANGE AGREEMENT" means that certain exchange
agreement, dated April 5, 2000, between the Company and the initial holders of
the Preferred Shares.
(ix) "ISSUANCE DATE" means, with respect to each
Preferred Share, the date of issuance of the applicable Preferred Share.
(x) "MATURITY DATE" means May 13, 2002, subject to
extension as provided in Section 2(d)(vii).
(xi) "MARKET PRICE" means, with respect to any security
for any period, that price which shall be computed as the arithmetic average of
the Closing Bid Prices for such security on each of the 20 consecutive Business
Days immediately preceding such date of determination. All such determinations
to be appropriately adjusted for any stock dividend, stock split or other
similar transaction during such period.
(xii) "N" means the number of days from, but excluding,
the Issuance Date through and including the Conversion Date for the Preferred
Shares for which conversion is being elected or such other date with respect to
which this determination is being made.
(xiii) "PERSON" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
(xiv) "PRINCIPAL MARKET" means the Nasdaq National
Market.
(xv) "STATED VALUE" means the sum of (A) $12,500, plus
(B) the Additional Amount (as defined in the Series A Certificate of
Designations (as defined in the Exchange Agreement)) of the Series A Preferred
Share (as defined in the Exchange Agreement),
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which was exchanged for the Preferred Share pursuant to the Exchange Agreement,
immediately prior to such exchange on the Issuance Date of such Preferred Share.
(b) Holder's Conversion Right. Subject to the provisions of
Section 5, at any time or times on or after the Issuance Date, any holder of
Preferred Shares shall be entitled to convert any whole or fractional number of
Preferred Shares into fully paid and nonassessable shares of Common Stock in
accordance with Section 2(d) at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a share of Common Stock upon any
conversion. All shares of Common Stock (including fractions thereof) issuable
upon conversion of more than one Preferred Share by a holder thereof shall be
aggregated for purposes of determining whether the conversion would result in
the issuance of a fraction of a share of Common Stock. If, after the
aforementioned aggregation, the issuance would result in the issuance of a
fraction of a share of Common Stock, the Company shall round such fraction of a
share of Common Stock up or down to the nearest whole share.
(c) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each Preferred Share pursuant to Section 2(b) shall
be determined according to the following formula (the "CONVERSION RATE"):
Conversion Amount
-----------------
Conversion Price
(d) Mechanics of Conversion. The conversion of Preferred
Shares shall be conducted in the following manner:
(i) Holder's Delivery Requirements. To convert Preferred
Shares into shares of Common Stock on any date (the "CONVERSION DATE"), the
holder thereof shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m., Central Time on such date, a copy of a fully
executed notice of conversion in the form attached hereto as Exhibit I (the
"CONVERSION NOTICE") to the Company with a copy thereof to the Company's
designated transfer agent (the "TRANSFER AGENT") and (B) if required by Section
2(d)(viii), surrender to a common carrier for delivery to the Company as soon as
practicable, but in no event later the five (5) Business Days, following such
date the original certificates representing the Preferred Shares being converted
(or an indemnification undertaking with respect to such shares in the case of
their loss, theft or destruction) (the "PREFERRED STOCK CERTIFICATES").
(ii) Company's Response. Upon receipt by the Company of a
copy of a Conversion Notice, the Company, on or before the second Business Day
following the date of receipt (the "SHARE DELIVERY DATE"), (A) issue and deliver
to the address as specified in the Conversion Notice, a certificate, registered
in the name of the holder or its designee, for the number of shares of Common
Stock to which the holder shall be entitled, or (B) provided the Transfer Agent
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<PAGE> 5
is participating in The Depository Trust Company ("DTC") Fast Automated
Securities Transfer Program, upon the request of the holder, credit such
aggregate number of shares of Common Stock to which the holder shall be entitled
to the holder's or its designee's balance account with DTC through its Deposit
Withdrawal Agent Commission system. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) physically submitted for
conversion is greater than the number of Preferred Shares being converted, then
the Company shall, as soon as practicable and in no event later than five
Business Days after receipt of the Preferred Stock Certificate(s) (the
"PREFERRED STOCK DELIVERY DATE") and at its own expense, issue and deliver to
the holder a new Preferred Stock Certificate representing the number of
Preferred Shares not converted.
(iii) Dispute Resolution. In the case of a dispute as to
the determination of the Market Price or the arithmetic calculation of the
Conversion Rate, the Company shall instruct the Transfer Agent to issue to the
holder the number of shares of Common Stock that is not disputed and promptly
shall submit the disputed determinations or arithmetic calculations to the
holder via facsimile. If such holder and the Company are unable to agree upon
the determination of the Market Price or arithmetic calculation of the
Conversion Rate within one (1) Business Day of such disputed determination or
arithmetic calculation being submitted to the holder, then the Company promptly
shall submit via facsimile (A) the disputed determination of the Market Price to
an independent, reputable investment bank selected by the Company and approved
by the holders of a majority of the Preferred Shares then outstanding or (B) the
disputed arithmetic calculation of the Conversion Rate to the Company's
independent, outside accountant. The Company shall use its reasonable best
efforts to cause the investment bank or the accountant, as the case may be, to
perform the determinations or calculations and notify the Company and the holder
of the results no later than ten (10) Business Days from the time it receives
the disputed determinations or calculations. Such investment bank's or
accountant's determination or calculation, as the case may be, shall be binding
upon all parties absent manifest error.
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert.
(A) Cash Damages. If within five (5)
Business Days after the Company's receipt of the facsimile copy of a Conversion
Notice the Company shall fail to issue a certificate to a holder or credit such
holder's balance account with DTC for the number of shares of Common Stock to
which such holder is entitled upon such holder's conversion of Preferred Shares
or to issue a new Preferred Stock Certificate representing the number of
Preferred Shares to which such holder is entitled pursuant to Section 2(d)(ii),
in addition to all other available remedies which such holder may pursue
hereunder and under the Securities Purchase Agreement (including indemnification
pursuant to Section 8 thereof), the Company shall pay additional damages to such
holder for each date after the Share Delivery Date such conversion is not timely
effected and/or each date after the Preferred Stock Delivery Date such Preferred
Stock Certificate is not delivered in an amount equal to 0.5% of the product of
(I) the sum of the number of shares of Common Stock not issued to the holder on
or prior to the Share Delivery Date and to which such holder is entitled and, in
the event the Company has failed to deliver a
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<PAGE> 6
Preferred Stock Certificate to the holder on or prior to the Preferred Stock
Delivery Date, the number of shares of Common Stock issuable upon conversion of
the Preferred Shares represented by such Preferred Stock Certificate, as of the
Preferred Stock Delivery Date, and (II) the Closing Bid Price of the Common
Stock on the Share Delivery Date, in the case of the failure to deliver Common
Stock, or the Preferred Stock Delivery Date, in the case of failure to deliver a
Preferred Stock Certificate.
(B) Void Conversion Notice; Adjustment to
Conversion Price. If for any reason a holder has not received all of the shares
of Common Stock prior to the tenth (10th) Business Day after the Share Delivery
Date with respect to a conversion of Preferred Shares, then the holder, upon
written notice to the Company, with a copy to the Transfer Agent, may void its
Conversion Notice with respect to, and retain or have returned, as the case may
be, any Preferred Shares that have not been converted pursuant to such holder's
Conversion Notice; provided that the voiding of a holder's Conversion Notice
shall not affect the Company's obligations to make any payments which have
accrued prior to the date of such notice pursuant to Section 2(d)(v)(A) or
otherwise.
(C) Redemption. If for any reason, other
than a Force Majeure Event (as defined below) a holder has not received all of
the shares of Common Stock on or prior to the tenth (10th) Business Day after
the Share Delivery Date with respect to a conversion of Preferred Shares (a
"CONVERSION FAILURE"), then the holder, upon written notice to the Company, may
require that the Company redeem all Preferred Shares previously submitted for
conversion and with respect to which the Company has not delivered shares of
Common Stock, in accordance with Section 3; provided that no holder shall be
entitled to require the Company to redeem Preferred Shares pursuant to this
Section 2(d)(v)(C) to the extent the failure of the Company to deliver such
shares of Common Stock results from fire, flood, storm, earthquake, shipwreck,
strike, war, acts of terrorism, crash involving facilities of a common carrier,
act of God or any similar event outside the control of the Company (it being
understood that the actions or failure to act of the Transfer Agent shall not be
deemed an event outside the control of the Company except to the extent
resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of
terrorism, crash involving the facilities of a common carrier, acts of God, the
bankruptcy, liquidation or reorganization of the Transfer Agent under any
bankruptcy, insolvency or other similar law or any similar event outside the
control of the Transfer Agent) (a "FORCE MAJEURE EVENT").
(vi) Pro Rata Conversion and Redemption. In the event the
Company receives a Conversion Notice from more than one holder of Preferred
Shares for the same Conversion Date and the Company can convert some, but not
all, of such Preferred Shares, the Company shall convert from each holder of
Preferred Shares electing to have Preferred Shares converted at such time a pro
rata amount of such holder's Preferred Shares submitted for conversion based on
the number of Preferred Shares submitted for conversion on such date by such
holder relative to the number of Preferred Shares submitted for conversion on
such date.
(vii) Mandatory Conversion or Redemption at Maturity. If
any Preferred Shares remain outstanding on the Maturity Date, then all such
Preferred Shares, at the
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<PAGE> 7
Company's option, either (i) shall be converted as of such date in accordance
with this Section 2 as if the holders of such Preferred Shares had given the
Conversion Notice on the Maturity Date (a "MATURITY DATE MANDATORY CONVERSION")
or (ii) shall be redeemed as of such date for an amount in cash per Preferred
Share (the "MATURITY DATE REDEMPTION PRICE") equal to the Liquidation Preference
as of such date (a "MATURITY DATE MANDATORY REDEMPTION"); provided, however,
that if the Company has elected a Maturity Date Mandatory Conversion and a
Triggering Event has occurred and is continuing on the Maturity Date or any
event shall have occurred and be continuing on the Maturity Date which solely
with the passage of time and the failure to cure would result in a Triggering
Event, then the Company shall, within 30 Business Days following the Maturity
Date (unless otherwise notified in writing by the holder of its request to have
the Preferred Shares converted into Common Stock), pay to each holder of
Preferred Shares then outstanding, in immediately available funds, an amount
equal to the Maturity Date Redemption Price. The Company shall be deemed to have
elected a Maturity Date Mandatory Redemption unless it delivers written notice
to each holder of Preferred Shares at least 30 Business Days prior to the
Maturity Date of its election to effect a Maturity Date Mandatory Conversion. If
the Company elects a Maturity Date Mandatory Redemption, then on the Maturity
Date the Company shall pay to each holder of Preferred Shares outstanding on the
Maturity Date, by wire transfer of immediately available funds, an amount per
Preferred Share equal to the Maturity Date Redemption Price. All holders of
Preferred Shares shall thereupon surrender all Preferred Stock Certificates,
duly endorsed for cancellation, to the Company, provided that the Company has
complied with its obligations under this Section 2(d)(vii). Notwithstanding the
foregoing, if the Company has elected a Maturity Date Mandatory Conversion,
then, if applicable, the Maturity Date shall be extended for any Preferred
Shares for as long as the conversion of such Preferred Shares would violate the
provisions of Section 5; provided that the holder of such Preferred Shares shall
use its reasonable best efforts after May 13, 2002 to convert and sell shares of
Common Stock in such a manner so as to permit the conversion of all Preferred
Shares held by such holder as soon as practicable after such date.
(viii) Book-Entry. Notwithstanding anything to the
contrary set forth herein, upon conversion of Preferred Shares in accordance
with the terms hereof, the holder thereof shall not be required to physically
surrender the certificate representing the Preferred Shares to the Company
unless the full number of Preferred Shares represented by the certificate are
being converted. The holder and the Company shall maintain records showing the
number of Preferred Shares so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the holder and the
Company, so as not to require physical surrender of the certificate representing
the Preferred Shares upon each such conversion. In the event of any dispute or
discrepancy, such records of the Company shall be controlling and determinative
in the absence of manifest error. Notwithstanding the foregoing, if Preferred
Shares represented by a certificate are converted as aforesaid, the holder may
not transfer the certificate representing the Preferred Shares unless the holder
first physically surrenders the certificate representing the Preferred Shares to
the Company, whereupon the Company will forthwith issue and deliver upon the
order of the holder a new certificate of like tenor, registered as the holder
may request, representing in the aggregate the remaining number of Preferred
Shares represented by such certificate. The holder and any assignee, by
acceptance of a certificate, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of any Preferred Shares,
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<PAGE> 8
the number of Preferred Shares represented by such certificate may be less than
the number of Preferred Shares stated on the face thereof. Each certificate for
Preferred Shares shall bear the following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE
TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF THE PREFERRED SHARES REPRESENTED BY THIS
CERTIFICATE, INCLUDING SECTION 2(d)(viii) THEREOF. THE NUMBER OF
PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS
THAN THE NUMBER OF PREFERRED SHARES STATED ON THE FACE HEREOF
PURSUANT TO SECTION 2(d)(viii) OF THE CERTIFICATE OF
DESIGNATIONS, PREFERENCES AND RIGHTS.
(e) Taxes. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Common Stock upon the
conversion of Preferred Shares.
(f) Adjustments to Conversion Price -- Dilution and Other
Events. The Conversion Price will be subject to adjustment from time to time as
provided in this Section 2(f).
(i) Adjustment of Conversion Price upon Issuance of
Common Stock. If and whenever on or after the Issuance Date, the Company issues
or sells, or in accordance with this Section 2(f) is deemed to have issued or
sold, any shares of Common Stock (including the issuance or sale of shares of
Common Stock owned or held by or for the account of the Company, but excluding
shares of Common Stock deemed to have been issued by the Company in connection
with an Approved Stock Plan (as defined below) or Excluded Securities (as
defined below) or upon conversion of the Preferred Shares or exercise of the
Series A Warrants (as defined in the Exchange Agreement)) for a consideration
per share less than a price (the "APPLICABLE PRICE") equal to the Closing Sale
Price of the Common Stock on the date of such issue or sale, then immediately
after such issue or sale, the Conversion Price then in effect shall be reduced
to an amount equal to the product of (x) the Conversion Price in effect
immediately prior to such issuance, and (y) the quotient of (1) the sum of (I)
the product of the Applicable Price multiplied by the number of shares of Common
Stock Deemed Outstanding (as defined below) immediately prior to such issue or
sale and (II) the consideration, if any, received by the Company upon such issue
or sale, divided by (2) the product of (I) the Applicable Price multiplied by
(II) the number of shares of Common Stock Deemed Outstanding immediately after
such issue or sale. Notwithstanding anything to the contrary in this Section
2(f)(i), no adjustment to the Conversion Price shall be required to be made
pursuant to this Section 2(f)(i) unless such adjustment would result in a
decrease in the Conversion Price of at least 2.5% of the Conversion Price on May
6, 2000; provided that any adjustments which by reason of this sentence are not
required to be made at a certain time shall be carried forward and taken into
account and applied
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<PAGE> 9
in any subsequent adjustment. For purposes of determining the adjusted
Conversion Price, under this Section 2(f)(i), the following shall be applicable:
(A) Issuance of Options. If the Company in
any manner grants or sells any Options and the lowest price per share for which
one share of Common Stock is issuable upon the exercise of any such Option or
upon conversion or exchange of any Convertible Securities issuable upon exercise
of such Option is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per
share. For purposes of this Section 2(f)(i)(A), the "lowest price per share for
which one share of Common Stock is issuable upon the exercise of any such Option
or upon conversion or exchange of any Convertible Securities issuable upon
exercise of such Option" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon granting or sale of the Option, upon exercise of
the Option and upon conversion or exchange of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Conversion Price
shall be made upon the actual issuance of such Common Stock or of such
Convertible Securities upon the exercise of such Options or upon the actual
issuance of such Common Stock upon conversion or exchange of such Convertible
Securities. Notwithstanding the foregoing, no adjustment shall be made pursuant
to this Section 2(f)(i)(A) to the extent that such adjustment is based solely on
the fact that the Convertible Securities issuable upon exercise of such Option
are convertible into or exchangeable for Common Stock at a price which varies
with the market price of the Common Stock.
(B) Issuance of Convertible Securities. If
the Company in any manner issues or sells any Convertible Securities and the
lowest price per share for which one share of Common Stock is issuable upon such
conversion or exchange thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the issuance of sale of such Convertible
Securities for such price per share. For the purposes of this Section
2(f)(i)(B), the "price per share for which one share of Common Stock is issuable
upon such conversion or exchange" shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the issuance or sale of the
Convertible Security and upon the conversion or exchange of such Convertible
Security. No further adjustment of the Conversion Price shall be made upon the
actual issuance of such Common Stock upon conversion or exchange of such
Convertible Securities, and if any such issue or sale of such Convertible
Securities is made upon exercise of any Options for which adjustment of the
Conversion Price, as applicable, had been or are to be made pursuant to other
provisions of this Section 2(f)(i), no further adjustment of the Conversion
Price shall be made by reason of such issue or sale. Notwithstanding the
foregoing, no adjustment shall be made pursuant to this Section 2(f)(i)(B) to
the extent that such adjustment is based solely on the fact that such
Convertible Securities are convertible into or exchangeable for Common Stock at
a price which varies with the market price of the Common Stock.
(C) Change in Option Price or Rate of
Conversion. If the purchase price provided for in any Options, the additional
consideration, if any, payable upon the
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<PAGE> 10
issue, conversion or exchange of any Convertible Securities, or the rate at
which any Convertible Securities are convertible into or exchangeable for Common
Stock changes at any time, the Conversion Price in effect at the time of such
change shall be adjusted to the Fixed Conversion Price and/or the Initial Fixed
Conversion Price, as applicable, which would have been in effect at such time
had such Options or Convertible Securities provided for such changed purchase
price, additional consideration or changed conversion rate, as the case may be,
at the time initially granted, issued or sold. For purposes of this Section
2(f)(i)(C), if the terms of any Option or Convertible Security that was
outstanding as of the date of issuance of the Preferred Shares are changed in
the manner described in the immediately preceding sentence, then such Option or
Convertible Security and the Common Stock deemed issuable upon exercise,
conversion or exchange thereof shall be deemed to have been issued as of the
date of such change. No adjustment shall be made if such adjustment would result
in an increase of the Conversion Price then in effect.
(D) Calculation of Consideration Received.
In case any Option is issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated transaction in
which no specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a consideration of
$.01. If any Common Stock, Options or Convertible Securities are issued or sold
or deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company therefor.
If any Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company will be the Market Price of such
securities on the date of receipt. If any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the holders of a majority of the Preferred Shares
then outstanding. If such parties are unable to reach agreement within 10 days
after the occurrence of an event requiring valuation (the "VALUATION EVENT"),
the fair value of such consideration will be determined within five Business
Days after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the holders of a
majority of the Preferred Shares then outstanding. The determination of such
appraiser shall be deemed binding upon all parties absent manifest error and the
fees and expenses of such appraiser shall be borne by the Company.
(E) Record Date. If the Company takes a
record of the holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (2) to subscribe for or purchase Common Stock, Options
or Convertible Securities, then such record date will be deemed to be the date
of the issue or sale of the shares of Common Stock deemed to have been
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<PAGE> 11
issued or sold upon the declaration of such dividend or the making of such other
distribution or the date of the granting of such right of subscription or
purchase, as the case may be.
(F) Certain Definitions. For purposes of
this Section 2(f)(i), the following terms have the respective meanings set forth
below:
(I) "APPROVED STOCK PLAN" shall mean
any employee benefit plan which has been approved, or after the Issuance Date is
approved, by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, officer, director or
consultant for services provided to the Company.
(II) "COMMON STOCK DEEMED OUTSTANDING"
means, at any given time, the number of shares of Common Stock actually
outstanding at such time, plus the number of shares of Common Stock issuable
upon conversion or exercise of outstanding Options and Convertible Securities
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock owned or held
by or for the account of the Company.
(III) "OPTIONS" means any rights,
warrants or options to subscribe for or purchase Common Stock or Convertible
Securities.
(IV) "CONVERTIBLE SECURITIES" means
any stock or securities (other than Options) directly or indirectly convertible
into or exchangeable for Common Stock. (V) "EXCLUDED SECURITIES" means any of
the following (a) any issuance by the Company of securities in connection with a
strategic partnership or joint venture (the primary purpose of which is not to
raise equity capital), (b) shares of Common Stock issued by the Company in a
firm commitment, underwritten public offering and (c) any issuance by the
Company of securities as consideration for a merger or consolidation or the
acquisition of a business, product, license or other assets of another person or
entity.
(ii) Adjustment of Conversion Price upon Subdivision or
Combination of Common Stock. If the Company at any time subdivides (by any stock
split, stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the
Conversion Price in effect immediately prior to such subdivision will be
proportionately reduced. If the Company at any time combines (by combination,
reverse stock split or otherwise) one or more classes of its outstanding shares
of Common Stock into a smaller number of shares, the Conversion Price in effect
immediately prior to such combination will be proportionately increased.
(iii) Other Events. If any event occurs of the type
contemplated by the provisions of this Section 2(f) but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company's Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Preferred
Shares; provided
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<PAGE> 12
that no such adjustment will increase the Conversion Price as otherwise
determined pursuant to this Section 2(f).
(v) Notices.
(A) Promptly after any adjustment of the
Conversion Price, the Company will give written notice thereof to each holder of
Preferred Shares, setting forth in reasonable detail, and certifying, the
calculation of such adjustment.
(B) The Company will give written notice
to each holder of Preferred Shares at least ten (10) days prior to the date on
which the Company closes its books or takes a record (I) with respect to any
dividend or distribution upon the Common Stock, (II) with respect to any pro
rata subscription offer to holders of Common Stock or (III) for determining
rights to vote with respect to any Organic Change, dissolution or liquidation,
provided that such information shall be made known to the public prior to or in
conjunction with such notice being provided to such holder; provided that if
such information has not been made known to the public and in the good faith
opinion of the Board of Directors of the Company it is not in the best interest
of the Company to disclose such information, then the Company shall not be
required to give the notice provided for in this Section 2(f)(v)(B) until the
earlier of the date on which the Company publicly releases such information and
the date on which the Board of Directors no longer believes that in the good
faith opinion of the Board of Directors such information should not be
disclosed.
(C) The Company will also give written
notice to each holder of Preferred Shares at least ten (10) days prior to the
date on which any Organic Change, dissolution or liquidation will take place,
provided that such information shall be made known to the public prior to or in
conjunction with such notice being provided to such holder; provided that if
such information has not been made known to the public and in the good faith
opinion of the Board of Directors of the Company it is not in the best interest
of the Company to disclose such information, then the Company shall not be
required to give the notice provided for in this Section 2(f)(v)(C) until the
earlier of the date on which the Company publicly releases such information and
the date on which the Board of Directors no longer believes that in the good
faith opinion of the Board of Directors such information should not be
disclosed.
(3) Redemption at Option of Holders.
(a) Redemption Option Upon Triggering Event. In addition to
all other rights of the holders of Preferred Shares contained herein, after
a Triggering Event (as defined below), each holder of Preferred Shares shall
have the right, at such holder's option, to require the Company to redeem
all or a portion of such holder's Preferred Shares at a price per Preferred
Share equal to (I) in the case of a Triggering Event under subparagraphs (i)
or (ii) of Section 3(b), the sum of (w) 100% of the Stated Value, plus (x)
the Additional Amount for such Preferred Share, and (II) in the case of a
Triggering Event under subparagraph (iii), the greater of (i) the sum of (y)
100% of the Stated Value, plus (z) the Additional Amount for such Preferred
Share, and (ii) the product of (A) the
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<PAGE> 13
Conversion Rate in effect at such time as such holder delivers a Notice of
Redemption at Option of Buyer (as defined below) and (B) the Closing Bid
Price of the Common Stock on the date immediately preceding such Triggering
Event on which the Principal Market, or the market or exchange where the
Common Stock is then traded, is open for trading ("REDEMPTION PRICE").
(b) "Triggering Event". A "TRIGGERING EVENT" shall be deemed
to have occurred at such time as any of the following events:
(i) prior to May 13, 2001, on any day there shall not be
available adequate current public information with respect to the Company as
determined in accordance with Rule 144(c) under the Securities Act of 1933, as
amended, or any successor rule thereto;
(ii) the suspension from trading or failure of the Common
Stock to be listed on the Nasdaq National Market, The Nasdaq SmallCap Market,
The New York Stock Exchange, Inc. or The American Stock Exchange, Inc. for a
period of 10 consecutive Business Days or for more than an aggregate of 20
Business Days in any 365-day period; or
(iii) a Conversion Failure (as defined in Section
2(d)(v)(C)), provided that such Conversion Failure shall only constitute a
Triggering Event with respect to the Preferred Shares submitted for conversion.
(c) Mechanics of Redemption at Option of Buyer. Within one (1)
Business Day after the occurrence of a Triggering Event, the Company shall
deliver written notice thereof via facsimile ("NOTICE OF TRIGGERING EVENT")
to each holder of Preferred Shares. At any time (i) after the earlier of a
holder's receipt of a Notice of Triggering Event and such holder becoming
aware of a Triggering Event, but (ii) prior to the later of (A) the date
which is 15 days after such holder's receipt of the Notice of Triggering
Event and (B) such holder's receipt of written notice from the Company that
such Triggering Event has been cured, any holder of Preferred Shares then
outstanding may require the Company to redeem all of the Preferred Shares by
delivering written notice thereof via facsimile ("NOTICE OF REDEMPTION AT
OPTION OF BUYER") to the Company, which Notice of Redemption at Option of
Buyer shall indicate (i) the number of Preferred Shares that such holder is
electing to redeem and (ii) the applicable Redemption Price, as calculated
pursuant to Section 3(a) above.
(d) Payment of Redemption Price. Upon the Company's receipt of
a Notice(s) of Redemption at Option of Buyer from any holder of Preferred
Shares, the Company shall immediately notify each holder of Preferred Shares
by facsimile of the Company's receipt of such notices and each holder which
has sent such a notice shall promptly submit to the Transfer Agent such
holder's Preferred Stock Certificates which such holder has elected to have
redeemed. The Company shall deliver the applicable Redemption Price to such
holder within 20 Business Days after the Company's receipt of a Notice of
Redemption at Option of Buyer; provided that a holder's Preferred Stock
Certificates shall have been so delivered to the Transfer Agent. If the
Company is unable
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<PAGE> 14
to redeem all of the Preferred Shares submitted for redemption, the Company
shall (i) redeem a pro rata amount from each holder of Preferred Shares
based on the number of Preferred Shares submitted for redemption by such
holder relative to the total number of Preferred Shares submitted for
redemption by all holders of Preferred Shares and (ii) in addition to any
remedy such holder of Preferred Shares may have under this Certificate of
Designations and the Exchange Agreement, pay to each holder interest at the
rate of 1.5% per month (prorated for partial months) in respect of each
unredeemed Preferred Share until paid in full.
(e) Void Redemption. In the event that the Company does not
pay the Redemption Price within the time period set forth in Section 3(d),
at any time thereafter and until the Company pays such unpaid applicable
Redemption Price in full, a holder of Preferred Shares shall have the option
(the "VOID OPTIONAL REDEMPTION OPTION") to, in lieu of redemption, require
the Company to promptly return to such holder any or all of the Preferred
Shares that were submitted for redemption by such holder under this Section
3 and for which the applicable Redemption Price (together with any interest
thereon) has not been paid, by sending written notice thereof to the Company
via facsimile (the "VOID OPTIONAL REDEMPTION NOTICE"). Upon the Company's
receipt of such Void Optional Redemption Notice, (i) the Notice of
Redemption at Option of Buyer shall be null and void with respect to those
Preferred Shares subject to the Void Optional Redemption Notice and (ii) the
Company shall immediately return any Preferred Shares subject to the Void
Optional Redemption Notice.
(f) Disputes; Miscellaneous. In the event of a dispute as to
the determination of the Closing Bid Price or the arithmetic calculation of
the Redemption Price, such dispute shall be resolved pursuant to Section
2(d)(iii) above with the term "Closing Bid Price" being substituted for the
term "Market Price" and the term "Redemption Price" being substituted for
the term "Conversion Rate". A holder's delivery of a Void Optional
Redemption Notice and exercise of its rights following such notice shall not
effect the Company's obligations to make any payments which have accrued
prior to the date of such notice. In the event of a redemption pursuant to
this Section 3 of less than all of the Preferred Shares represented by a
particular Preferred Stock Certificate, the Company shall promptly cause to
be issued and delivered to the holder of such Preferred Shares a preferred
stock certificate representing the remaining Preferred Shares which have not
been redeemed.
(4) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or substantially all of the Company's assets to another
Person or other transaction which is effected in such a way that holders of
Common Stock are entitled to receive (either directly or upon subsequent
liquidation) stock, securities or assets with respect to or in exchange for
Common Stock (other than pursuant to the JFAX.COM Merger (as defined in Section
6) provided that the Company has complied with the material provisions of this
Certificate of Designations and the Exchange Agreement, including without
limitations, Section 4(p) of the Exchange Agreement) is referred to herein as
"ORGANIC CHANGE." Prior to the consummation of any (i) sale of all or
substantially
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<PAGE> 15
all of the Company's assets to an acquiring Person or (ii) other Organic Change
following which the Company is not a surviving entity, the Company will secure
from the Person purchasing such assets or the successor resulting from such
Organic Change (in each case, the "ACQUIRING ENTITY") a written agreement (in
form and substance reasonably satisfactory to the holders of a majority of the
Preferred Shares then outstanding) to deliver to each holder of Preferred Shares
in exchange for such shares, a security of the Acquiring Entity evidenced by a
written instrument substantially similar in form and substance to the Preferred
Shares, including, without limitation, having a stated value and liquidation
preference equal to the Stated Value and the Liquidation Preference of the
Preferred Shares held by such holder, and reasonably satisfactory to the holders
of a majority of the Preferred Shares then outstanding. Prior to the
consummation of any other Organic Change, the Company shall make appropriate
provision (in form and substance reasonably satisfactory to the holders of a
majority of the Preferred Shares then outstanding) to insure that each of the
holders of the Preferred Shares will thereafter have the right to acquire and
receive in lieu of or in addition to (as the case may be) the shares of Common
Stock immediately theretofore acquirable and receivable upon the conversion of
such holder's Preferred Shares such shares of stock, securities or assets that
would have been issued or payable in such Organic Change with respect to or in
exchange for the number of shares of Common Stock which would have been
acquirable and receivable upon the conversion of such holder's Preferred Shares
as of the date of such Organic Change (without taking into account any
limitations or restrictions on the convertibility of the Preferred Shares).
(5) Limitations on Conversion. The Company shall not effect any
conversion of Preferred Shares and no holder of Preferred Shares shall have the
right to convert any Preferred Shares pursuant to Section 2(b) to the extent
that after giving effect to such conversion such Person (together with such
Person's affiliates) (A) would beneficially own in excess of 10.00% of the
outstanding shares of the Common Stock following such conversion or (B) would
have acquired, through conversion of Preferred Shares or otherwise, in excess of
10.00% of the outstanding shares of the Common Stock following such conversion
during the 60-day period ending on and including such Conversion Date (as
defined below). For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by a Person and its affiliates or acquired by a
Person and its affiliates, as the case may be, shall include the number of
shares of Common Stock issuable upon conversion of the Preferred Shares with
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of Common Stock which would be issuable upon (i)
conversion of the remaining, nonconverted Preferred Shares beneficially owned by
such Person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
(including, without limitation, the Warrants) subject to a limitation on
conversion or exercise analogous to the limitation contained herein beneficially
owned by such Person and its affiliates. Except as set forth in the preceding
sentence, for purposes of this Section 5(a), beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended. For purposes of this Section 5, in determining the number of
outstanding shares of Common Stock a holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) the Company's most recent
Form 10-Q or Form 10-K, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or its
transfer agent setting forth the number of shares of Common Stock outstanding.
For any reason at any time, upon the
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<PAGE> 16
written or oral request of any a holder, the Company shall within two (2)
Business Days confirm orally and in writing to any such holder the number of
shares Common Stock then outstanding. In any case, the number of outstanding
shares of Common Stock shall be determined after giving effect to the conversion
of Preferred Shares by such holder since the date as of which such number of
outstanding shares of Common Stock was reported.
(6) Conversion at the Company's Election. Subject to Section 5 and
Section 14, at any time prior to November 30, 2000, the Company shall have the
right, in its sole discretion, to require that any or all of such outstanding
Preferred Shares be converted into shares of Common Stock ("CONVERSION AT
COMPANY'S ELECTION") at the Conversion Rate concurrent with the consummation of
a merger of the Company into JFAX.COM or an affiliate of JFAX.COM on
substantially the same terms as described in the Disclosed Information (as
defined in the Exchange Agreement) (the "JFAX.COM MERGER"); provided that the
Conditions to Conversion at the Company's Election (as set forth below) are
satisfied. The Company shall exercise its right to Conversion at Company's
Election by providing each holder of Preferred Shares written notice by
facsimile ("NOTICE OF CONVERSION AT COMPANY'S ELECTION") by 5:00 p.m., Central
Time, on the date which is at least three (3) Business Days, but not more than
five (5) Business Days prior to the closing date of the JFAX.COM Merger
("COMPANY'S ELECTION CONVERSION DATE"). If the Company elects to require
conversion of some, but not all, of such Preferred Shares, the Company shall
convert an amount from each holder of Preferred Shares equal to such holder's
pro rata amount (based on the number of such Preferred Shares held by such
holder relative to the number of such Preferred Shares outstanding on the
Company's Election Conversion Date) of all Preferred Shares the Company is
requiring to be converted. The Notice of Conversion at Company's Election shall
indicate (x) the number of Preferred Shares the Company has selected for
conversion, (y) confirmation of the Company's Election Conversion Date, which
date shall be on the same date as the closing of the JFAX.COM Merger at least
three (3) Business Days, but not more than five (5) Business Days after the
receipt by each holder of Preferred Shares of the Notice of Conversion at
Company's Election, and (z) each holder's pro rata share of outstanding
Preferred Shares. All Preferred Shares selected for conversion in accordance
with the provisions of this Section 6 shall be converted concurrent with the
closing of the JFAX.COM Merger on the Company's Election Conversion Date in
accordance with Section 2 as if the holders of such Preferred Shares selected by
the Company to be converted had given the Conversion Notice on the Company's
Election Conversion Date. All holders of Preferred Shares shall thereupon
surrender all Preferred Stock Certificates selected for conversion, duly
endorsed for cancellation, to the Company. "CONDITIONS TO CONVERSION AT THE
COMPANY'S ELECTION" means the following conditions: the Company has satisfied
its obligations in all material respects and is not in default in any material
respect under this Certificate of Designations, the Exchange Agreement and the
Series A Warrants. Notwithstanding the above, any holder of Preferred Shares may
convert such shares (including Preferred Shares selected for conversion) into
Common Stock pursuant to Section 2(b) on or prior to the date immediately
preceding the Company's Election Conversion Date.
(7) Purchase Rights. If at any time the Company grants, issues or
sells any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "PURCHASE RIGHTS"), then the
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<PAGE> 17
holders of Preferred Shares then outstanding will be entitled to acquire, upon
the terms applicable to such Purchase Rights, the aggregate Purchase Rights
which such holder could have acquired if such holder had held the number of
shares of Common Stock acquirable upon complete conversion of the Preferred
Shares (without taking into account any limitations or restrictions on the
convertibility of the Preferred Shares) immediately before the date on which a
record is taken for the grant, issuance or sale of such Purchase Rights, or, if
no such record is taken, the date as of which the record holders of Common Stock
are to be determined for the grant, issue or sale of such Purchase Rights.
(8) Reservation of Shares; Authorized Shares.
(a) Reservation. The Company shall, so long as any of the
Preferred Shares are outstanding, take all action necessary to reserve and
keep available out of its authorized and unissued Common Stock, solely for
the purpose of effecting the conversion of the Preferred Shares, such number
of shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all of the Preferred Shares then outstanding (without
regard to any limitations on conversions) (the "REQUIRED RESERVE AMOUNT").
The initial number of shares of Common Stock reserved for conversions of the
Preferred Shares and each increase in the number of shares so reserved shall
be allocated pro rata among the holders of the Preferred Shares based on the
number of Preferred Shares held by each holder at the time of issuance of
the Preferred Shares or increase in the number of reserved shares, as the
case may be. In the event a holder shall sell or otherwise transfer any of
such holder's Preferred Shares, each transferee shall be allocated a pro
rata portion of the number of reserved shares of Common Stock reserved for
such transferor. Any shares of Common Stock reserved and allocated to any
Person which ceases to hold any Preferred Shares shall be allocated to the
remaining holders of Preferred Shares, pro rata based on the number of
Preferred Shares then held by such holders.
(b) Insufficient Authorized Shares. If at any time while any
of the Preferred Shares remain outstanding the Company does not have a
sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon conversion of the
Preferred Shares at least a number of shares of Common Stock equal to the
Required Reserve Amount (an "AUTHORIZED SHARE FAILURE"), then the Company
shall immediately take all action necessary to increase the Company's
authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Preferred Shares then
outstanding. Without limiting the generality of the foregoing sentence, as
soon as practicable after the date of the occurrence of an Authorized Share
Failure, but in no event later than 75 days after the occurrence of such
Authorized Share Failure, the Company shall hold a meeting of its
stockholders for the authorization of an increase in the number of
authorized shares of Common Stock. In connection with such meeting, the
Company shall provide each stockholder with a proxy statement and shall use
its best efforts to solicit its stockholders' approval of such increase in
authorized shares of Common Stock and to cause its board of directors to
recommend to the stockholders that they approve such proposal.
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<PAGE> 18
(9) Voting Rights. Holders of Preferred Shares shall have no
voting rights, except as required by law, including but not limited to the
General Corporation Law of the State of Delaware, and as expressly provided in
this Certificate of Designations.
(10) Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of the Preferred Shares shall be entitled to receive in cash out of
the assets of the Company, whether from capital or from earnings available for
distribution to its stockholders (the "LIQUIDATION FUNDS"), before any amount
shall be paid to the holders of any of the capital stock of the Company of any
class junior in rank to the Preferred Shares in respect of the preferences as to
the distributions and payments on the liquidation, dissolution and winding up of
the Company, an amount per Preferred Share equal to the sum of (i) the Stated
Value and (ii) the Additional Amount for such Preferred Share (such sum being
referred to as the "LIQUIDATION PREFERENCE"); provided that, if the Liquidation
Funds are insufficient to pay the full amount due to the holders of Preferred
Shares and holders of shares of other classes or series of preferred stock of
the Company that are of equal rank with the Preferred Shares as to payments of
Liquidation Funds (the "PARI PASSU SHARES"), then each holder of Preferred
Shares and Pari Passu Shares shall receive a percentage of the Liquidation Funds
equal to the full amount of Liquidation Funds payable to such holder as a
liquidation preference, in accordance with their respective Certificate of
Designations, Preferences and Rights, as a percentage of the full amount of
Liquidation Funds payable to all holders of Preferred Shares and Pari Passu
Shares. The purchase or redemption by the Company of stock of any class, in any
manner permitted by law, shall not, for the purposes hereof, be regarded as a
liquidation, dissolution or winding up of the Company. Neither the consolidation
or merger of the Company with or into any other Person, nor the sale or transfer
by the Company of less than substantially all of its assets, shall, for the
purposes hereof, be deemed to be a liquidation, dissolution or winding up of the
Company. No holder of Preferred Shares shall be entitled to receive any amounts
with respect thereto upon any liquidation, dissolution or winding up of the
Company other than the amounts provided for herein; provided that a holder of
Preferred Shares shall be entitled to all amounts previously accrued with
respect to amounts owed hereunder.
(11) Preferred Rank. All shares of Common Stock shall be of junior
rank to all Preferred Shares in respect to the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the Company.
The rights of the shares of Common Stock shall be subject to the preferences and
relative rights of the Preferred Shares. Without the prior express written
consent of the holders of not less than two-thirds (2/3) of the then outstanding
Preferred Shares, the Company shall not hereafter authorize or issue additional
or other capital stock that is of senior rank to the Preferred Shares in respect
of the preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Company. Without the prior express written
consent of the holders of not less than two-thirds (2/3) of the then outstanding
Preferred Shares, the Company shall not hereafter authorize or make any
amendment to the Company's Certificate of Incorporation or bylaws, or file any
resolution of the board of directors of the Company with the Secretary of State
of the State of Delaware or enter into any agreement containing any provisions,
which would adversely affect or otherwise impair the rights or relative priority
of the holders of the Preferred Shares relative to the holders of the Common
Stock or the holders of any other class of capital stock.
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<PAGE> 19
(12) Participation. The holders of the Preferred Shares shall, as
holders of Preferred Stock, be entitled to such dividends paid and distributions
made to the holders of Common Stock to the same extent as if such holders of
Preferred Shares had converted the Preferred Shares into Common Stock (without
regard to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and distributions.
Payments under the preceding sentence shall be made concurrently with the
dividend or distribution to the holders of Common Stock.
(13) Restriction on Redemption and Cash Dividends. Until all of
the Preferred Shares have been converted or redeemed as provided herein, the
Company shall not, directly or indirectly, declare or pay any cash dividend or
distribution on, its Common Stock without the prior express written consent of
the holders of not less than two-thirds (2/3) of the then outstanding Preferred
Shares. Until all of the Preferred Shares have been converted or redeemed as
provided herein, the Company shall not, directly or indirectly, redeem, purchase
or buy-back any of its Common Stock unless at least 10 Business Days prior to
the first such redemption, purchase or buy-back the Company offers in writing
each holder of Preferred Shares the right to require the Company to redeem up to
a number of Preferred Shares equal to such holder's pro rata amount (based on
the number of Preferred Shares then outstanding) of a number of Preferred Shares
having an aggregate Stated Value equal to the dollar amount of shares of Common
Stock redeemed, purchased or bought-back by the Company. Redemption of Preferred
Shares pursuant to the immediately preceding sentence shall be at a price equal
to the Liquidation Preference (as defined in Section 10) of such Preferred
Shares.
(14) Limitation on Number of Conversion Shares. The Company shall
not be obligated to issue any shares of Common Stock upon conversion of the
Preferred Shares if the issuance of such shares of Common Stock would exceed
that number of shares of Common Stock which the Company may issue upon
Conversion of the Preferred Shares (the "EXCHANGE CAP") without breaching the
Company's obligations under the rules or regulations of the Principal Market, or
the market or exchange where the Common Stock is then traded, except that such
limitation shall not apply in the event that the Company (a) obtains the
approval of its stockholders as required by the applicable rules of the
Principal Market, or the market or exchange where the Common Stock is then
traded, (or any successor rule or regulation) for issuances of Common Stock in
excess of such amount or (b) obtains a written opinion from outside counsel to
the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the holders of a majority of the Preferred Shares
then outstanding. Until such approval or written opinion is obtained, no
purchaser of Preferred Shares pursuant to the Securities Purchase Agreement (the
"PURCHASERS") shall be issued, upon conversion of Preferred Shares, shares of
Common Stock in an amount greater than the product of (i) the Exchange Cap
amount multiplied by (ii) a fraction, the numerator of which is the number of
Preferred Shares issued to such Purchaser pursuant to the Securities Purchase
Agreement and the denominator of which is the aggregate amount of all the
Preferred Shares issued to the Purchasers pursuant to the Securities Purchase
Agreement (the "CAP ALLOCATION AMOUNT"). In the event that any Purchaser shall
sell or otherwise transfer any of such Purchaser's Preferred Shares, the
transferee shall be allocated a pro rata portion of such Purchaser's Cap
Allocation Amount. In the event that any holder of Preferred Shares shall
convert all of such holder's Preferred Shares into a number of shares of
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<PAGE> 20
Common Stock which, in the aggregate, is less than such holder's Cap Allocation
Amount, then the difference between such holder's Cap Allocation Amount and the
number of shares of Common Stock actually issued to such holder shall be
allocated to the respective Cap Allocation Amounts of the remaining holders of
Preferred Shares on a pro rata basis in proportion to the number of Preferred
Shares then held by each such holder.
(15) Vote to Change the Terms of Preferred Shares. The affirmative
vote at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of not less than two-thirds (2/3) of the then
outstanding Preferred Shares, shall be required for any change to this
Certificate of Designations or the Company's Certificate of Incorporation which
would amend, alter, change or repeal any of the powers, designations,
preferences and rights of the Preferred Shares.
(16) Lost or Stolen Certificates. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the holder to the Company in customary form and, in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall not
be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares into
Common Stock.
(17) Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Certificate of Designations
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as
expressly provided herein. Amounts set forth or provided for herein with respect
to payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of the
Preferred Shares and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, the holders of the Preferred Shares shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.
(18) Specific Shall Not Limit General; Construction. No specific
provision contained in this Certificate of Designations shall limit or modify
any more general provision
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<PAGE> 21
contained herein. This Certificate of Designations shall be deemed to be jointly
drafted by the Company and all Buyers and shall not be construed against any
person as the drafter hereof.
(19) Failure or Indulgence Not Waiver. No failure or delay on the
part of a holder of Preferred Shares in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
(20) Restriction on Transfer of Preferred Shares. In addition to
an restrictions on transfer in the Exchange Agreement, no holder of Preferred
Shares may transfer such Preferred Shares except to a Permitted Transferee (as
defined below) or with the prior consent of the Company, which consent shall not
be unreasonably withheld, to a person which is not a Permitted Transferee.
Notwithstanding anything to the contrary contained in this Section 20, a holder
of Preferred Shares shall be entitled to pledge such Preferred Shares in
connection with a bona fide margin account or other loan secured by such
Preferred Shares. For purposes of this Section 20, a "PERMITTED TRANSFEREE"
shall mean (i) an Investor (as defined in the Exchange Agreement), (ii) an
Affiliate (as that term is defined in Rule 501(b) under the 1933 act) of an
Investor, (iii) any holder of Preferred Shares or Series A Warrants and (iv) any
Affiliate of a holder of Preferred Shares or Series A Warrants.
* * * * * * *
-21-
<PAGE> 22
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by Michael M. Crandell, its Executive VP and Chief
Technology Officer, as of the 5th day of April, 2000.
EFAX.COM
By: /s/ MICHAEL M. CRANDELL
------------------------------------
Name: Michael M. Crandell
Its: Executive VP and CTO
<PAGE> 23
EXHIBIT I
EFAX.COM
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock (the "CERTIFICATE OF DESIGNATIONS"). In
accordance with and pursuant to the Certificate of Designations, the undersigned
hereby elects to convert the number of shares of Series B Convertible Preferred
Stock, par value $.01 per share (the "PREFERRED SHARES"), of eFax.com (formerly
known as eFax.com, Inc.), a Delaware corporation (the "COMPANY"), indicated
below into shares of Common Stock, par value $.01 per share (the "COMMON
STOCK"), of the Company as of the date specified below.
Date of Conversion:
-----------------------------------------------------
Number of Preferred Shares to be converted:
-----------------------------
Stock certificate no(s). of Preferred Shares to be converted:
-----------
Please confirm the following information:
Conversion Price:
-------------------------------------------------------
Number of shares of Common Stock to be issued:
--------------------------
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
------------------------------------
Facsimile Number:
------------------------------------
Authorization:
------------------------------------
By:
---------------------------------
Title:
------------------------------
Dated:
------------------------------------
Account Number (if electronic book entry transfer):
--------------------
Transaction Code Number (if electronic book entry transfer):
------------
[NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO
TRANSFER AGENT]
<PAGE> 24
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby
directs [TRANSFER AGENT] to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated ________ ___,
2000 from the Company and acknowledged and agreed to by [TRANSFER AGENT].
EFAX.COM
By:
-----------------------------------
Name
-------------------------
Title:
-----------------------
<PAGE> 1
EXHIBIT 3.2
CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK
OF
EFAX.COM
eFax.com (formerly known as eFax.com, Inc.) (the "COMPANY"), a
corporation organized and existing under the General Corporation Law of the
State of Delaware, does hereby certify that, pursuant to authority conferred
upon the Board of Directors of the Company by the Certificate of Incorporation,
as amended, of the Company, and pursuant to Section 151 of the General
Corporation Law of the State of Delaware, the Board of Directors of the Company
at a meeting duly held, adopted resolutions (i) authorizing a series of the
Company's previously authorized preferred stock, par value $.01 per share, and
(ii) providing for the designations, preferences and relative, participating,
optional or other rights, and the qualifications, limitations or restrictions
thereof, of One Thousand Five Hundred (1,500) shares of Series C Convertible
Preferred Stock of the Company, as follows:
RESOLVED, that the Company is authorized to issue 1,500 shares of
Series C Convertible Preferred Stock (the "Preferred Shares"), par value
$.01 per share, which shall have the following powers, designations,
preferences and other special rights:
(1) Dividends. Subject to Section 4(c), the Preferred Shares shall
bear dividends ("Dividends") at a rate per annum equal to the Dividend Rate
(as defined below), which shall be cumulative, accrue daily from the
Issuance Date (as defined below) and be payable on each of May 13, 2000, if
after the Issuance Date, May 13, 2001, if after the Issuance Date, and May
13, 2002 (subject to Section 4(c), each a "Dividend Date"). If a Dividend
Date is not a Business Day (as defined below) then the Dividend shall be due
and payable on the Business Day immediately following the Dividend Date.
Dividends shall be payable in cash or, at the option of the Company, in
shares of Common Stock based on the Dividend Conversion Price (as defined
below) on the Dividend Date, provided that the Dividends which accrued
during any period shall be payable in shares of Common Stock only if the
Company provides written notice ("Dividend Election Notice") to each holder
of Preferred Shares at least five (5) Business Days prior to the Dividend
Date. Notwithstanding the foregoing, the Company shall not be entitled to
pay Dividends in shares of Common Stock and shall be required to pay such
Dividends in cash if any event constituting a Triggering Event (as defined
in Section 3(b)), or an event that solely with the
<PAGE> 2
passage of time would constitute a Triggering Event if not cured, has occurred
and is continuing on the date of the Company's Dividend Election Notice or on
the Dividend Date, unless otherwise consented to in writing by the holder of
Preferred Shares entitled to receive such Dividend. Any accrued and unpaid
dividends which are not paid (in stock or cash as applicable) within seven (7)
Business Days of such accrued and unpaid dividends' Dividend Date shall bear
interest at the rate of 18.0% per annum from such Dividend Date until the same
is paid (the "DEFAULT INTEREST").
(2) Conversion of Preferred Shares. Preferred Shares shall be
convertible into shares of the Company's common stock, par value $.01 per share
(the "COMMON STOCK"), on the terms and conditions set forth in this Section 2.
(a) Certain Defined Terms. For purposes of this Certificate of
Designations, the following terms shall have the following meanings:
(i) "ADDITIONAL AMOUNT" means, on a per share basis, the
result of the following formula: (the Dividend Rate)(N/365)(the Stated Value).
(ii) "BUSINESS DAY" means a day on which the Principal
Market or, if the Principal Market is not the principal trading market for the
Common Stock, the principal trading market for the Common Stock is open for
general trading of securities.
(iii) "CLOSING BID PRICE" means, for any security as of
any date, the last closing bid price for such security on the Principal Market
(as defined below) as reported by Bloomberg Financial Markets ("BLOOMBERG"), or,
if the Principal Market is not the principal securities exchange or trading
market for such security, the last closing bid price of such security on the
principal securities exchange or trading market where such security is listed or
traded as reported by Bloomberg, or if the foregoing do not apply, the last
closing bid price of such security in the over-the-counter market on the
electronic bulletin board for such security as reported by Bloomberg, or, if no
closing bid price is reported for such security by Bloomberg, the last closing
trade price of such security as reported by Bloomberg, or, if no last closing
trade price is reported for such security by Bloomberg, the average of the bid
prices of any market makers for such security as reported in the "pink sheets"
by the National Quotation Bureau, Inc. If the Closing Bid Price cannot be
calculated for such security on such date on any of the foregoing bases, the
Closing Bid Price of such security on such date shall be the fair market value
as mutually determined by the Company and the holders of Preferred Shares. If
the Company and the holders of Preferred Shares are unable to agree upon the
fair market value of the Common Stock, then such dispute shall be resolved
pursuant to Section 2(d)(iii) below with the term "Closing Bid Price" being
substituted for the term "Market Price." All such determinations to be
appropriately adjusted for any stock dividend, stock split or other similar
transaction during such period.
(iv) "CLOSING SALE PRICE" means, for any security as of any
date, the last closing trade price for such security on the Principal Market as
reported by Bloomberg, or, if the Principal Market is not the principal
securities exchange or trading market for such security, the last closing trade
price of such security on the principal securities exchange or trading market
where such security is listed or traded as reported by Bloomberg, or if the
foregoing do not apply, the last closing trade price of such security in the
over-the-counter market on the electronic bulletin board
-2-
<PAGE> 3
for such security as reported by Bloomberg, or, if no last closing trade price
is reported for such security by Bloomberg, the last closing ask price of such
security as reported by Bloomberg, or, if no last closing ask price is reported
for such security by Bloomberg, the average of the ask prices of any market
makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Sale Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Sale Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the holders of Preferred Shares. If the Company and the
holders of the Preferred Shares are unable to agree upon the fair market value
of the Common Stock, then such dispute shall be resolved pursuant to Section
2(d)(iii) below with the term "Closing Sale Price" being substituted for the
term "Market Price". All such determinations to be appropriately adjusted for
any stock dividend, stock split or other similar transaction during such period.
(v) "CONVERSION AMOUNT" means the sum of (A) the
Additional Amount and (B) the Stated Value.
(vi) "CONVERSION PRICE" means (A) as of any Conversion
Date (as defined in Section 2(d)) or other date of determination prior to the
date which is May 13, 2002, the Fixed Conversion Price in effect on such date
and subject to adjustment as provided herein (including, without limitation,
pursuant to Section 2(f)), and (B) on and after May 13, 2002, the Market Price
as of such date, each in effect as of such date and subject to adjustment as
provided herein.
(vii) "DIVIDEND CONVERSION PRICE" means, as of any
Dividend Date, the average of the Closing Bid Prices of the Common Stock for the
five consecutive Business Days immediately preceding such Dividend Date.
(viii) "DIVIDEND RATE" means, with respect to any
Preferred Share, 8.0%. (ix) "EXCHANGE AGREEMENT" means that certain exchange
agreement, dated April 5, 2000, between the Company and the initial holders of
the Preferred Shares.
(x) "FIXED CONVERSION PRICE" means $21.1375, subject to
adjustment as provided herein (including, without limitation, pursuant to
Section 2(f)) as if Preferred Shares were outstanding at the time of any such
adjustment.
(xi) "INITIAL FIXED CONVERSION PRICE" means $21.1375,
subject to adjustment as provided herein as if Preferred Shares were outstanding
at the time of any such adjustment.
(xii) "ISSUANCE DATE" means, with respect to each
Preferred Share, the date of issuance of the applicable Preferred Share.
(xiii) "MATURITY DATE" means May 13, 2002.
(xiv) "MARKET PRICE" means, with respect to any security
for any period, that price which shall be computed as the arithmetic average of
the Closing Bid Prices for such security on each of the 20 consecutive Business
Days immediately preceding such date of
-3-
<PAGE> 4
determination. All such determinations to be appropriately adjusted for any
stock dividend, stock split or other similar transaction during such period.
(xv) "N" means the number of days from, but excluding,
the Issuance Date or the last Dividend Date with respect to which Dividends,
along with any Default Interest, has been paid by the Company on the applicable
Preferred Share through and including the Conversion Date for the Preferred
Shares for which conversion is being elected or such other date with respect to
which this determination is being made.
(xvi) "PERSON" means an individual, a limited liability
company, a partnership, a joint venture, a corporation, a trust, an
unincorporated organization and a government or any department or agency
thereof.
(xvii) "PRINCIPAL MARKET" means the Nasdaq National
Market.
(xviii)"SERIES A WARRANTS" means the warrants to acquire
Common Stock issued by the Company pursuant to the securities purchase
agreement, dated May 7, 1999, between the Company and the Buyers set forth
therein on the Schedule of Buyers.
(xix) "STATED VALUE" means the difference of (A) the
Conversion Amount (as defined in the Series B Certificate of Designations (as
defined in the Exchange Agreement)) of the Series B Preferred Share (as defined
in the Exchange Agreement), which was exchanged for the Preferred Share pursuant
to the Exchange Agreement, immediately prior to such exchange on the Issuance
Date of such Preferred Share, minus (B) $2,500.
(b) Holder's Conversion Right. Subject to the provisions of
Section 5, at any time or times on or after the Issuance Date, any holder of
Preferred Shares shall be entitled to convert any whole number of Preferred
Shares into fully paid and nonassessable shares of Common Stock in
accordance with Section 2(d) at the Conversion Rate (as defined below). The
Company shall not issue any fraction of a share of Common Stock upon any
conversion. All shares of Common Stock (including fractions thereof)
issuable upon conversion of more than one Preferred Share by a holder
thereof shall be aggregated for purposes of determining whether the
conversion would result in the issuance of a fraction of a share of Common
Stock. If, after the aforementioned aggregation, the issuance would result
in the issuance of a fraction of a share of Common Stock, the Company shall
round such fraction of a share of Common Stock up or down to the nearest
whole share.
(c) Conversion Rate. The number of shares of Common Stock
issuable upon conversion of each Preferred Share pursuant to Section 2(b)
shall be determined according to the following formula (the "CONVERSION
RATE"):
-4-
<PAGE> 5
Conversion Amount
-----------------
Conversion Price
(d) Mechanics of Conversion. The conversion of Preferred
Shares shall be conducted in the following manner:
(i) Holder's Delivery Requirements. To convert Preferred
Shares into shares of Common Stock on any date (the "CONVERSION DATE"), the
holder thereof shall (A) transmit by facsimile (or otherwise deliver), for
receipt on or prior to 11:59 p.m., Central Time on such date, a copy of a fully
executed notice of conversion in the form attached hereto as Exhibit I (the
"CONVERSION NOTICE") to the Company with a copy thereof to the Company's
designated transfer agent (the "TRANSFER AGENT") and (B) if required by Section
2(d)(viii), surrender to a common carrier for delivery to the Company as soon as
practicable, but in no event later the five (5) Business Days, following such
date the original certificates representing the Preferred Shares being converted
(or an indemnification undertaking with respect to such shares in the case of
their loss, theft or destruction) (the "PREFERRED STOCK CERTIFICATES").
(ii) Company's Response. Upon receipt by the Company of a
copy of a Conversion Notice, the Company, on or before the second Business Day
following the date of receipt (the "SHARE DELIVERY DATE"), (A) issue and deliver
to the address as specified in the Conversion Notice, a certificate, registered
in the name of the holder or its designee, for the number of shares of Common
Stock to which the holder shall be entitled, or (B) provided the Transfer Agent
is participating in The Depository Trust Company ("DTC") Fast Automated
Securities Transfer Program, upon the request of the holder, credit such
aggregate number of shares of Common Stock to which the holder shall be entitled
to the holder's or its designee's balance account with DTC through its Deposit
Withdrawal Agent Commission system. If the number of Preferred Shares
represented by the Preferred Stock Certificate(s) physically submitted for
conversion is greater than the number of Preferred Shares being converted, then
the Company shall, as soon as practicable and in no event later than five
Business Days after receipt of the Preferred Stock Certificate(s) (the
"PREFERRED STOCK DELIVERY DATE") and at its own expense, issue and deliver to
the holder a new Preferred Stock Certificate representing the number of
Preferred Shares not converted.
(iii) Dispute Resolution. In the case of a dispute as to
the determination of the Market Price or the arithmetic calculation of the
Conversion Rate, the Company shall instruct the Transfer Agent to issue to the
holder the number of shares of Common Stock that is not disputed and promptly
shall submit the disputed determinations or arithmetic calculations to the
holder via facsimile. If such holder and the Company are unable to agree upon
the determination of the Market Price or arithmetic calculation of the
Conversion Rate within one (1) Business Day of such disputed determination or
arithmetic calculation being submitted to the
-5-
<PAGE> 6
holder, then the Company promptly shall submit via facsimile (A) the disputed
determination of the Market Price to an independent, reputable investment bank
selected by the Company and approved by the holders of a majority of the
Preferred Shares then outstanding or (B) the disputed arithmetic calculation of
the Conversion Rate to the Company's independent, outside accountant. The
Company shall use its reasonable best efforts to cause the investment bank or
the accountant, as the case may be, to perform the determinations or
calculations and notify the Company and the holder of the results no later than
ten (10) Business Days from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
manifest error.
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of Preferred
Shares shall be treated for all purposes as the record holder or holders of such
shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert.
(A) Cash Damages. If within five (5)
Business Days after the Company's receipt of the facsimile copy of a Conversion
Notice the Company shall fail to issue a certificate to a holder or credit such
holder's balance account with DTC for the number of shares of Common Stock to
which such holder is entitled upon such holder's conversion of Preferred Shares
or to issue a new Preferred Stock Certificate representing the number of
Preferred Shares to which such holder is entitled pursuant to Section 2(d)(ii),
in addition to all other available remedies which such holder may pursue
hereunder and under the Exchange Agreement (including indemnification pursuant
to Section 8 thereof), the Company shall pay additional damages to such holder
for each date after the Share Delivery Date such conversion is not timely
effected and/or each date after the Preferred Stock Delivery Date such Preferred
Stock Certificate is not delivered in an amount equal to 0.5% of the product of
(I) the sum of the number of shares of Common Stock not issued to the holder on
or prior to the Share Delivery Date and to which such holder is entitled and, in
the event the Company has failed to deliver a Preferred Stock Certificate to the
holder on or prior to the Preferred Stock Delivery Date, the number of shares of
Common Stock issuable upon conversion of the Preferred Shares represented by
such Preferred Stock Certificate, as of the Preferred Stock Delivery Date, and
(II) the Closing Bid Price of the Common Stock on the Share Delivery Date, in
the case of the failure to deliver Common Stock, or the Preferred Stock Delivery
Date, in the case of failure to deliver a Preferred Stock Certificate.
(B) Void Conversion Notice; Adjustment to
Conversion Price. If for any reason a holder has not received all of the shares
of Common Stock prior to the tenth (10th) Business Day after the Share Delivery
Date with respect to a conversion of Preferred Shares, then the holder, upon
written notice to the Company, with a copy to the Transfer Agent, may void its
Conversion Notice with respect to, and retain or have returned, as the case may
be, any Preferred Shares that have not been converted pursuant to such holder's
Conversion Notice; provided that the voiding of a holder's Conversion Notice
shall not affect the Company's obligations to make any payments which have
accrued prior to the date of such notice pursuant to Section 2(d)(v)(A) or
otherwise.
-6-
<PAGE> 7
(C) Redemption. If for any reason, other
than a Force Majeure Event (as defined below) a holder has not received all of
the shares of Common Stock on or prior to the tenth (10th) Business Day after
the Share Delivery Date with respect to a conversion of Preferred Shares (a
"CONVERSION FAILURE"), then the holder, upon written notice to the Company, may
require that the Company redeem all Preferred Shares previously submitted for
conversion and with respect to which the Company has not delivered shares of
Common Stock, in accordance with Section 3; provided that no holder shall be
entitled to require the Company to redeem Preferred Shares pursuant to this
Section 2(d)(v)(C) to the extent the failure of the Company to deliver such
shares of Common Stock results from fire, flood, storm, earthquake, shipwreck,
strike, war, acts of terrorism, crash involving facilities of a common carrier,
act of God or any similar event outside the control of the Company (it being
understood that the actions or failure to act of the Transfer Agent shall not be
deemed an event outside the control of the Company except to the extent
resulting from fire, flood, storm, earthquake, shipwreck, strike, war, acts of
terrorism, crash involving the facilities of a common carrier, acts of God, the
bankruptcy, liquidation or reorganization of the Transfer Agent under any
bankruptcy, insolvency or other similar law or any similar event outside the
control of the Transfer Agent) (a "FORCE MAJEURE EVENT").
(vi) Pro Rata Conversion and Redemption. In the event the
Company receives a Conversion Notice from more than one holder of Preferred
Shares for the same Conversion Date and the Company can convert some, but not
all, of such Preferred Shares, the Company shall convert from each holder of
Preferred Shares electing to have Preferred Shares converted at such time a pro
rata amount of such holder's Preferred Shares submitted for conversion based on
the number of Preferred Shares submitted for conversion on such date by such
holder relative to the number of Preferred Shares submitted for conversion on
such date.
(vii) Mandatory Conversion or Redemption at Maturity. If
any Preferred Shares remain outstanding on the Maturity Date, then all such
Preferred Shares, at the Company's option, either (i) shall be converted as of
such date in accordance with this Section 2 as if the holders of such Preferred
Shares had given the Conversion Notice on the Maturity Date (a "MATURITY DATE
MANDATORY CONVERSION") or (ii) shall be redeemed as of such date for an amount
in cash per Preferred Share (the "MATURITY DATE REDEMPTION PRICE") equal to the
Liquidation Preference as of such date (a "MATURITY DATE MANDATORY REDEMPTION");
provided, however, that if the Company has elected a Maturity Date Mandatory
Conversion and a Triggering Event has occurred and is continuing on the Maturity
Date or any event shall have occurred and be continuing on the Maturity Date
which solely with the passage of time and the failure to cure would result in a
Triggering Event, then the Company shall, within 30 Business Days following the
Maturity Date (unless otherwise notified in writing by the holder of its request
to have the Preferred Shares converted into Common Stock), pay to each holder of
Preferred Shares then outstanding, in immediately available funds, an amount
equal to the Maturity Date Redemption Price. The Company shall be deemed to have
elected a Maturity Date Mandatory Redemption unless it delivers written notice
to each holder of Preferred Shares at least 30 Business Days prior to the
Maturity Date of its election to effect a Maturity Date Mandatory Conversion. If
the Company elects a Maturity Date Mandatory Redemption, then on the Maturity
Date the Company shall pay to each holder of Preferred Shares outstanding on the
Maturity Date, by wire
-7-
<PAGE> 8
transfer of immediately available funds, an amount per Preferred Share equal to
the Maturity Date Redemption Price. All holders of Preferred Shares shall
thereupon surrender all Preferred Stock Certificates, duly endorsed for
cancellation, to the Company, provided that the Company has complied with its
obligations under this Section 2(d)(vii). Notwithstanding the foregoing, if the
Company has elected a Maturity Date Mandatory Conversion, then, if applicable,
the Maturity Date shall be extended for any Preferred Shares for as long as the
conversion of such Preferred Shares would violate the provisions of Section 5;
provided that the holder of such Preferred Shares shall use its reasonable best
efforts after May 13, 2002 to convert sell shares of Common Stock in such a
manner so as to permit the conversion of all Preferred Shares held by such
holder as soon as practicable after such date; provided, further, that Dividends
shall stop accruing on the Preferred Shares after May 13, 2002.
(viii) Book-Entry. Notwithstanding anything to the
contrary set forth herein, upon conversion of Preferred Shares in accordance
with the terms hereof, the holder thereof shall not be required to physically
surrender the certificate representing the Preferred Shares to the Company
unless the full number of Preferred Shares represented by the certificate are
being converted. The holder and the Company shall maintain records showing the
number of Preferred Shares so converted and the dates of such conversions or
shall use such other method, reasonably satisfactory to the holder and the
Company, so as not to require physical surrender of the certificate representing
the Preferred Shares upon each such conversion. In the event of any dispute or
discrepancy, such records of the Company shall be controlling and determinative
in the absence of manifest error. Notwithstanding the foregoing, if Preferred
Shares represented by a certificate are converted as aforesaid, the holder may
not transfer the certificate representing the Preferred Shares unless the holder
first physically surrenders the certificate representing the Preferred Shares to
the Company, whereupon the Company will forthwith issue and deliver upon the
order of the holder a new certificate of like tenor, registered as the holder
may request, representing in the aggregate the remaining number of Preferred
Shares represented by such certificate. The holder and any assignee, by
acceptance of a certificate, acknowledge and agree that, by reason of the
provisions of this paragraph, following conversion of any Preferred Shares, the
number of Preferred Shares represented by such certificate may be less than the
number of Preferred Shares stated of the face thereof. Each certificate for
Preferred Shares shall bear the following legend:
ANY TRANSFEREE OF THIS CERTIFICATE SHOULD CAREFULLY REVIEW THE
TERMS OF THE COMPANY'S CERTIFICATE OF DESIGNATIONS, PREFERENCES
AND RIGHTS OF THE PREFERRED SHARES REPRESENTED BY THIS
CERTIFICATE, INCLUDING SECTION 2(d)(viii) THEREOF. THE NUMBER OF
PREFERRED SHARES REPRESENTED BY THIS CERTIFICATE MAY BE LESS
THAN THE NUMBER OF PREFERRED SHARES STATED ON THE FACE HEREOF
PURSUANT TO SECTION 2(d)(viii) OF THE CERTIFICATE OF
DESIGNATIONS, PREFERENCES AND RIGHTS.
-8-
<PAGE> 9
(e) Taxes. The Company shall pay any and all taxes that may be
payable with respect to the issuance and delivery of Common Stock upon the
conversion of Preferred Shares.
(f) One-Year Adjustment to Fixed Conversion Price. In addition
to any other adjustment to the Fixed Conversion Price provided for in this
Certificate of Designations, the Fixed Conversion Price shall be subject to
the following adjustment. In the event that the Market Price of the Common
Stock on May 13, 2000 (the "ONE-YEAR ADJUSTMENT DATE") is less than the
Fixed Conversion Price that would be in effect if Preferred Shares were
outstanding on the date immediately preceding the One-Year Adjustment Date,
then from and after the One-Year Adjustment Date, the Fixed Conversion Price
shall be equal to the greater of (A) 60.0% of the Initial Fixed Conversion
Price on the date immediately preceding the One-Year Adjustment Date
(subject to appropriate adjustment pursuant to Section 2(g)) and (B) the
Market Price on the One-Year Adjustment Date; subject to further adjustment
as provided elsewhere in this Certificate of Designations.
(g) Adjustments to Conversion Price -- Dilution and Other
Events. The Conversion Price and the Initial Fixed Conversion Price will be
subject to adjustment from time to time as provided in this Section 2(g).
(i) Adjustment of Fixed Conversion Price and the Initial
Fixed Conversion Price upon Issuance of Common Stock. If and whenever on or
after May 13, 1999, the Company issues or sells, or in accordance with this
Section 2(g) is deemed to have issued or sold, any shares of Common Stock
(including the issuance or sale of shares of Common Stock owned or held by or
for the account of the Company, but excluding shares of Common Stock deemed to
have been issued by the Company in connection with an Approved Stock Plan (as
defined below) or Excluded Securities (as defined below) or upon conversion of
the Preferred Shares or exercise of the Series A Warrants) for a consideration
per share less than a price (the "APPLICABLE PRICE") equal to the Closing Sale
Price of the Common Stock on the date of such issue or sale, then immediately
after such issue or sale, the Fixed Conversion Price and/or the Initial Fixed
Conversion Price, as applicable, that would be in effect if Preferred Shares
were outstanding at such time shall be reduced to an amount equal to the product
of (x) the Fixed Conversion Price or the Initial Fixed Conversion Price, as
applicable, and (y) the quotient of (1) the sum of (I) the product of the
Applicable Price multiplied by the number of shares of Common Stock Deemed
Outstanding (as defined below) immediately prior to such issue or sale and (II)
the consideration, if any, received by the Company upon such issue or sale,
divided by (2) the product of (I) the Applicable Price multiplied by (II) the
number of shares of Common Stock Deemed Outstanding immediately after such issue
or sale. Notwithstanding anything to the contrary in this Section 2(g)(i), no
adjustment to the Fixed Conversion Price or the Initial Fixed Conversion Price
shall be required to be made pursuant to this Section 2(g)(i) unless such
adjustment would result in a decrease in the Fixed Conversion Price and/or the
Initial Fixed Conversion Price, as the case may be, of at least $0.53; provided
that any adjustments which by reason of this sentence are not required to be
made at a certain time shall be carried forward and taken into account and
applied in any subsequent adjustment. For purposes of determining the adjusted
Fixed Conversion Price
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<PAGE> 10
and/or the Initial Fixed Conversion Price, as applicable, under this Section
2(g)(i), the following shall be applicable:
(A) Issuance of Options. If the Company in
any manner grants or sells any Options and the lowest price per share for which
one share of Common Stock is issuable upon the exercise of any such Option or
upon conversion or exchange of any Convertible Securities issuable upon exercise
of such Option is less than the Applicable Price, then such share of Common
Stock shall be deemed to be outstanding and to have been issued and sold by the
Company at the time of the granting or sale of such Option for such price per
share. For purposes of this Section 2(g)(i)(A), the "lowest price per share for
which one share of Common Stock is issuable upon the exercise of any such Option
or upon conversion or exchange of any Convertible Securities issuable upon
exercise of such Option" shall be equal to the sum of the lowest amounts of
consideration (if any) received or receivable by the Company with respect to any
one share of Common Stock upon granting or sale of the Option, upon exercise of
the Option and upon conversion or exchange of any Convertible Security issuable
upon exercise of such Option. No further adjustment of the Fixed Conversion
Price and/or the Initial Fixed Conversion Price, as applicable, shall be made
upon the actual issuance of such Common Stock or of such Convertible Securities
upon the exercise of such Options or upon the actual issuance of such Common
Stock upon conversion or exchange of such Convertible Securities.
Notwithstanding the foregoing, no adjustment shall be made pursuant to this
Section 2(g)(i)(A) to the extent that such adjustment is based solely on the
fact that the Convertible Securities issuable upon exercise of such Option are
convertible into or exchangeable for Common Stock at a price which varies with
the market price of the Common Stock.
(B) Issuance of Convertible Securities. If
the Company in any manner issues or sells any Convertible Securities and the
lowest price per share for which one share of Common Stock is issuable upon such
conversion or exchange thereof is less than the Applicable Price, then such
share of Common Stock shall be deemed to be outstanding and to have been issued
and sold by the Company at the time of the issuance of sale of such Convertible
Securities for such price per share. For the purposes of this Section
2(g)(i)(B), the "price per share for which one share of Common Stock is issuable
upon such conversion or exchange" shall be equal to the sum of the lowest
amounts of consideration (if any) received or receivable by the Company with
respect to any one share of Common Stock upon the issuance or sale of the
Convertible Security and upon the conversion or exchange of such Convertible
Security. No further adjustment of the Fixed Conversion Price and/or the Initial
Fixed Conversion Price, as applicable, shall be made upon the actual issuance of
such Common Stock upon conversion or exchange of such Convertible Securities,
and if any such issue or sale of such Convertible Securities is made upon
exercise of any Options for which adjustment of the Fixed Conversion Price
and/or the Initial Fixed Conversion Price, as applicable, had been or are to be
made pursuant to other provisions of this Section 2(g)(i), no further adjustment
of the Fixed Conversion Price and/or the Initial Fixed Conversion Price, as
applicable, shall be made by reason of such issue or sale. Notwithstanding the
foregoing, no adjustment shall be made pursuant to this Section 2(g)(i)(B) to
the extent that such adjustment is based solely on the fact that such
Convertible Securities are convertible into or exchangeable for Common Stock at
a price which varies with the market price of the Common Stock.
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<PAGE> 11
(C) Change in Option Price or Rate of
Conversion. If the purchase price provided for in any Options, the additional
consideration, if any, payable upon the issue, conversion or exchange of any
Convertible Securities, or the rate at which any Convertible Securities are
convertible into or exchangeable for Common Stock changes at any time, the Fixed
Conversion Price and/or the Initial Fixed Conversion Price, as applicable, in
effect at the time of such change shall be adjusted to the Fixed Conversion
Price and/or the Initial Fixed Conversion Price, as applicable, which would have
been in effect at such time had such Options or Convertible Securities provided
for such changed purchase price, additional consideration or changed conversion
rate, as the case may be, at the time initially granted, issued or sold. For
purposes of this Section 2(g)(i)(C), if the terms of any Option or Convertible
Security that was outstanding as of the date of issuance of the Preferred Shares
are changed in the manner described in the immediately preceding sentence, then
such Option or Convertible Security and the Common Stock deemed issuable upon
exercise, conversion or exchange thereof shall be deemed to have been issued as
of the date of such change. No adjustment shall be made if such adjustment would
result in an increase of the Fixed Conversion Price or the Initial Fixed
Conversion Price then in effect.
(D) Calculation of Consideration Received.
In case any Option is issued in connection with the issue or sale of other
securities of the Company, together comprising one integrated transaction in
which no specific consideration is allocated to such Options by the parties
thereto, the Options will be deemed to have been issued for a consideration of
$.01. If any Common Stock, Options or Convertible Securities are issued or sold
or deemed to have been issued or sold for cash, the consideration received
therefor will be deemed to be the net amount received by the Company therefor.
If any Common Stock, Options or Convertible Securities are issued or sold for a
consideration other than cash, the amount of the consideration other than cash
received by the Company will be the fair value of such consideration, except
where such consideration consists of securities, in which case the amount of
consideration received by the Company will be the Market Price of such
securities on the date of receipt. If any Common Stock, Options or Convertible
Securities are issued to the owners of the non-surviving entity in connection
with any merger in which the Company is the surviving entity, the amount of
consideration therefor will be deemed to be the fair value of such portion of
the net assets and business of the non-surviving entity as is attributable to
such Common Stock, Options or Convertible Securities, as the case may be. The
fair value of any consideration other than cash or securities will be determined
jointly by the Company and the holders of a majority of the Preferred Shares
then outstanding. If such parties are unable to reach agreement within 10 days
after the occurrence of an event requiring valuation (the "VALUATION EVENT"),
the fair value of such consideration will be determined within five Business
Days after the tenth (10th) day following the Valuation Event by an independent,
reputable appraiser jointly selected by the Company and the holders of a
majority of the Preferred Shares then outstanding. The determination of such
appraiser shall be deemed binding upon all parties absent manifest error and the
fees and expenses of such appraiser shall be borne by the Company.
(E) Record Date. If the Company takes a
record of the holders of Common Stock for the purpose of entitling them (1) to
receive a dividend or other distribution payable in Common Stock, Options or in
Convertible Securities or (2) to subscribe
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<PAGE> 12
for or purchase Common Stock, Options or Convertible Securities, then such
record date will be deemed to be the date of the issue or sale of the shares of
Common Stock deemed to have been issued or sold upon the declaration of such
dividend or the making of such other distribution or the date of the granting of
such right of subscription or purchase, as the case may be.
(F) Certain Definitions. For purposes of
this Section 2(g)(i), the following terms have the respective meanings set forth
below:
(I) "APPROVED STOCK PLAN" shall mean
any employee benefit plan which has been approved, or after the Issuance Date is
approved, by the Board of Directors of the Company, pursuant to which the
Company's securities may be issued to any employee, officer, director or
consultant for services provided to the Company.
(II) "COMMON STOCK DEEMED OUTSTANDING"
means, at any given time, the number of shares of Common Stock actually
outstanding at such time, plus the number of shares of Common Stock issuable
upon conversion or exercise of outstanding Options and Convertible Securities
regardless of whether the Options or Convertible Securities are actually
exercisable at such time, but excluding any shares of Common Stock owned or held
by or for the account of the Company.
(III) "OPTIONS" means any rights,
warrants or options to subscribe for or purchase Common Stock or Convertible
Securities.
(IV) "CONVERTIBLE SECURITIES" means
any stock or securities (other than Options) directly or indirectly convertible
into or exchangeable for Common Stock. (V) "EXCLUDED SECURITIES" means any of
the following (a) any issuance by the Company of securities in connection with a
strategic partnership or joint venture (the primary purpose of which is not to
raise equity capital), (b) shares of Common Stock issued by the Company in a
firm commitment, underwritten public offering and (c) any issuance by the
Company of securities as consideration for a merger or consolidation or the
acquisition of a business, product, license or other assets of another person or
entity.
(ii) Adjustment of Fixed Conversion Price and
Initial Fixed Conversion Price upon Subdivision or Combination of Common Stock.
If the Company at any time after May 13, 1999 subdivides (by any stock split,
stock dividend, recapitalization or otherwise) one or more classes of its
outstanding shares of Common Stock into a greater number of shares, the Fixed
Conversion Price and Initial Fixed Conversion Price that would be in effect if
Preferred Shares were outstanding immediately prior to such subdivision will be
proportionately reduced. If the Company at any time after May 13, 1999 combines
(by combination, reverse stock split or otherwise) one or more classes of its
outstanding shares of Common Stock into a smaller number of shares, the Fixed
Conversion Price and Initial Fixed Conversion Price that would be in effect if
Preferred Shares were outstanding immediately prior to such combination will be
proportionately increased.
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<PAGE> 13
(iii) Other Events. If any event occurs of the type
contemplated by the provisions of this Section 2(g) but not expressly provided
for by such provisions (including, without limitation, the granting of stock
appreciation rights, phantom stock rights or other rights with equity features),
then the Company's Board of Directors will make an appropriate adjustment in the
Conversion Price so as to protect the rights of the holders of the Preferred
Shares; provided that no such adjustment will increase the Conversion Price or
the Initial Fixed Conversion Price as otherwise determined pursuant to this
Section 2(g).
(v) Notices.
(A) Promptly after any adjustment of the
Conversion Price, the Company will give written notice thereof to each holder of
Preferred Shares, setting forth in reasonable detail, and certifying, the
calculation of such adjustment.
(B) The Company will give written notice
to each holder of Preferred Shares at least ten (10) days prior to the date on
which the Company closes its books or takes a record (I) with respect to any
dividend or distribution upon the Common Stock, (II) with respect to any pro
rata subscription offer to holders of Common Stock or (III) for determining
rights to vote with respect to any Organic Change, dissolution or liquidation,
provided that such information shall be made known to the public prior to or in
conjunction with such notice being provided to such holder; provided that if
such information has not been made known to the public and in the good faith
opinion of the Board of Directors of the Company it is not in the best interest
of the Company to disclose such information, then the Company shall not be
required to give the notice provided for in this Section 2(g)(v)(B) until the
earlier of the date on which the Company publicly releases such information and
the date on which the Board of Directors no longer believes that in the good
faith opinion of the Board of Directors such information should not be
disclosed.
(C) The Company will also give written
notice to each holder of Preferred Shares at least ten (10) days prior to the
date on which any Organic Change, dissolution or liquidation will take place,
provided that such information shall be made known to the public prior to or in
conjunction with such notice being provided to such holder; provided that if
such information has not been made known to the public and in the good faith
opinion of the Board of Directors of the Company it is not in the best interest
of the Company to disclose such information, then the Company shall not be
required to give the notice provided for in this Section 2(g)(v)(C) until the
earlier of the date on which the Company publicly releases such information and
the date on which the Board of Directors no longer believes that in the good
faith opinion of the Board of Directors such information should not be
disclosed.
(3) Redemption at Option of Holders.
(a) Redemption Option Upon Triggering Event. In addition to
all other rights of the holders of Preferred Shares contained herein, after
a Triggering Event (as defined below), each holder of Preferred Shares shall
have the right, at such holder's option, to require the Company to redeem
all or a portion of such holder's Preferred
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<PAGE> 14
Shares at a price per Preferred Share equal to (I) in the case of a
Triggering Event under subparagraphs (i) or (ii) of Section 3(b), the sum of
(w) 125% of the Stated Value, plus (x) the Additional Amount for such
Preferred Share, and (II) in the case of a Triggering Event under
subparagraph (iii), the greater of (i) the sum of (y) 125% of the Stated
Value, plus (z) the Additional Amount for such Preferred Share, and (ii) the
product of (A) the Conversion Rate in effect at such time as such holder
delivers a Notice of Redemption at Option of Buyer (as defined below) and
(B) the Closing Bid Price of the Common Stock on the date immediately
preceding such Triggering Event on which the Principal Market, or the market
or exchange where the Common Stock is then traded, is open for trading
("REDEMPTION PRICE").
(b) "Triggering Event". A "TRIGGERING EVENT" shall be deemed
to have occurred at such time as any of the following events:
(i) prior to May 13, 2001, on any day there shall not be
available adequate current public information with respect to the Company as
determined in accordance with Rule 144(c) under the Securities Act of 1933, as
amended, or any successor rule thereto;
(ii) the suspension from trading or failure of the Common
Stock to be listed on the Nasdaq National Market, The Nasdaq SmallCap Market,
The New York Stock Exchange, Inc. or The American Stock Exchange, Inc. for a
period of 10 consecutive Business Days or for more than an aggregate of 20
Business Days in any 365-day period; or
(iii) a Conversion Failure (as defined in Section
2(d)(v)(C)), provided that such Conversion Failure shall only constitute a
Triggering Event with respect to the Preferred Shares submitted for conversion.
(c) Mechanics of Redemption at Option of Buyer. Within one (1)
Business Day after the occurrence of a Triggering Event, the Company shall
deliver written notice thereof via facsimile ("NOTICE OF TRIGGERING EVENT")
to each holder of Preferred Shares. At any time (i) after the earlier of a
holder's receipt of a Notice of Triggering Event and such holder becoming
aware of a Triggering Event, but (ii) prior to the later of (A) the date
which is 15 days after such holder's receipt of the Notice of Triggering
Event and (B) such holder's receipt of written notice from the Company that
such Triggering Event has been cured, any holder of Preferred Shares then
outstanding may require the Company to redeem all of the Preferred Shares by
delivering written notice thereof via facsimile ("NOTICE OF REDEMPTION AT
OPTION OF BUYER") to the Company, which Notice of Redemption at Option of
Buyer shall indicate (i) the number of Preferred Shares that such holder is
electing to redeem and (ii) the applicable Redemption Price, as calculated
pursuant to Section 3(a) above.
(d) Payment of Redemption Price. Upon the Company's receipt of
a Notice(s) of Redemption at Option of Buyer from any holder of Preferred
Shares, the Company shall immediately notify each holder of Preferred Shares
by facsimile of the Company's receipt of such notices and each holder which
has sent such a notice shall
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<PAGE> 15
promptly submit to the Transfer Agent such holder's Preferred Stock Certificates
which such holder has elected to have redeemed. The Company shall deliver the
applicable Redemption Price to such holder within 20 Business Days after the
Company's receipt of a Notice of Redemption at Option of Buyer; provided that a
holder's Preferred Stock Certificates shall have been so delivered to the
Transfer Agent. If the Company is unable to redeem all of the Preferred Shares
submitted for redemption, the Company shall (i) redeem a pro rata amount from
each holder of Preferred Shares based on the number of Preferred Shares
submitted for redemption by such holder relative to the total number of
Preferred Shares submitted for redemption by all holders of Preferred Shares and
(ii) in addition to any remedy such holder of Preferred Shares may have under
this Certificate of Designations and the Exchange Agreement, pay to each holder
interest at the rate of 1.5% per month (prorated for partial months) in respect
of each unredeemed Preferred Share until paid in full.
(e) Void Redemption. In the event that the Company does not
pay the Redemption Price within the time period set forth in Section 3(d), at
any time thereafter and until the Company pays such unpaid applicable Redemption
Price in full, a holder of Preferred Shares shall have the option (the "VOID
OPTIONAL REDEMPTION OPTION") to, in lieu of redemption, require the Company to
promptly return to such holder any or all of the Preferred Shares that were
submitted for redemption by such holder under this Section 3 and for which the
applicable Redemption Price (together with any interest thereon) has not been
paid, by sending written notice thereof to the Company via facsimile (the "VOID
OPTIONAL REDEMPTION NOTICE"). Upon the Company's receipt of such Void Optional
Redemption Notice, (i) the Notice of Redemption at Option of Buyer shall be null
and void with respect to those Preferred Shares subject to the Void Optional
Redemption Notice and (ii) the Company shall immediately return any Preferred
Shares subject to the Void Optional Redemption Notice.
(f) Disputes; Miscellaneous. In the event of a dispute as to
the determination of the Closing Bid Price or the arithmetic calculation of the
Redemption Price, such dispute shall be resolved pursuant to Section 2(d)(iii)
above with the term "Closing Bid Price" being substituted for the term "Market
Price" and the term "Redemption Price" being substituted for the term
"Conversion Rate". A holder's delivery of a Void Optional Redemption Notice and
exercise of its rights following such notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of such
notice. In the event of a redemption pursuant to this Section 3 of less than all
of the Preferred Shares represented by a particular Preferred Stock Certificate,
the Company shall promptly cause to be issued and delivered to the holder of
such Preferred Shares a preferred stock certificate representing the remaining
Preferred Shares which have not been redeemed.
(4) Other Rights of Holders
(a) Reorganization, Reclassification, Consolidation, Merger or
Sale. Any recapitalization, reorganization, reclassification, consolidation,
merger, sale of all or
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<PAGE> 16
substantially all of the Company's assets to another Person or other transaction
which is effected in such a way that holders of Common Stock are entitled to
receive (either directly or upon subsequent liquidation) stock, securities or
assets with respect to or in exchange for Common Stock is referred to herein as
"ORGANIC CHANGE." Prior to the consummation of any (i) sale of all or
substantially all of the Company's assets to an acquiring Person or (ii) other
Organic Change following which the Company is not a surviving entity, the
Company will secure from the Person purchasing such assets or the successor
resulting from such Organic Change (in each case, the "ACQUIRING ENTITY") a
written agreement (in form and substance reasonably satisfactory to the holders
of a majority of the Preferred Shares then outstanding) to deliver to each
holder of Preferred Shares in exchange for such shares, a security of the
Acquiring Entity evidenced by a written instrument substantially similar in form
and substance to the Preferred Shares, including, without limitation, having a
stated value and liquidation preference equal to the Stated Value and the
Liquidation Preference of the Preferred Shares held by such holder, and
reasonably satisfactory to the holders of a majority of the Preferred Shares
then outstanding. Prior to the consummation of any other Organic Change, the
Company shall make appropriate provision (in form and substance reasonably
satisfactory to the holders of a majority of the Preferred Shares then
outstanding) to insure that each of the holders of the Preferred Shares will
thereafter have the right to acquire and receive in lieu of or in addition to
(as the case may be) the shares of Common Stock immediately theretofore
acquirable and receivable upon the conversion of such holder's Preferred Shares
such shares of stock, securities or assets that would have been issued or
payable in such Organic Change with respect to or in exchange for the number of
shares of Common Stock which would have been acquirable and receivable upon the
conversion of such holder's Preferred Shares as of the date of such Organic
Change (without taking into account any limitations or restrictions on the
convertibility of the Preferred Shares).
(b) Optional Redemption Upon Major Corporate Event. In
addition to the rights of the holders of Preferred Shares under Section 4(a),
upon a Major Corporate Event (as defined below) of the Company each holder of
Preferred Shares shall have the right, at such holder's option, to require the
Company to redeem all or a portion of such holder's Preferred Shares at a price
per Preferred Share equal to the sum of (i) 125% of the Stated Value, plus (ii)
the Additional Amount for such Preferred Share ("MAJOR CORPORATE EVENT
REDEMPTION PRICE"). No sooner than 30 days nor later than five (5) days prior to
the consummation of a Major Corporate Event, but not prior to the public
announcement of such Major Corporate Event, the Company shall deliver written
notice thereof via facsimile (a "NOTICE OF MAJOR CORPORATE EVENT") to each
holder of Preferred Shares. At any time during the period beginning after
receipt of a Notice of Major Corporate Event (or, in the event a Notice of Major
Corporate Event is not delivered at least five (5) days prior to a Major
Corporate Event, at any time on or after the date which is five (5) days prior
to a Major Corporate Event) and ending on the date of such Major Corporate
Event, any holder of the Preferred Shares then outstanding may require the
Company to redeem all or a portion of the holder's Preferred Shares then
outstanding by delivering written notice thereof via facsimile (a "NOTICE OF
REDEMPTION UPON MAJOR CORPORATE EVENT") to the Company, which Notice of
Redemption Upon Major Corporate Event shall indicate (i) the number of Preferred
Shares that such holder is submitting for redemption, and (ii) the applicable
Major Corporate Event Redemption Price, as calculated pursuant to this Section
4(b). Upon the Company's receipt of a Notice(s) of Redemption Upon Major
Corporate Event from any holder
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<PAGE> 17
of Preferred Shares, the Company shall promptly, but in no event later than one
(1) Business Day following such receipt, notify each holder of Preferred Shares
by facsimile of the Company's receipt of such Notice(s) of Redemption Upon Major
Corporate Event. The Company shall deliver the applicable Major Corporate Event
Redemption Price simultaneous with the consummation of the Major Corporate
Event; provided that, if required by Section 2(d)(viii), a holder's Preferred
Stock Certificates shall have been so delivered to the Company. For purposes of
this Section 4(b), "MAJOR CORPORATE EVENT" means (i) the consolidation, merger
or other business combination of the Company with or into another Person (other
than (A) a consolidation, merger or other business combination in which holders
of the Company's voting power immediately prior to the transaction continue
after the transaction to hold, directly or indirectly, the voting power of the
surviving entity or entities necessary to elect a majority of the members of the
board of directors (or their equivalent if other than a corporation) of such
entity or entities, or (B) pursuant to a migratory merger effected solely for
the purpose of changing the jurisdiction of incorporation of the Company), (ii)
the sale or transfer of all or substantially all of the Company's assets, or
(iii) a purchase, tender or exchange offer made to and accepted by the holders
of more than the 50% of the outstanding shares of Common Stock.
(5) Limitations on Conversion. The Company shall not effect any
conversion of Preferred Shares and no holder of Preferred Shares shall have the
right to convert any Preferred Shares pursuant to Section 2(b) to the extent
that after giving effect to such conversion such Person (together with such
Person's affiliates) (A) would beneficially own in excess of 10.00% of the
outstanding shares of the Common Stock following such conversion or (B) would
have acquired, through conversion of Preferred Shares or otherwise, in excess of
10.00% of the outstanding shares of the Common Stock following such conversion
during the 60-day period ending on and including such Conversion Date (as
defined below). For purposes of the foregoing sentence, the number of shares of
Common Stock beneficially owned by a Person and its affiliates or acquired by a
Person and its affiliates, as the case may be, shall include the number of
shares of Common Stock issuable upon conversion of the Preferred Shares with
respect to which the determination of such sentence is being made, but shall
exclude the number of shares of Common Stock which would be issuable upon (i)
conversion of the remaining, nonconverted Preferred Shares beneficially owned by
such Person and its affiliates and (ii) exercise or conversion of the
unexercised or unconverted portion of any other securities of the Company
(including, without limitation, the Series A Warrants) subject to a limitation
on conversion or exercise analogous to the limitation contained herein
beneficially owned by such Person and its affiliates. Except as set forth in the
preceding sentence, for purposes of this Section 5(a), beneficial ownership
shall be calculated in accordance with Section 13(d) of the Securities Exchange
Act of 1934, as amended. For purposes of this Section 5, in determining the
number of outstanding shares of Common Stock a holder may rely on the number of
outstanding shares of Common Stock as reflected in (1) the Company's most recent
Form 10-Q or Form 10-K, as the case may be, (2) a more recent public
announcement by the Company or (3) any other notice by the Company or its
transfer agent setting forth the number of shares of Common Stock outstanding.
For any reason at any time, upon the written or oral request of any a holder,
the Company shall within two (2) Business Days confirm orally and in writing to
any such holder the number of shares Common Stock then outstanding. In any case,
the number of outstanding shares of Common Stock shall be determined after
giving
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<PAGE> 18
effect to the conversion of Preferred Shares by such holder since the date as of
which such number of outstanding shares of Common Stock was reported.
(6) Conversion at the Company's Election. At any time after June
13, 2001, the Company shall have the right, in its sole discretion, to require
that any or all of such outstanding Preferred Shares be converted ("CONVERSION
AT COMPANY'S ELECTION") at the Conversion Rate; provided that the Conditions to
Conversion at the Company's Election (as set forth below) are satisfied. The
Company shall exercise its right to Conversion at Company's Election by
providing each holder of Preferred Shares written notice by facsimile ("NOTICE
OF CONVERSION AT COMPANY'S ELECTION") by 5:00 p.m., Central Time, on the
Business Day selected by the Company for conversion ("COMPANY'S ELECTION
CONVERSION DATE"). If the Company elects to require conversion of some, but not
all, of such Preferred Shares, the Company shall convert an amount from each
holder of Preferred Shares equal to such holder's pro rata amount (based on the
number of such Preferred Shares held by such holder relative to the number of
such Preferred Shares outstanding on the Company's Election Conversion Date) of
all Preferred Shares the Company is requiring to be converted. The Notice of
Conversion at Company's Election shall indicate (x) the number of Preferred
Shares the Company has selected for conversion, (y) confirmation of the
Company's Election Conversion Date, which date shall be the Business Day on
which each holder received such notice prior to 5:00 p.m., Central Time, on such
date, and (z) each holder's pro rata share of outstanding Preferred Shares. All
Preferred Shares selected for conversion in accordance with the provision of
this Section 6 shall be converted as of the Company's Election Conversion Date
in accordance with Section 2 as if the holders of such Preferred Shares selected
by the Company to be converted had given the Conversion Notice on the Company's
Election Conversion Date. All holders of Preferred Shares shall thereupon and
within two Business Days after the Company's Election Conversion Date surrender
all Preferred Stock Certificates selected for conversion, duly endorsed for
cancellation, to the Company. "CONDITIONS TO CONVERSION AT THE COMPANY'S
ELECTION" means the following conditions: (i) on each day during the period
beginning 20 days prior to the Company's Election Conversion Date and ending on
and including the Company's Election Conversion Date, the Common Stock is
designated for quotation on the Nasdaq National Market or The Nasdaq SmallCap
Market or listed on The New York Stock Exchange, Inc. and is not suspended from
trading; (ii) on each day during the 20 consecutive Business Days ending on and
including the Company's Election Conversion Date, the Closing Bid Price of the
Common Stock is at least $42.255 (subject to adjustment for stock splits, stock
dividends, stock combinations and other similar transactions after May 13,
1999); and (iii) the Company has satisfied its obligations in all material
respects and is not in default in any material respect under this Certificate of
Designations, the Exchange Agreement and the Series A Warrants. Notwithstanding
the above, any holder of Preferred Shares may convert such shares (including
Preferred Shares selected for conversion) into Common Stock pursuant to Section
2(b) on or prior to the date immediately preceding the Company's Election
Conversion Date.
(7) Redemption at the Company's Election Upon Change of Control.
At any time or times on or after the date the Company publicly discloses a
Change of Control Transaction (as defined below) after the Issuance Date, the
Company shall have the right, in its sole discretion, to require that all of the
outstanding Preferred Shares be redeemed ("REDEMPTION AT COMPANY'S
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<PAGE> 19
ELECTION") at a price per Preferred Share equal to the sum of (a) 125% of the
Stated Value, plus (b) the Additional Amount for such Preferred Share
("COMPANY'S ELECTION REDEMPTION PRICE"); provided that the Conditions to
Redemption at the Company's Election (as set forth below) are satisfied. The
Company shall exercise its right to Redemption at Company's Election by
providing each holder of Preferred Shares written notice ("NOTICE OF REDEMPTION
AT COMPANY'S ELECTION") after the public disclosure of a Change of Control
Transaction and at least 20 Business Days prior to the date of consummation of
the Change of Control Transaction ("COMPANY'S ELECTION REDEMPTION DATE"). The
Notice of Redemption at Company's Election shall indicate the anticipated
Company's Election Redemption Date. If the Company has exercised its right of
Redemption at Company's Election and the conditions to such Redemption at
Company's Election have been satisfied, then all Preferred Shares outstanding at
the time of the consummation of the Change of Control Transaction shall be
redeemed as of the Company's Election Redemption Date by payment by the Company
to each holder of Preferred Shares of the Company's Election Redemption Price
concurrent with the closing of the Change of Control Transaction. All holders of
Preferred Shares shall thereupon and within two (2) Business Days after the
Company's Election Redemption Date, or such earlier date as the Company and each
holder of Preferred Shares mutually agree, surrender all outstanding Preferred
Stock Certificates, duly endorsed for cancellation, to the Company. If the
Company fails to pay the full Company's Election Redemption Price with respect
to any Preferred Shares concurrently with the closing of the Change of Control
Transaction, then the Redemption at Company's Election shall be null and void
with respect to such Preferred Shares and the holder of such Preferred Shares
shall be entitled to all the rights of a holder of outstanding Preferred Shares
set forth in this Certificate of Designations. "CONDITIONS TO REDEMPTION AT THE
COMPANY'S ELECTION" means the following conditions: the Company has satisfied
its obligations in all material respects and is not in default in any material
respect under this Certificate of Designations, the Exchange Agreement and the
Series A Warrants. Notwithstanding the above, any holder of Preferred Shares may
convert such shares (including Preferred Shares selected for redemption) into
Common Stock pursuant to Section 2(a) on or prior to the date immediately
preceding the Company's Election Redemption Date. For purposes of this Section
7, "CHANGE OF CONTROL TRANSACTION" means the consolidation, merger or other
business combination of the Company with or into another Person (other than (A)
a consolidation, merger or other business combination in which holders of the
Company's voting power immediately prior to the transaction continue after the
transaction to hold, directly or indirectly, the voting power of the surviving
entity or entities necessary to elect a majority of the members of the board of
directors (or their equivalent if other than a corporation) of such entity or
entities or (B) pursuant to a migratory merger effected solely for the purpose
of changing the jurisdiction of incorporation of the Company).
(8) Redemption at the Company's Election Upon a Qualified
Offering. At any time after June 13, 2001, the Company shall have the right, in
its sole discretion, to require that all of the outstanding Preferred Shares be
redeemed ("COMPANY'S OFFERING REDEMPTION") concurrent with the closing of a
Qualified Offering (as defined below); provided that the Conditions to a
Company's Offering Redemption (as set forth below) are satisfied. The redemption
price per Preferred Share upon a Company's Offering Redemption shall be equal to
the Company's Offering Redemption Price (as defined below). The Company shall
exercise its right to Company's Offering Redemption by providing each holder of
Preferred Shares written notice
- -19-
<PAGE> 20
("NOTICE OF COMPANY'S OFFERING REDEMPTION") at least 20 days prior to the
Company's Offering Redemption Date, but in no event prior to the filing of the
registration statement for the Qualified Public Offering (as defined below), in
the case of a Qualified Public Offering, or the public announcement of the
Qualified Private Placement (as defined below), in the case of a Qualified
Private Placement. The Notice of Company's Offering Redemption shall indicate
the anticipated Company's Public Redemption Date and the name of the managing
underwriters of the proposed Qualified Public Offering or placement agent, if
any, of the Qualified Private Placement, as the case may be. The date of the
consummation of the Company's Offering Redemption (the "COMPANY'S OFFERING
REDEMPTION DATE") shall be the date of the closing of the Qualified Offering. If
the Company has exercised its right of Company's Offering Redemption and the
conditions to such Company's Offering Redemption have been satisfied, then all
Preferred Shares outstanding at the time of the consummation of the Qualified
Offering shall be redeemed as of the Company's Offering Redemption Date by
payment by the Company to each holder of Preferred Shares then outstanding of
the Company's Offering Redemption Price concurrent with the closing of the
Qualified Offering. All holders of Preferred Shares shall thereupon and within
two (2) Business Days after the Company's Offering Redemption Date, or such
earlier date as the Company and each holder of Preferred Shares mutually agree,
surrender all outstanding Preferred Stock Certificates, duly endorsed for
cancellation, to the Company. If the Company fails to pay the full Company's
Offering Redemption Price with respect to any Preferred Shares concurrently with
the closing of the Qualified Offering, then the Company's Offering Redemption
shall be null and void with respect to such Preferred Shares and the holder of
such Preferred Shares shall be entitled to all the rights of a holder of
outstanding Preferred Shares set forth in this Certificate of Designations.
"CONDITIONS TO COMPANY'S OFFERING REDEMPTION" means the following conditions:
(i) on each day during the period beginning 30 days prior to the date of the
Company's Notice of Company's Offering Redemption and ending on and including
the Company's Offering Redemption Date, the Common Stock is designated for
quotation on the Nasdaq National Market or The Nasdaq SmallCap Market or listed
on The New York Stock Exchange, Inc. and is not suspended from trading; and (ii)
the Company has satisfied its obligations in all material respects and is not in
default in any material respect under this Certificate of Designations, the
Exchange Agreement and the Series A Warrants. Notwithstanding the above, any
holder of Preferred Shares may convert such shares (including Preferred Shares
selected for redemption) into Common Stock pursuant to Section 2(a) on or prior
to the date immediately preceding the Company's Offering Redemption Date. For
purposes of this Section 8, "QUALIFIED OFFERING" means a Qualified Public
Offering or a Qualified Private Placement, as applicable. For purposes of this
Section 8, "QUALIFIED PUBLIC OFFERING" means a firm commitment, underwritten
public offering of Common Stock by the Company which (a) is being underwritten
by one or more the underwriters agreed to in writing by the Company and the
purchasers of the Preferred Shares on May 13, 1999 and (b) is an offering which
generates aggregate gross proceeds to the Company (as reflected in the
preliminary prospectus and the final prospectus for such offering) of at least
$25,000,000. For purposes of this Section 8, "QUALIFIED PRIVATE PLACEMENT" means
a private placement by the Company of Common Stock or securities convertible
into or exercisable for Common Stock which generates aggregate gross proceeds to
the Company (as reflected in the private placement memorandum or other offering
circular, if any, for such private placement) of at least $25,000,000. For
purposes of this Section 8, "COMPANY'S OFFERING REDEMPTION PRICE" means the
Company's Public Offering Redemption Price, in the case of a Qualified Public
Offering, or
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<PAGE> 21
the Company's Private Placement Redemption Price, in the case of a Qualified
Private Placement (each as defined below). For purposes of this Section 8,
"COMPANY'S PUBLIC OFFERING REDEMPTION PRICE" means that price equal to the sum
of (a) the Stated Value, plus (b) the product of (i) the Stated Value,
multiplied by (ii) the greater of (A) 0.15 and (B) the product of (I) 0.30,
multiplied by (I) the quotient of (x) the number of days during the period
beginning on, but excluding, the May 13, 1999 and ending on and including the
Company's Public Offering Redemption Date (as defined below), divided by (y)
365, plus (c) the Additional Amount for such Preferred Share on the Company's
Offering Redemption Date. For purposes of this Section 8, "COMPANY'S PRIVATE
PLACEMENT REDEMPTION PRICE" means the price equal to the sum of (a) the Stated
Value, plus (b) the product of (i) the Stated Value, multiplied by (ii) the
Company's Redemption Percentage (as defined below), plus (c) the Additional
Amount for such Preferred Share on the Company's Offering Redemption Date. For
purposes of this Section 8, "COMPANY'S REDEMPTION PERCENTAGE" means (A) 0.00, if
the Closing Bid Price of the Common Stock on the date of the receipt by each
holder of Preferred Shares of the Notice of Redemption at Company's Election is
less than $7.50 (subject to adjustment for stock splits, stock dividends, stock
combinations and other similar transactions after May 13, 1999), (B) 0.10, if
the Closing Bid Price of the Common Stock on the date of the receipt by each
holder of Preferred Shares of the Notice of Redemption at Company's Election is
greater than or equal to $7.50 and less than $10.00 (each such price subject to
adjustment for stock splits, stock dividends, stock combinations and other
similar transactions after May 13, 1999), (C) 0.25, if the Closing Bid Price of
the Common Stock on the date of the receipt by each holder of Preferred Shares
of the Notice of Redemption at Company's Election is greater than or equal to
$10.00 and less than $15.00 (each such price subject to adjustment for stock
splits, stock dividends, stock combinations and other similar transactions after
May 13, 1999), and (D) 1.0, if the Closing Bid Price of the Common Stock on the
date of the receipt by each holder of Preferred Shares of the Notice of
Redemption at Company's Election is greater than or equal to $15.00 (subject to
adjustment for stock splits, stock dividends, stock combinations and other
similar transactions after May 13, 1999).
(9) Purchase Rights. If at any time the Company grants, issues or
sells any Options, Convertible Securities or rights to purchase stock, warrants,
securities or other property pro rata to the record holders of any class of
Common Stock (the "PURCHASE RIGHTS"), then the holders of Preferred Shares then
outstanding will be entitled to acquire, upon the terms applicable to such
Purchase Rights, the aggregate Purchase Rights which such holder could have
acquired if such holder had held the number of shares of Common Stock acquirable
upon complete conversion of the Preferred Shares (without taking into account
any limitations or restrictions on the convertibility of the Preferred Shares)
immediately before the date on which a record is taken for the grant, issuance
or sale of such Purchase Rights, or, if no such record is taken, the date as of
which the record holders of Common Stock are to be determined for the grant,
issue or sale of such Purchase Rights.
(10) Reservation of Shares; Authorized Shares.
(a) Reservation. The Company shall, so long as any of the
Preferred Shares are outstanding, take all action necessary to reserve and
keep available out of its authorized and unissued Common Stock, solely for
the purpose of effecting the conversion
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<PAGE> 22
of the Preferred Shares, such number of shares of Common Stock as shall from
time to time be sufficient to effect the conversion of all of the Preferred
Shares then outstanding (without regard to any limitations on conversions);
provided that on each day prior to the One-Year Adjustment Date the number
of shares of Common Stock so reserved shall at no time be less than the
number of shares of Common Stock issuable upon conversion of all of the
Preferred Shares then outstanding based on a Conversion Price equal to 60%
of the Initial Fixed Conversion Price then in effect (without regard to any
limitations on conversions) (the "REQUIRED RESERVE AMOUNT). The initial
number of shares of Common Stock reserved for conversions of the Preferred
Shares and each increase in the number of shares so reserved shall be
allocated pro rata among the holders of the Preferred Shares based on the
number of Preferred Shares held by each holder at the time of issuance of
the Preferred Shares or increase in the number of reserved shares, as the
case may be. In the event a holder shall sell or otherwise transfer any of
such holder's Preferred Shares, each transferee shall be allocated a pro
rata portion of the number of reserved shares of Common Stock reserved for
such transferor. Any shares of Common Stock reserved and allocated to any
Person which ceases to hold any Preferred Shares shall be allocated to the
remaining holders of Preferred Shares, pro rata based on the number of
Preferred Shares then held by such holders.
(b) Insufficient Authorized Shares. If at any time while any
of the Preferred Shares remain outstanding the Company does not have a
sufficient number of authorized and unreserved shares of Common Stock to
satisfy its obligation to reserve for issuance upon conversion of the
Preferred Shares at least a number of shares of Common Stock equal to the
Required Reserve Amount (an "AUTHORIZED SHARE FAILURE"), then the Company
shall immediately take all action necessary to increase the Company's
authorized shares of Common Stock to an amount sufficient to allow the
Company to reserve the Required Reserve Amount for the Preferred Shares then
outstanding. Without limiting the generality of the foregoing sentence, as
soon as practicable after the date of the occurrence of an Authorized Share
Failure, but in no event later than 75 days after the occurrence of such
Authorized Share Failure, the Company shall hold a meeting of its
stockholders for the authorization of an increase in the number of
authorized shares of Common Stock. In connection with such meeting, the
Company shall provide each stockholder with a proxy statement and shall use
its best efforts to solicit its stockholders' approval of such increase in
authorized shares of Common Stock and to cause its board of directors to
recommend to the stockholders that they approve such proposal.
(11) Voting Rights. Holders of Preferred Shares shall have no
voting rights, except as required by law, including but not limited to the
General Corporation Law of the State of Delaware, and as expressly provided in
this Certificate of Designations.
(12) Liquidation, Dissolution, Winding-Up. In the event of any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of the Preferred Shares shall be entitled to receive in cash out of
the assets of the Company, whether from capital or from earnings available for
distribution to its stockholders (the "LIQUIDATION FUNDS"), before any amount
shall be paid to the holders of any of the capital stock of the Company of any
class
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<PAGE> 23
junior in rank to the Preferred Shares in respect of the preferences as to the
distributions and payments on the liquidation, dissolution and winding up of the
Company, an amount per Preferred Share equal to the sum of (i) the Stated Value
and (ii) the Additional Amount for such Preferred Share (such sum being referred
to as the "LIQUIDATION PREFERENCE"); provided that, if the Liquidation Funds are
insufficient to pay the full amount due to the holders of Preferred Shares and
holders of shares of other classes or series of preferred stock of the Company
that are of equal rank with the Preferred Shares as to payments of Liquidation
Funds (the "PARI PASSU SHARES"), then each holder of Preferred Shares and Pari
Passu Shares shall receive a percentage of the Liquidation Funds equal to the
full amount of Liquidation Funds payable to such holder as a liquidation
preference, in accordance with their respective Certificate of Designations,
Preferences and Rights, as a percentage of the full amount of Liquidation Funds
payable to all holders of Preferred Shares and Pari Passu Shares. The purchase
or redemption by the Company of stock of any class, in any manner permitted by
law, shall not, for the purposes hereof, be regarded as a liquidation,
dissolution or winding up of the Company. Neither the consolidation or merger of
the Company with or into any other Person, nor the sale or transfer by the
Company of less than substantially all of its assets, shall, for the purposes
hereof, be deemed to be a liquidation, dissolution or winding up of the Company.
No holder of Preferred Shares shall be entitled to receive any amounts with
respect thereto upon any liquidation, dissolution or winding up of the Company
other than the amounts provided for herein; provided that a holder of Preferred
Shares shall be entitled to all amounts previously accrued with respect to
amounts owed hereunder.
(13) Preferred Rank. All shares of Common Stock shall be of junior
rank to all Preferred Shares in respect to the preferences as to distributions
and payments upon the liquidation, dissolution and winding up of the Company.
The rights of the shares of Common Stock shall be subject to the preferences and
relative rights of the Preferred Shares. Without the prior express written
consent of the holders of not less than two-thirds (2/3) of the then outstanding
Preferred Shares, the Company shall not hereafter authorize or issue additional
or other capital stock that is of senior rank to the Preferred Shares in respect
of the preferences as to distributions and payments upon the liquidation,
dissolution and winding up of the Company. Without the prior express written
consent of the holders of not less than two-thirds (2/3) of the then outstanding
Preferred Shares, the Company shall not hereafter authorize or make any
amendment to the Company's Certificate of Incorporation or bylaws, or file any
resolution of the board of directors of the Company with the Secretary of State
of the State of Delaware or enter into any agreement containing any provisions,
which would adversely affect or otherwise impair the rights or relative priority
of the holders of the Preferred Shares relative to the holders of the Common
Stock or the holders of any other class of capital stock.
(14) Participation. The holders of the Preferred Shares shall, as
holders of Preferred Stock, be entitled to such dividends paid and distributions
made to the holders of Common Stock to the same extent as if such holders of
Preferred Shares had converted the Preferred Shares into Common Stock (without
regard to any limitations on conversion herein or elsewhere) and had held such
shares of Common Stock on the record date for such dividends and distributions.
Payments under the preceding sentence shall be made concurrently with the
dividend or distribution to the holders of Common Stock.
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<PAGE> 24
(15) Restriction on Redemption and Cash Dividends. Until all of
the Preferred Shares have been converted or redeemed as provided herein, the
Company shall not, directly or indirectly, declare or pay any cash dividend or
distribution on, its Common Stock without the prior express written consent of
the holders of not less than two-thirds (2/3) of the then outstanding Preferred
Shares. Until all of the Preferred Shares have been converted or redeemed as
provided herein, the Company shall not, directly or indirectly, redeem, purchase
or buy-back any of its Common Stock unless at least 10 Business Days prior to
the first such redemption, purchase or buy-back the Company offers in writing
each holder of Preferred Shares the right to require the Company to redeem up to
a number of Preferred Shares equal to such holder's pro rata amount (based on
the number of Preferred Shares then outstanding) of a number of Preferred Shares
having an aggregate Stated Value equal to the dollar amount of shares of Common
Stock redeemed, purchased or bought-back by the Company. Redemption of Preferred
Shares pursuant to the immediately preceding sentence shall be at a price equal
to the Liquidation Preference (as defined in Section 12) of such Preferred
Shares.
(16) Limitation on Number of Conversion Shares. The Company shall
not be obligated to issue any shares of Common Stock upon conversion of the
Preferred Shares if the issuance of such shares of Common Stock would exceed
that number of shares of Common Stock which the Company may issue upon
Conversion of the Preferred Shares (the "EXCHANGE CAP") without breaching the
Company's obligations under the rules or regulations of the Principal Market, or
the market or exchange where the Common Stock is then traded, except that such
limitation shall not apply in the event that the Company (a) obtains the
approval of its stockholders as required by the applicable rules of the
Principal Market, or the market or exchange where the Common Stock is then
traded, (or any successor rule or regulation) for issuances of Common Stock in
excess of such amount or (b) obtains a written opinion from outside counsel to
the Company that such approval is not required, which opinion shall be
reasonably satisfactory to the holders of a majority of the Preferred Shares
then outstanding. Until such approval or written opinion is obtained, no
purchaser of Preferred Shares pursuant to the Exchange Agreement (the
"PURCHASERS") shall be issued, upon conversion of Preferred Shares, shares of
Common Stock in an amount greater than the product of (i) the Exchange Cap
amount multiplied by (ii) a fraction, the numerator of which is the number of
Series B Preferred Shares issued to such Purchaser pursuant to the Exchange
Agreement and the denominator of which is the aggregate amount of all the Series
B Preferred Shares issued to the Purchasers pursuant to the Exchange Agreement
(the "CAP ALLOCATION AMOUNT"). In the event that any Purchaser shall sell or
otherwise transfer any of such Purchaser's Preferred Shares, the transferee
shall be allocated a pro rata portion of such Purchaser's Cap Allocation Amount.
In the event that any holder of Preferred Shares shall convert all of such
holder's Preferred Shares into a number of shares of Common Stock which, in the
aggregate, is less than such holder's Cap Allocation Amount, then the difference
between such holder's Cap Allocation Amount and the number of shares of Common
Stock actually issued to such holder shall be allocated to the respective Cap
Allocation Amounts of the remaining holders of Preferred Shares on a pro rata
basis in proportion to the number of Preferred Shares then held by each such
holder.
(17) Vote to Change the Terms of Preferred Shares. The affirmative
vote at a meeting duly called for such purpose or the written consent without a
meeting, of the holders of
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<PAGE> 25
not less than two-thirds (2/3) of the then outstanding Preferred Shares, shall
be required for any change to this Certificate of Designations or the Company's
Certificate of Incorporation which would amend, alter, change or repeal any of
the powers, designations, preferences and rights of the Preferred Shares.
(18) Lost or Stolen Certificates. Upon receipt by the Company of
evidence reasonably satisfactory to the Company of the loss, theft, destruction
or mutilation of any Preferred Stock Certificates representing the Preferred
Shares, and, in the case of loss, theft or destruction, of any indemnification
undertaking by the holder to the Company in customary form and, in the case of
mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however, the Company shall not
be obligated to re-issue preferred stock certificates if the holder
contemporaneously requests the Company to convert such Preferred Shares into
Common Stock.
(19) Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Certificate of Designations
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. The Company covenants to each holder of Preferred Shares that
there shall be no characterization concerning this instrument other than as
expressly provided herein. Amounts set forth or provided for herein with respect
to payments, conversion and the like (and the computation thereof) shall be the
amounts to be received by the holder thereof and shall not, except as expressly
provided herein, be subject to any other obligation of the Company (or the
performance thereof). The Company acknowledges that a breach by it of its
obligations hereunder will cause irreparable harm to the holders of the
Preferred Shares and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, the holders of the Preferred Shares shall be entitled, in
addition to all other available remedies, to an injunction restraining any
breach, without the necessity of showing economic loss and without any bond or
other security being required.
(20) Specific Shall Not Limit General; Construction. No specific
provision contained in this Certificate of Designations shall limit or modify
any more general provision contained herein. This Certificate of Designations
shall be deemed to be jointly drafted by the Company and all Buyers and shall
not be construed against any person as the drafter hereof.
(21) Failure or Indulgence Not Waiver. No failure or delay on the
part of a holder of Preferred Shares in the exercise of any power, right or
privilege hereunder shall operate as a waiver thereof, nor shall any single or
partial exercise of any such power, right or privilege preclude other or further
exercise thereof or of any other right, power or privilege.
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<PAGE> 26
(22) Restriction on Transfer of Preferred Shares. In addition to
any restrictions on transfer in the Exchange Agreement, no holder of Preferred
Shares may transfer such Preferred Shares except to a Permitted Transferee (as
defined below) or with the prior consent of the Company, which consent shall not
be unreasonably withheld, to a person which is not a Permitted Transferee.
Notwithstanding anything to the contrary contained in this Section 22, a holder
of Preferred Shares shall be entitled to pledge such Preferred Shares in
connection with a bona fide margin account or other loan secured by such
Preferred Shares. For purposes of this Section 22, a "PERMITTED TRANSFEREE"
shall mean (i) an Investor (as defined in the Exchange Agreement), (ii) an
Affiliate (as that term is defined in Rule 501(b) under the 1933 act) of an
Investor, (iii) any holder of Preferred Shares or Series A Warrants and (iv) any
Affiliate of a holder of Preferred Shares or Series A Warrants.
* * * * * * *
-26-
<PAGE> 27
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by Michael M. Crandell, its Executive Vice President
and Chief Technology Officer, as of the 5th day of April, 2000.
EFAX.COM
By: /s/ MICHAEL M. CRANDELL
------------------------------------
Name: Michael M. Crandell
Its: Executive VP and CTO
<PAGE> 28
EXHIBIT I
EFAX.COM
CONVERSION NOTICE
Reference is made to the Certificate of Designations, Preferences and Rights of
Series B Convertible Preferred Stock (the "CERTIFICATE OF DESIGNATIONS"). In
accordance with and pursuant to the Certificate of Designations, the undersigned
hereby elects to convert the number of shares of Series B Convertible Preferred
Stock, par value $.01 per share (the "PREFERRED SHARES"), of eFax.com (formerly
known as eFax.com, Inc.), a Delaware corporation (the "COMPANY"), indicated
below into shares of Common Stock, par value $.01 per share (the "COMMON
STOCK"), of the Company as of the date specified below.
Date of Conversion:
-----------------------------------------------------
Number of Preferred Shares to be converted:
-----------------------------
Stock certificate no(s). of Preferred Shares to be converted:
-----------
Please confirm the following information:
Conversion Price:
-------------------------------------------------------
Number of shares of Common Stock to be issued:
--------------------------
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to:
------------------------------------
Facsimile Number:
------------------------------------
Authorization:
------------------------------------
By:
---------------------------------
Title:
------------------------------
Dated:
------------------------------------
Account Number (if electronic book entry transfer):
--------------------
Transaction Code Number (if electronic book entry transfer):
------------
[NOTE TO HOLDER -- THIS FORM MUST BE SENT CONCURRENTLY TO
TRANSFER AGENT]
<PAGE> 29
ACKNOWLEDGMENT
The Company hereby acknowledges this Conversion Notice and hereby
directs [TRANSFER AGENT] to issue the above indicated number of shares of Common
Stock in accordance with the Transfer Agent Instructions dated ________ ___,
2000 from the Company and acknowledged and agreed to by [TRANSFER AGENT].
EFAX.COM
By:
-------------------------------------
Name
-----------------------------------
Title:
----------------------------------
<PAGE> 1
EXHIBIT 10.1
EXCHANGE AGREEMENT
EXCHANGE AGREEMENT (the "AGREEMENT"), dated as of April 5, 2000, by and
among eFax.com (formerly known as eFax.com, Inc.), a Delaware corporation, with
headquarters located at 1378 Willow Road, Menlo Park, California 94025 (the
"COMPANY"), and the investors listed on the Schedule of Investors attached
hereto (individually, an "INVESTOR" and collectively, the "INVESTORS").
WHEREAS:
A. Each of the Investors owns shares of Series A Convertible Preferred
Stock, par value $.01 per share (the "SERIES A PREFERRED SHARES"), which has the
rights set forth in the Company's Certificate of Designations, Preferences and
Rights of the Series A Convertible Preferred Stock (the "SERIES A CERTIFICATE OF
DESIGNATIONS"), and which were issued pursuant to the Securities Purchase
Agreement, dated as of May 7, 1999, between the Company and the Investors (the
"SERIES A PURCHASE AGREEMENT").
B. The Company has agreed and each of the Investors, severally and not
jointly, has agreed that, subject to the terms and conditions of this Agreement,
each Investor will tender to the Company that number of shares of Series A
Preferred Stock set forth opposite such Investor's name on the Schedule of
Investors and the Company will exchange the Series A Preferred Stock for an
equal number of shares of a newly created series of preferred stock, par value
$.01 per share, designated Series B Convertible Preferred Stock (the "SERIES B
PREFERRED SHARES"), which shall be convertible into shares of the Company's
Common Stock, par value $.01 per share (the "COMMON STOCK") (as converted, the
"SERIES B CONVERSION SHARES"), in accordance with the terms of the Company's
Certificate of Designations, Preferences and Rights of the Series B Convertible
Preferred Stock (the "SERIES B CERTIFICATE OF DESIGNATIONS"), substantially in
the form attached hereto as Exhibit A.
C. Subject to the terms and conditions of this Agreement, each Investor
shall have the right to exchange any of such Investor's Series B Preferred
Shares for an equal number of shares of a newly created series of preferred
stock, par value $.01 per share, designated Series C Convertible Preferred Stock
(the "SERIES C PREFERRED SHARES" and, collectively with the Series B Preferred
Shares, the "PREFERRED SHARES"), which shall be convertible into shares of the
Common Stock (as converted, the "SERIES C CONVERSION SHARES" and, collectively
with the Series B Conversion Shares, the "CONVERSION SHARES") in accordance with
the terms of the Company's Certificate of Designations, Preferences and Rights
of the Series C Convertible Preferred Stock (the "SERIES C CERTIFICATE OF
DESIGNATIONS"), substantially in the form attached hereto as Exhibit B.
D. The execution and delivery of this Agreement by the Company and the
Investors and the offer and issuance by the Company of Preferred Shares is being
made in reliance upon the provisions of Section 3(a)(9) of the Securities Act of
1933, as amended (the "1933 ACT"). The
<PAGE> 2
Preferred Shares and the Conversion Shares issuable upon conversion thereof are
sometimes collectively referred to in this Agreement as the "SECURITIES".
NOW THEREFORE, the Company and the Investors hereby agree as follows:
1. AGREEMENT TO EXCHANGE.
(a) Exchange. Each Investor, severally and not jointly, hereby agrees
that at the Closing (as defined below) it will exchange shares of Series A
Preferred Stock for shares of Series B Convertible Preferred Stock in the
amounts set forth in the Schedule of Investors and on the terms and conditions
set forth herein. At the Closing, the Company shall issue to each Investor one
(1) Series B Preferred Share for each Series A Preferred Share being exchanged
by such Investor, in the denominations as such Investor shall request and in the
name of such Investor or its designee.
(b) The Closing Date. The date and time of the Closing (the "CLOSING
DATE") shall be 10:00 a.m. Central Time within two (2) business days following
the earlier of the date the public announcement of a proposed merger between the
Company and JFAX.COM, Inc. ("JFAX.COM") or an affiliate of JFAX.COM and the
execution by the Company and JFAX.COM or an affiliate of JFAX.COM of a letter of
intent for a proposed merger between the Company and JFAX.COM or an affiliate of
JFAX.COM on substantially the same terms described in the Disclosed Information
(as defined in Section 3(f)) (the "LETTER OF INTENT"), subject to satisfaction
(or waiver) of the conditions to the Closing set forth in Sections 6 and 7 (or
such later date as is mutually agreed to by the Company and the Investors). The
Closing shall occur on the Closing Date at the offices of Katten Muchin Zavis,
525 West Monroe Street, Suite 1600, Chicago, Illinois 60661-3693 or at such
other place as the Company and the Investors may mutually agree.
2. INVESTOR'S REPRESENTATIONS AND WARRANTIES.
Each Investor represents and warrants with respect to only itself
that:
(a) Reliance on Exemptions. Such Investor understands that the
Securities are being offered and sold to it in reliance on specific exemptions
from the registration requirements of United States federal and state securities
laws and that the Company is relying in part upon the truth and accuracy of, and
such Investor's compliance with, the representations, warranties, agreements,
acknowledgments and understandings of such Investor set forth herein in order to
determine the availability of such exemptions and the eligibility of such
Investor to acquire the Securities.
(b) No Governmental Review. Such Investor understands that no United
States federal or state agency or any other government or governmental agency
has passed on or made any recommendation or endorsement of the Securities or the
fairness or suitability of the
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investment in the Securities nor have such authorities passed upon or endorsed
the merits of the offering of the Securities.
(c) Transfer or Resale. Such Investor understands that: (i) the
Securities have not been and are not being registered under the 1933 Act or any
state securities laws, and may not be offered for sale, sold, assigned or
transferred unless (A) subsequently registered thereunder, (B) such Investor
shall have delivered to the Company an opinion of counsel, in a form reasonably
acceptable to the Company, to the effect that such Securities to be sold,
assigned or transferred may be sold, assigned or transferred pursuant to an
exemption from such registration, or (C) such Investor provides the Company with
assurances reasonably acceptable to the Company that such Securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933
Act, as amended, (or a successor rule thereto) ("RULE 144"); (ii) any sale of
the Securities made in reliance on Rule 144 may be made only in accordance with
the terms of Rule 144 and further, if Rule 144 is not applicable, any resale of
the Securities under circumstances in which the seller (or the person through
whom the sale is made) may be deemed to be an underwriter (as that term is
defined in the 1933 Act) may require compliance with some other exemption under
the 1933 Act or the rules and regulations of the SEC thereunder; and (iii)
neither the Company nor any other person is under any obligation to register
such Securities under the 1933 Act or any state securities laws or to comply
with the terms and conditions of any exemption thereunder.
(d) Legends. Such Investor understands that, subject to the last
paragraph of this Section 2(d), the certificates or other instruments
representing the Preferred Shares and the stock certificates representing the
Conversion Shares, except as set forth below, shall bear a restrictive legend in
substantially the following form (and a stop-transfer order may be placed
against transfer of such stock certificates):
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, OR APPLICABLE STATE SECURITIES LAWS. THE
SECURITIES MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED
OR ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION
STATEMENT FOR THE SECURITIES UNDER THE SECURITIES ACT OF
1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, OR
AN OPINION OF COUNSEL, IN A FORM REASONABLY ACCEPTABLE TO
THE COMPANY, THAT REGISTRATION IS NOT REQUIRED UNDER SAID
ACT OR APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD
PURSUANT TO RULE 144 UNDER SAID ACT. NOTWITHSTANDING THE
FOREGOING, THE SECURITIES MAY BE PLEDGED IN CONNECTION WITH
A BONA FIDE MARGIN ACCOUNT.
The legend set forth above shall be removed and the Company shall issue a
certificate or other instrument without such legend to the holder of the
Securities upon which it is stamped, if, unless otherwise required by state
securities laws, (i) such Securities are registered for sale under the 1933 Act,
(ii) in connection with a sale transaction, such holder provides the Company
with an opinion of counsel, in a form reasonably acceptable to the Company, to
the effect that a public
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sale, assignment or transfer of the Securities may be made without registration
under the 1933 Act, or (iii) such holder provides the Company assurances
reasonably acceptable to the Company that such Securities can be sold pursuant
to Rule 144 without any restriction as to the number of securities acquired as
of a particular date that can then be immediately sold.
(e) Authorization; Enforcement. This Agreement has been duly and
validly authorized, executed and delivered on behalf of such Investor and
constitutes valid and binding agreements of such Investor enforceable against
such Investor in accordance with its terms, subject as to enforceability to
general principles of equity and to applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation and other similar laws relating to, or
affecting generally, the enforcement of applicable creditors' rights and
remedies.
(f) Residency. Such Investor is a resident of that country specified
in its address on the Schedule of Investors.
(g) Ownership of Shares. Such Investor has not granted to any other
party any rights under the Series A Purchase Agreement and has all rights to
waive any rights which it may have under the Series A Purchase Agreement to
permit such Investor to tender its Series A Preferred Shares to the Company in
exchange for Series B Preferred Shares pursuant to the terms of this Agreement.
3. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.
The Company represents and warrants to each of the Investors that:
a. Organization and Qualification. The Company and its "SUBSIDIARIES"
(which for purposes of this Agreement means any entity in which the Company,
directly or indirectly, owns capital stock or holds an equity or similar
interest, except for DocuMagix, Inc.) are corporations duly organized and
validly existing in good standing under the laws of the jurisdiction in which
they are incorporated, and have the requisite corporate power and authorization
to own their properties and to carry on their business as now being conducted.
Each of the Company and its Subsidiaries is duly qualified as a foreign
corporation to do business and is in good standing in every jurisdiction in
which its ownership of property or the nature of the business conducted by it
makes such qualification necessary, except to the extent that the failure to be
so qualified or be in good standing would not have a Material Adverse Effect. As
used in this Agreement, "MATERIAL ADVERSE EFFECT" means any material adverse
effect on the business, properties, assets, operations, results of operations,
financial condition or prospects of the Company and its Subsidiaries, if any,
taken as a whole, or on the transactions contemplated hereby or by the
agreements and instruments to be entered into in connection herewith, or on the
authority or ability of the Company to perform its obligations under the
Transaction Documents (as defined below). The Company has no Subsidiaries except
as set forth on Schedule 3(a). DocuMagix, Inc. has no or only deminimus assets
and has no liabilities in excess of $250,000.
b. Authorization; Enforcement; Validity. (i) The Company has the
requisite corporate power and authority to enter into and perform this
Agreement, the Series B Certificate
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of Designations, the Series C Certificate of Designations and the Irrevocable
Transfer Agent Instructions (as defined in Section 5) and each of the other
agreements entered into by the parties hereto in connection with the
transactions contemplated by this Agreement (collectively, the "TRANSACTION
DOCUMENTS"), and to issue the Securities in accordance with the terms hereof and
thereof, (ii) the execution and delivery of the Transaction Documents by the
Company and the consummation by it of the transactions contemplated hereby and
thereby, including without limitation the issuance of the Preferred Shares and
the reservation for issuance and the issuance of the Conversion Shares issuable
upon conversion thereof, have been duly authorized by the Company's Board of
Directors and no further consent or authorization is required by the Company,
its Board of Directors or its stockholders (except such stockholder approval as
may be required (A) by the Nasdaq National Market for the issuance of a number
of Conversion Shares which is greater than 20% of the number of shares of Common
Stock outstanding on the Closing Date ("20% APPROVAL") or (B) to increase the
number of authorized shares of Common Stock of the Company), (iii) this
Agreement and the Irrevocable Transfer Agent Instructions have been duly
executed and delivered by the Company, (iv) the Transaction Documents constitute
the valid and binding obligations of the Company enforceable against the Company
in accordance with their terms, except as such enforceability may be limited by
general principles of equity or applicable bankruptcy, insolvency,
reorganization, moratorium, liquidation or similar laws relating to, or
affecting generally, the enforcement of creditors' rights and remedies, and (v)
prior to the Closing Date, the Series B Certificate of Designations will be
filed with the Secretary of State of the State of Delaware and will not have
been amended since the date it was filed.
c. Capitalization. As of the date hereof, the authorized capital
stock of the Company consists of (i) 35,000,000 shares of Common Stock, of which
as of April 1, 2000, 13,184,072 shares are issued and outstanding, 5,470,000
shares are reserved for issuance pursuant to the Company's stock option and
purchase plans and 345,002 shares are issuable and reserved for issuance
pursuant to securities (other than the Preferred Shares and Series A Preferred
Shares) exercisable or exchangeable for, or convertible into, shares of Common
Stock and (ii) 5,000,000 shares of preferred stock, of which as of the date
hereof, 1,500 shares were designated as Series A Convertible Preferred Stock and
1,500 shares of Series A Convertible Preferred Stock were issued and
outstanding. As of the Closing Date, the Company shall not have issued or
reserved for issuance any shares of Common Stock since April 1, 2000 except (A)
pursuant to the exercise of options for which shares of Common Stock were
reserved as of April 1, 2000 and are reflected in the number of reserved shares
set forth in clause (i) of the immediately preceding sentence, (B) any shares of
Common Stock issuable upon exercise of warrants issued to JFAX.COM pursuant to
the terms of the Letter of Intent, and (C) the Conversion Shares. All of such
outstanding shares have been, or upon issuance will be, validly issued and are
fully paid and nonassessable. Except as disclosed in Schedule 3(c), (i) no
shares of the Company's capital stock are subject to preemptive rights or any
other similar rights or any liens or encumbrances suffered or permitted by the
Company, (ii) there are no outstanding debt securities, (iii) there are no
outstanding options, warrants, scrip, rights to subscribe to, calls or
commitments of any character whatsoever relating to, or securities or rights
convertible into, any shares of capital stock of the Company or any of its
Subsidiaries, or contracts, commitments, understandings or arrangements by which
the Company or any of its Subsidiaries is bound to issue currently or
potentially in the future additional shares of capital stock of the Company or
any of its Subsidiaries or options, warrants,
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<PAGE> 6
scrip, rights to subscribe to, calls or commitments of any character whatsoever
relating to, or securities or rights convertible into, any shares of capital
stock of the Company or any of its Subsidiaries, (iv) there are no agreements or
arrangements under which the Company or any of its Subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act, (v) there are
no outstanding securities or instruments of the Company or any of its
Subsidiaries which contain any redemption or similar provisions (other than the
Series A Preferred Shares), and there are no contracts, commitments,
understandings or arrangements by which the Company or any of its Subsidiaries
is bound to redeem currently or potentially in the future a security of the
Company or any of its Subsidiaries, (vi) there are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Securities as described in this Agreement, and (vii) the Company
does not have any stock appreciation rights or "phantom stock" plans or
agreements or any similar plan or agreement. The Company has furnished to the
Investor true and correct copies of the Company's Certificate of Incorporation,
as amended and as in effect on the date hereof (the "CERTIFICATE OF
INCORPORATION"), and the Company's By-laws, as amended and as in effect on the
date hereof (the "BY-LAWS"), and the terms of all securities convertible into or
exercisable for Common Stock and the material rights of the holders thereof in
respect thereto.
d. Issuance of Securities. The Preferred Shares are duly authorized
and, upon issuance in accordance with the terms hereof, shall be (i) validly
issued, fully paid and non-assessable, (ii) free from all taxes, liens and
charges with respect to the issue thereof and (iii) entitled to the rights and
preferences set forth in the respective Series B Certificate of Designations or
Series C Certificate of Designations. At least 4,500,000 of shares of Common
Stock (subject to adjustment pursuant to the Company's covenant set forth in
Section 4(f) below) have been duly authorized and reserved for issuance upon
conversion of the Preferred Shares. Upon conversion in accordance with the
Certificate of Designations, the Conversion Shares will be validly issued, fully
paid and nonassessable and free from all taxes, liens and charges with respect
to the issue thereof, with the holders being entitled to all rights accorded to
a holder of Common Stock. Assuming the accuracy as to factual matters of the
representations set forth in Section 2, the issuance by the Company of the
Securities is exempt from registration under the 1933 Act.
e. No Conflicts. Except as disclosed in Schedule 3(e), the execution,
delivery and performance of the Transaction Documents by the Company, the
performance by the Company of its obligations under the Series B Certificate of
Designations and the Series C Certificate of Designations and the consummation
by the Company of the transactions contemplated hereby and thereby (including,
without limitation, the reservation for issuance and issuance of the Conversion
Shares) will not (i) result in a violation of the Certificate of Incorporation,
any Certificate of Designations, Preferences and Rights of any outstanding
series of preferred stock of the Company or the By-laws or (ii) conflict with,
or constitute a default (or an event which with notice or lapse of time or both
would become a default) under, or give to others any rights of termination,
amendment, acceleration or cancellation of, any material agreement, indenture or
instrument to which the Company or any of its Subsidiaries is a party, or result
in a violation of any law, rule, regulation, order, judgment or decree
(including federal and state securities laws and regulations and the rules and
regulations of the Principal Market (as defined below)) applicable to the
Company or any of its Subsidiaries or by which any property
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<PAGE> 7
or asset of the Company or any of its Subsidiaries is bound or affected. Except
as disclosed in Schedule 3(e), neither the Company nor its Subsidiaries is in
violation of any term of or in default under its Certificate of Incorporation,
any Certificate of Designation, Preferences and Rights of any outstanding series
of preferred stock of the Company or By-laws or their organizational charter or
by-laws, respectively. Except as disclosed in Schedule 3(e), neither the Company
nor any of its Subsidiaries is in violation of any term of or in default under
any contract, agreement, mortgage, indebtedness, indenture, instrument,
judgment, decree or order or any statute, rule or regulation applicable to the
Company or its Subsidiaries, except for possible conflicts, defaults,
terminations or amendments which would not, individually or in the aggregate,
have a Material Adverse Effect. The business of the Company and its Subsidiaries
is not being conducted in violation of any law, ordinance or regulation of any
governmental entity, except for possible violations the sanctions for which
either individually or in the aggregate would not have a Material Adverse
Effect. Except as specifically contemplated by the Transaction Documents and
except for a notice of filing pursuant to the California Corporation Code, the
Company is not required to obtain any consent, authorization or order of, or
make any filing or registration with, any court or governmental agency or any
regulatory or self-regulatory agency in order for it to execute, deliver or
perform any of its obligations under or contemplated by the Transaction
Documents, in each case in accordance with the terms hereof or thereof. Except
as disclosed in Schedule 3(e), all consents, authorizations, orders, filings and
registrations which the Company is required to obtain on or prior to the Closing
Date pursuant to the preceding sentence have been obtained or effected on or
prior to the date hereof. The Company and its Subsidiaries are unaware of any
facts or circumstances which might give rise to any of the foregoing. The
Company is not in violation of the listing requirements of the Nasdaq National
Market, including, without limitation, the requirements set forth in Rule 4460
of the Nasdaq National Market.
f. SEC Documents; Financial Statements. Since December 31, 1997, the
Company has filed all reports, schedules, forms, statements and other documents
required to be filed by it with the SEC pursuant to the reporting requirements
of the Securities Exchange Act of 1934, as amended (the "1934 ACT") (all of the
foregoing filed prior to the date hereof and all exhibits included therein and
financial statements and schedules thereto and documents incorporated by
reference therein being hereinafter referred to as the "SEC DOCUMENTS"). As of
their respective dates, the SEC Documents complied in all material respects with
the requirements of the 1934 Act and the rules and regulations of the SEC
promulgated thereunder applicable to the SEC Documents, and none of the SEC
Documents, at the time they were filed with the SEC, contained any untrue
statement of a material fact or omitted to state a material fact required to be
stated therein or necessary in order to make the statements therein, in light of
the circumstances under which they were made, not misleading. As of their
respective dates, the financial statements of the Company included in the SEC
Documents complied as to form in all material respects with applicable
accounting requirements and the published rules and regulations of the SEC with
respect thereto. Such financial statements have been prepared in accordance with
generally accepted accounting principles, consistently applied, during the
periods involved (except (i) as may be otherwise indicated in such financial
statements or the notes thereto, or (ii) in the case of unaudited interim
statements, to the extent they may exclude footnotes or may be condensed or
summary statements) and fairly present in all material respects the financial
position of the Company as of the dates thereof and the results of its
operations and cash flows for the
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periods then ended (subject, in the case of unaudited statements, to normal
year-end audit adjustments). Except for the proposed terms of a possible merger
transaction with JFAX.COM disclosed to each Investor by Todd Kenck, the
Company's Chief Financial Officer, on April 2, 2000 (the "DISCLOSED
INFORMATION"), neither the Company nor any of its Subsidiaries or any of their
officers, directors, employees or agents have provided any of the Investors with
any material, nonpublic information.
g. Acknowledgment Regarding Investors' Exchange of Preferred Shares.
The Company acknowledges and agrees that each of the Investors is acting solely
in the capacity of arm's length purchaser with respect to the Transaction
Documents and the transactions contemplated hereby and thereby. The Company
further acknowledges that each Investor is not acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to the
Transaction Documents and the transactions contemplated hereby and thereby and
any advice given by any of the Investor or any of their respective
representatives or agents in connection with the Transaction Documents and the
transactions contemplated hereby and thereby is merely incidental to such
Investor's purchase of the Securities. The Company further represents to each
Investor that the Company's decision to enter into the Transaction Documents has
been based solely on the independent evaluation by the Company and its
representatives.
h. Solicitation. Neither the Company, nor any of its affiliates, nor
any person acting on its or their behalf, has paid or given, either directly or
indirectly, a commission or other remuneration for soliciting the exchange of
the Securities.
i. No Integrated Offering. Neither the Company, nor any of its
affiliates, nor any person acting on its or their behalf has, directly or
indirectly, made any offers or sales of any security or solicited any offers to
buy any security, under circumstances that would require registration of any of
the Securities under the 1933 Act or cause this offering of the Securities to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
any applicable stockholder approval provisions, including, without limitation,
under the rules and regulations of any exchange or automated quotation system on
which any of the securities of the Company are listed or designated. Neither the
Company nor any of its Subsidiaries has taken any action or steps that would
require registration of any of the Securities under the 1933 Act or cause the
offering of the Securities to be integrated with other offerings for purposes of
provisions relating to the 20% Approval.
j. Transactions With Affiliates. Except as set forth on Schedule 3(j)
and in the SEC Documents filed at least ten days prior to the date hereof and
other than the grant of stock options disclosed on Schedule 3(c), none of the
officers, directors, or employees of the Company is presently a party to any
transaction with the Company or any of its Subsidiaries (other than for services
as employees, officers and directors), including any contract, agreement or
other arrangement providing for the furnishing of services to or by, providing
for rental of real or personal property to or from, or otherwise requiring
payments to or from any officer, director or such employee or, to the knowledge
of the Company, any corporation, partnership, trust or other entity in which any
officer, director, or any such employee has a substantial interest or is an
officer, director, trustee or partner.
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k. Application of Takeover Protections. The Company and its board of
directors have taken all necessary action, if any, in order to render
inapplicable any control share acquisition, business combination, poison pill
(including any distribution under a rights agreement) or other similar
anti-takeover provision under the Certificate of Incorporation or the laws of
the state of its incorporation which is or could become applicable to the
Investors as a result of the transactions contemplated by this Agreement,
including, without limitation, the Company's issuance of the Securities and the
Investor's ownership of the Securities.
l. Rights Agreement. The Company has not adopted a shareholder rights
plan or similar arrangement relating to accumulations of beneficial ownership of
Common Stock or a change in control of the Company.
4. COVENANTS.
(a) Best Efforts. Each party shall use its best efforts timely to
satisfy each of the conditions to be satisfied by it as provided in Sections 6
and 7 of this Agreement.
(b) Blue Sky. The Company shall, on or before the Closing Date, take
such action as the Company shall reasonably determine is necessary to qualify
the Securities for, or obtain exemption for the Securities for, sale to the
Investors at the Closing pursuant to this Agreement under applicable securities
or "Blue Sky" laws of the states of the United States, and shall provide
evidence of any such action so taken to the Investors on or prior to the Closing
Date. The Company shall make all filings and reports relating to the offer and
sale of the Securities required under applicable securities or "Blue Sky" laws
of the states of the United States following the Closing Date.
(c) Reporting Status. Until the earlier of (i) the date which is one
(1) year after the date as of which the Investors may sell all of the Conversion
Shares without restriction pursuant to Rule 144(k) promulgated under the 1933
Act (or successor thereto); or (ii) the date on which (A) the Investors shall
have sold all the Conversion Shares, and (B) none of the Preferred Shares is
outstanding (the "REPORTING PERIOD"); the Company (I) shall file all reports
required to be filed with the SEC pursuant to the 1934 Act, and (II) except as a
result of a Major Corporate Event (as defined in the Series C Certificate of
Designations) (provided that the Company has complied with Section 4(j) of this
Agreement with Section 4 of the Series B Certificate of Designations, with
respect to the Series B Preferred Shares, and Sections 4(a) and 4(b) of the
Series C Certificate of Designations, with respect to the Series C Preferred
Shares, if any), shall not terminate its status as an issuer required to file
reports under the 1934 Act even if the 1934 Act or the rules and regulations
thereunder would otherwise permit such termination.
(d) Financial Information. The Company agrees to send the following
to each Investor during the Reporting Period: (i) within two (2) business days
after the filing thereof with the SEC, a copy of its Annual Reports on Form
10-K, its Quarterly Reports on Form 10-Q, any Current Reports on Form 8-K and
any registration statements or amendments (other than on Form S-8) filed
pursuant to the 1933 Act; (ii) using the Company's reasonable best efforts, on
the same day as the release thereof, facsimile copies of all press releases
issued by the Company or any of
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its Subsidiaries, and (iii) copies of any notices and other information made
available or given to the stockholders of the Company generally,
contemporaneously with the making available or giving thereof to the
stockholders.
(e) Reservation of Shares. The Company shall take all action
necessary to at all times have authorized, and reserved for the purpose of
issuance, no less than the number of shares of Common Stock needed to provide
for the issuance of the Conversion Shares (without regard to any limitations on
conversions), based on the then current Conversion Price.
(f) Listing. The Company shall promptly secure the listing of all of
the Conversion Shares (as defined in the Registration Rights Agreement) upon
each national securities exchange and automated quotation system, if any, upon
which shares of Common Stock are then listed (subject to official notice of
issuance) and shall maintain, so long as any other shares of Common Stock shall
be so listed, such listing of all Conversion Shares from time to time issuable
under the terms of the Transaction Documents. The Company shall maintain the
Common Stock's authorization for listing on the Nasdaq National Market, AMEX or
NYSE, except as a result of a Major Corporate Event (provided that the Company
has complied with Section 4(j) of this Agreement, with Section 4 of the Series B
Certificate of Designations with respect to the Series B Preferred Shares, and
Sections 4(a) and 4(b) of the Series C Certificate of Designations with respect
to the Series C Preferred Shares, if any). Neither the Company nor any of its
Subsidiaries shall take any action which would reasonably be expected to result
in the delisting or suspension of the Common Stock on the Nasdaq National
Market, AMEX or NYSE (other than to switch listings from the Nasdaq National
Market to AMEX or NYSE or from AMEX to the Nasdaq National Market or NYSE or as
a result of a Major Corporate Event (provided that the Company has complied with
Section 4(j) of this Agreement with Section 4 of the Series B Certificate of
Designations, with respect to the Series B Preferred Shares, and Sections 4(a)
and 4(b) of the Series C Certificate of Designations, with respect to the Series
C Preferred Shares, if any). The Company shall pay all fees and expenses in
connection with satisfying its obligations under this Section 4(f).
(g) Expenses. Subject to Section 9(l) below, by May 15, 2000 the
Company shall reimburse the Investors for the Investors' attorneys' fees and
expenses in connection with negotiating and preparing the Transaction Documents
and consummating the transactions contemplated thereby up to an aggregate of
$25,000.
(h) Filing of Form 8-K. On or before the earlier of (i) the date
which is one (1) business day after the date the Company signs a letter of
intent with JFAX.COM or an affiliate of JFAX.COM for a proposed merger
transaction and (ii) the time of the public announcement of a proposed merger
between the Company and JFAX.COM or an affiliate of JFAX.COM, the Company shall
file a Form 8-K or the Company's Form 10-K for the year ended December 31, 1999
with the SEC describing the terms of the transaction contemplated by the
Transaction Documents and including as exhibits to such Form 8-K or Form 10-K
this Agreement, the Series B Certificate of Designations and the Series C
Certificate of Designations, in the form required by the 1934 Act.
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(i) Disclosure of Disclosed Information. Prior to or concurrent with
the first public announcement of a proposed merger between the Company and
JFAX.COM or an affiliate of JFAX.COM, the Company shall publicly disclose the
Disclosed Information (as defined in Section 3(f)).
(j) Corporate Existence. So long as a Investor beneficially owns any
Preferred Shares, the Company shall maintain its corporate existence and shall
not sell all or substantially all of the Company's assets, except in the event
of a merger or consolidation or sale of all or substantially all of the
Company's assets, where the surviving or successor entity in such transaction
(i) assumes the Company's obligations hereunder and under the agreements and
instruments entered into in connection herewith and (ii) is a publicly traded
corporation whose common stock is listed for trading on the Nasdaq National
Market, NYSE or AMEX.
(k) Rule 144. The Company shall not, directly or indirectly, dispute
or otherwise interfere with any claim by a holder of Preferred Shares that such
holder's holding period of any Security for purposes of Rule 144 promulgated
under the 1933 Act (or a successor rule thereto) ("RULE 144") relates back
(i.e., tacks) to the holding period for the Series A Preferred Stock.
(l) Right to Exchange Series B Preferred Shares. If the Company does
not consummate a merger transaction with JFAX.COM or an affiliate of JFAX.COM on
substantially the same terms as was disclosed in the Disclosed Information or
the proposed merger transaction between the Company and JFAX.COM or an affiliate
of JFAX.COM is terminated or abandoned, then at any time beginning on and
including the date of the Merger Termination (as defined below), subject to the
exceptions described below, any holder of Series B Preferred Shares may exchange
all or any portion of such holder's Series B Preferred Shares for an equal
number of Series C Preferred Shares by delivering written notice to the Company
of such holder's election to exchange its Series B Preferred Shares for Series C
Preferred Shares (a "SERIES C ELECTION NOTICE"). The consummation of such an
exchange of Series B Preferred Shares for Series C Preferred Shares shall be at
10:00 a.m. Central Time on the date which is three (3) business days after the
date such investors delivers a Series C Election Notice to the Company (a
"SERIES C CLOSING"). Each of the Company and such Investor shall deliver at such
Series C Closing documents substantially similar to those described in Sections
6 and 7 and each of the Company's and such Investor's obligations at such Series
C Closing shall be subject to the satisfaction or waiver of the same type of
conditions described in Sections 6 and 7, respectively. Each Series C Closing
shall occur at the offices of Katten Muchin Zavis, 525 West Monroe Street, Suite
1600, Chicago, Illinois 60661-3693 or at such other place as the Company and the
applicable Investor(s) may mutually agree. "MERGER TERMINATION" means the
earlier of (i) the abandonment or termination of a proposed merger transaction
between the Company and JFAX.COM or an affiliate of JFAX.COM, if there has not
previously been a public announcement of a proposed merger transaction between
the Company and JFAX.COM or an affiliate of JFAX.COM, (ii) the public
announcement by the Company or JFAX.COM of the abandonment or termination of a
proposed merger transaction between the Company and JFAX.COM or an affiliate of
JFAX.COM, if there has previously been a public announcement of a proposed
merger transaction between the Company and JFAX.COM or an affiliate of JFAX.COM,
and (iii) November 30,
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2000, if the Company does not consummate a merger transaction with JFAX.COM or
an affiliate of JFAX.COM on substantially the same terms as was disclosed in the
Disclosed Information on or prior to November 30, 2000.
(m) Right of First Refusal. Subject to the exceptions described
below, following the Company's receipt of a Series C Election Notice the Company
and its Subsidiaries shall not contract with any party for any equity financing
(including any debt financing with an equity component) or issue any equity
securities of the Company or any Subsidiary or securities convertible or
exchangeable into or for equity securities of the Company or any Subsidiary
(including debt securities with an equity component) in any form ("FUTURE
OFFERINGS") during the period beginning on the date of the Company's receipt of
such Series C Election Notice and ending on, and including, May 13, 2000, unless
it shall have first delivered to each Investor or a designee appointed by such
Investor written notice (the "FUTURE OFFERING NOTICE") describing the proposed
Future Offering, including the terms and conditions thereof, and providing each
Investor an option to purchase up to its Aggregate Percentage (as defined below)
of the securities to be issued in such Future Offering, as of the date of
delivery of the Future Offering Notice, in the Future Offering (the limitations
referred to in this and the preceding sentence are collectively referred to as
the "CAPITAL RAISING LIMITATIONS"). For purposes of this Section 4(m),
"AGGREGATE PERCENTAGE" at any time with respect to any Investor shall mean the
percentage obtained by dividing (i) the aggregate number of the Series B
Preferred Shares initially issued to such Investor by (ii) the aggregate number
of the Series B Preferred Shares initially issued to all the Investors. An
Investor can exercise its option to participate in a Future Offering by
delivering written notice thereof to participate to the Company within five (5)
business days after receipt of a Future Offering Notice, which notice shall
state the quantity of securities being offered in the Future Offering that such
Investor will purchase, up to its Aggregate Percentage, and that number of
securities it is willing to purchase in excess of its Aggregate Percentage. In
the event that one or more Investors fail to elect to purchase up to each such
Investor's Aggregate Percentage, then each Investor which has indicated that it
is willing to purchase a number of securities in such Future Offering in excess
of its Aggregate Percentage shall be entitled to purchase its pro rata portion
(determined in the same manner as described in the preceding sentence) of the
securities in the Future Offering which one or more of the Investors have not
elected to purchase. In the event the Investors fail to elect to fully
participate in the Future Offering within the periods described in this Section
4(m), the Company shall have 60 days thereafter to sell the securities of the
Future Offering that the Investors did not elect to purchase, upon terms and
conditions, no more favorable to the purchasers thereof than specified in the
Future Offering Notice. In the event the Company has not sold such securities of
the Future Offering within such 60 day period, the Company shall not thereafter
issue or sell such securities without first offering such securities to the
Investors in the manner provided in this Section 4(m). The Capital Raising
Limitations shall not apply to (i) a loan from a commercial bank which does not
have any equity feature, (ii) any transaction involving the Company's issuances
of securities (A) as consideration in a merger or consolidation, (B) in
connection with any strategic partnership or joint venture (the primary purpose
of which is not to raise equity capital), (C) as consideration for the
acquisition of a business, product, license or other assets by the Company, or
(D) equipment lease financing, (iii) the issuance of Common Stock in a firm
commitment, underwritten public offering, (iv) the issuance of securities upon
exercise or conversion of the Company's options, warrants or other
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convertible securities outstanding as of the date hereof, (v) the grant of
additional options or warrants, or the issuance of additional securities, under
any Company stock option plan, restricted stock plan or stock purchase plan for
the benefit of the Company's employees, officers, directors or consultants for
services provided to the Company. The Investors shall not be required to
participate or exercise their right of first refusal with respect to a
particular Future Offering in order to exercise their right of first refusal
with respect to later Future Offerings.
(n) Right to Exchange Series C Preferred Shares. Subject to the
exceptions described below, so long as any Series C Preferred Shares are
outstanding, if the Company issues or agrees to issue any equity securities or
any instrument convertible into or exercisable or exchangeable for equity
securities of the Company (other than pursuant to a firm commitment,
underwritten public offering) ("NEW EQUITY SECURITIES") after the first date on
which the Company receives a Series C Election Notice, the Company shall provide
written notice thereof via facsimile and overnight courier to each holder of
Preferred Shares ("NEW FINANCING NOTICE") at least ten (10) days prior to the
date that the Company enters into any agreement with respect to any New Equity
Securities or issues any New Equity Securities. Within one business day after
each issuance of New Equity Securities, the Company shall make an irrevocable
exchange offer to each holder of Preferred Shares on such terms and conditions
as each such holder shall reasonably require to exchange any or all of such
holder's Preferred Shares for a like amount (based on the following formula to
value each Preferred Share: the Stated Value plus any accrued and unpaid
dividends) of the New Equity Securities. Each such exchange offer shall remain
open until the earlier of (i) the date which is 15 business days after the
receipt by each holder of Preferred Shares of the New Financing Notice or (ii)
such time as all of the holders of Preferred Shares accept or reject, in
writing, such exchange offer (the "EXCHANGE OFFER NOTICE PERIOD").
Notwithstanding the foregoing, a holder of Preferred Shares shall not be
entitled pursuant to this Section 4(n) to exchange such Preferred Shares for
securities issued by the Company as part of (i) a loan from a commercial bank
which does not have any equity feature, (ii) any transaction involving the
Company's issuances of securities (A) as consideration in a merger or
consolidation, (B) in connection with any strategic partnership or joint venture
(the primary purpose of which is not to raise equity capital), (C) as
consideration for the acquisition of a business, product, license or other
assets by the Company, or (D) equipment lease financing, (iii) the issuance of
Common Stock in a firm commitment, underwritten public offering, (iv) the
issuance of securities upon exercise or conversion of the Company's options,
warrants or other convertible securities outstanding as of April 1, 2000, (v)
the grant of additional options or warrants, or the issuance of additional
securities, under any Company stock option plan, restricted stock plan or stock
purchase plan for the benefit of the Company's employees, officers, directors or
consultants for services provided to the Company.
(o) Reports Under the 1934 Act for Rule 144. With a view to making
available to the Investors the benefits of Rule 144 promulgated under the 1933
Act or any other similar rule or regulation of the SEC that may at any time
permit the Investors to sell securities of the
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<PAGE> 14
Company to the public without registration ("RULE 144"), the Company agrees to
use all reasonable best efforts to, at all times prior to the merger of the
Company into JFAX.COM or an affiliate of JFAX.COM on substantially the same
terms set forth in the Letter of Intent:
i. make and keep public information available, as those terms
are understood and defined in Rule 144;
ii. file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and
the 1934 Act so long as the Company remains subject to
such requirements and the filing of such reports and other
documents is required for the applicable provisions of
Rule 144; and
iii. furnish to each Investor so long as such Investor owns any
of the Securities, promptly upon request, (i) a written
statement by the Company that it has complied with the
reporting requirements of Rule 144, the 1933 Act and the
1934 Act, (ii) a copy of the most recent annual or
quarterly report of the Company and such other reports and
documents so filed by the Company, and (iii) such other
information as may be reasonably requested to permit the
investors to sell such securities pursuant to Rule 144
without registration.
(p) Issuance of Shares of JFAX.COM for Series B Preferred Shares.
Prior to the consummation of a merger transaction with JFAX.COM or an affiliate
of JFAX.COM, the Company shall obtain the written agreement of JFAX.COM to
issue, in exchange for outstanding Series B Preferred Shares, a number of shares
of JFAX.COM's common stock ("JFAX.COM COMMON STOCK") to each holder of Series B
Preferred Shares, concurrent with the issuance of JFAX.COM Common Stock to the
holders of the Company's Common Stock, equal to the product of (i) the number
Series B Preferred Shares which such holder holds as of the time of such merger
(including the Series B Preferred Shares such holder is not able to convert as
of the date of the consummation of such merger due to the limitations of Section
5 or Section 14 of the Series B Certificate of Designations), multiplied by (ii)
the quotient of (A) the Conversion Amount (as defined in the Series B
Certificate of Designations), divided by (B) the Conversion Price (as defined in
the Series B Certificate of Designations), multiplied by (iii) the number of
shares of JFAX.COM Common Stock being issued in such merger for each share of
Common Stock outstanding.
(q) Issuance of Shares of JFAX.COM Warrants for Series A Warrants.
Prior to the consummation of a merger transaction with JFAX.COM or an affiliate
of JFAX.COM, the Company shall obtain the written agreement of JFAX.COM to
issue, in exchange for outstanding Warrants issued pursuant to the Series A
Purchase Agreement (the "SERIES A WARRANTS"), a warrant to each Investor, on
substantially the same terms as the Series A Warrants, to purchase shares of
JFAX.COM Common Stock, which new warrant shall be form and substance reasonably
satisfactory to such Investors.
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(r) Restriction on Sales Following Merger. If the Closing has
occurred and the Company consummates a merger transaction with JFAX.COM or an
affiliate of JFAX.COM on terms substantially similar to the terms set forth in
the Letter of Intent on or before November 30, 2000, then beginning immediately
following each Investor's receipt of the Merger Closing Notice (as defined
below), each Investor agrees that following receipt of written notice (the
"MERGER CLOSING NOTICE") from JFAX.COM that such merger has been consummated
neither such Investor nor any of its affiliates shall sell during any calendar
month ending on or after the date of such Investor's receipt of the Merger
Closing Notice (beginning with the first calendar month which ends on or after
the date of such Investor's receipt of the Merger Closing Notice), more than 10%
of such Investor's JFAX.COM Merger Shares (as defined below) on a cumulative
basis (with partial calendar months prorated). "JFAX.COM MERGER SHARES" means
the number of shares of JFAX.COM Common Stock which such Investor received
pursuant to the merger of the Company into JFAX.COM or an affiliate of JFAX.COM.
(s) Trading Restrictions. Each Investor agrees that during the period
beginning on and including the date of this Agreement and ending on and
including the first date on or after the consummation of a merger of the Company
into JFAX.COM or an affiliate of JFAX.COM on terms substantially similar to the
terms set forth in the Letter of Intent, neither such Investor nor any of such
Investor's affiliates shall engage in any transaction constituting a "short
sale" (as defined in Rule 3b-3 of the 1934 Act) of the JFAX.COM Common Stock,
including without limitation the purchase of a "put option" or the sale of a
"call option" on JFAX.COM Common Stock; provided, however, the restrictions set
forth in this sentence shall not apply at any time on and after the earlier of
the date of a Merger Termination (as defined in Section 4(l)) and the date on
which this Agreement is terminated in accordance with Section 9(l). Each
Investor agrees that during the period (A) beginning on the later of the first
day after the date which is 20 trading days after the Company files a Form 8-K
or its Form 10-K with the SEC disclosing the terms of the transactions
contemplated by this Agreement in accordance with Section 4(h) and the date on
which the Company and JFAX.COM sign a definitive merger agreement for the merger
of the Company into JFAX.COM or an affiliate of JFAX.COM on terms substantially
similar to the terms set forth in the Letter of Intent (such later date is
referred to herein as the "RESTRICTION TRIGGER DATE") and (B) ending on the
earlier of (I) the date of a Merger Termination, (II) the date which this
Agreement is terminated in accordance with Section 9(l), and (III) the date of
the consummation of the merger of the Company into JFAX.COM or an affiliate of
JFAX.COM on terms substantially similar to the same terms set forth in the
Letter of Intent, neither such Investor nor any of such Investor's affiliates
shall make Net Sales (as defined below) of the Common Stock during any calendar
month ending on or after the Restriction Trigger Date in excess of 400,000
shares of Common Stock (with partial calendar months prorated) (subject to
adjustment for stock splits, stock dividends, stock combinations and other
similar transactions). Notwithstanding the foregoing, the restrictions set forth
in the preceding sentence shall not apply on and after any date on which the
Company materially breaches any of its obligations or covenants in this
Agreement or in the Series B Certificate of Designations. For purposes of this
Section 4(s), "NET SALES" means the result of total sales of Common Stock during
a specific calendar month minus total purchases of Common Stock during such
calendar month.
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(t) Waiver and Consent Under Series A Purchase Agreement. Each
Investor waives the Company's obligations to comply with its obligations under
Sections 4(c) and 4(g) of the Series A Purchase Agreement in connection with the
Company's merger into JFAX.COM or an affiliate of JFAX.COM on substantially the
terms set forth in the Disclosure Information, provided that the Closing occurs
on or before April 14, 2000 and the Company otherwise is in compliance with its
obligations in this Agreement. Each Investor waives its rights under Sections
4(f) and 4(j) with respect to the Company's issuance of warrants to acquire
shares of Common stock to JFAX.COM pursuant to the terms set forth in the
Disclosed Information.
5. TRANSFER AGENT INSTRUCTIONS.
The Company shall issue irrevocable instructions to its transfer
agent, and any subsequent transfer agent, to issue certificates, registered in
the name of each Investor or its respective nominee(s), for the Conversion
Shares in such amounts as specified from time to time by each Investor to the
Company upon conversion of the Preferred Shares (the "IRREVOCABLE TRANSFER AGENT
INSTRUCTIONS"). Prior to registration of the Conversion Shares under the 1933
Act, all such certificates shall bear the restrictive legend specified in
Section 2(d) of this Agreement until such legend is permitted to be removed
pursuant to the last paragraph of Section 2(g). The Company warrants that no
instruction other than the Irrevocable Transfer Agent Instructions referred to
in this Section 5, and stop transfer instructions to give effect to Section 2(e)
(in the case of the Conversion Shares, prior to registration of the Conversion
Shares under the 1933 Act) will be given by the Company to its transfer agent
and that the Securities shall otherwise be freely transferable on the books and
records of the Company as and to the extent provided in this Agreement and the
Registration Rights Agreement. Nothing in this Section 5 shall affect in any way
each Investor's obligations and agreements set forth in Section 2(d) to comply
with all applicable prospectus delivery requirements, if any, upon resale of the
Securities. If an Investor provides the Company with an opinion of counsel, in a
form reasonably acceptable to the Company, to the effect that the public sale,
assignment or transfer of the Securities may be made without registration under
the 1933 Act or the Investor provides the Company with assurances reasonably
acceptable to the Company that the Securities can be sold pursuant to Rule 144
without any restriction as to the number of securities acquired as of a
particular date that can then be immediately sold, the Company shall permit the
transfer, and, in the case of the Conversion Shares promptly instruct its
transfer agent to issue one or more certificates in such name and in such
denominations as specified by such Investor and without any restrictive legends.
The Company acknowledges that a breach by it of its obligations hereunder will
cause irreparable harm to the Investors by vitiating the intent and purpose of
the transaction contemplated hereby. Accordingly, the Company acknowledges that
the remedy at law for a breach of its obligations under this Section 5 will be
inadequate and agrees, in the event of a breach or threatened breach by the
Company of the provisions of this Section 5, that the Investors shall be
entitled, in addition to all other available remedies, to an injunction
restraining any breach and requiring immediate issuance and transfer, without
the necessity of showing economic loss and without any bond or other security
being required.
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6. CONDITIONS TO THE COMPANY'S OBLIGATION TO EXCHANGE.
The obligation of the Company hereunder to consummate the exchange of
Series A Preferred Shares for Series B Preferred Shares as contemplated hereby
at the Closing is subject to the satisfaction, at or before the Closing Date, of
each of the following conditions, provided that these conditions are for the
Company's sole benefit and may be waived by the Company at any time in its sole
discretion by providing each Investor with prior written notice thereof:
(i) Each Investor shall have executed each of this Agreement and
delivered the same to the Company.
(ii) The Series B Certificate of Designations shall have been
filed with the Secretary of State of the State of Delaware.
(iii) Each Investor shall have delivered to the Company
certificates representing that number of shares of Series A Preferred
Stock being tendered by such Investor as set forth on the Schedule of
Investors.
(iv) The representations and warranties of each Investor set
forth in this Agreement shall be true and correct as of the date when
made and as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date), and
such Investor shall have performed, satisfied and complied with the
covenants, agreements and conditions required by the Transaction
Documents to be performed, satisfied or complied with by such Investor
at or prior to the Closing Date.
(v) The Company and JFAX.COM or an affiliate of JFAX.COM shall
have executed a letter of intent for a proposed merger between the
Company and JFAX.COM or an affiliate of JFAX.COM on substantially the
same terms described in the Disclosed Information (as defined in Section
3(f)).
7. CONDITIONS TO EACH INVESTOR'S OBLIGATION TO EXCHANGE.
The obligation of each Investor hereunder to consummate the exchange
of the Series A Preferred Shares for Series B Preferred Shares as contemplated
hereby at the Closing is subject to the satisfaction, at or before the Closing
Date, of each of the following conditions, provided that these conditions are
for each Investor's sole benefit and may be waived by such Investor at any time
in its sole discretion:
(i) The Company shall have executed this Agreement and delivered
the same to such Investor.
(ii) The Series B Certificate of Designations shall have been
filed with the Secretary of State of the State of Delaware, and a copy
thereof certified by such Secretary of State shall have been delivered
to such Investor.
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(iii) The Common Stock shall be authorized for quotation on the
Nasdaq National Market or listing on AMEX or NYSE, trading in the Common
Stock issuable upon conversion of the Preferred Shares to be traded on
the Nasdaq National Market, AMEX or NYSE shall not have been suspended
by the SEC, The Nasdaq Stock Market, Inc., AMEX or NYSE and all of the
Conversion Shares issuable upon conversion of the Series B Preferred
Shares to be exchanged at the Closing shall be listed upon the Nasdaq
National Market, AMEX or NYSE.
(iv) The representations and warranties of the Company set forth
in this Agreement shall be true and correct as of the date when made and
as of the Closing Date as though made at that time (except for
representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied with the covenants,
agreements and conditions required by the Transaction Documents to be
performed, satisfied or complied with by the Company at or prior to the
Closing Date. Such Investor shall have received a certificate, executed
by the Chief Financial Officer of the Company, dated as of the Closing
Date, to the foregoing effect and as to such other matters as may be
reasonably requested by such Investor including, without limitation, an
update as of the Closing Date regarding the representation contained in
Section 3(c) above.
(v) Such Investor shall have received the opinion of Howard,
Rice, Nemerovski, Canady, Falk & Rabkin, dated as of the Closing Date,
in form, scope and substance reasonably satisfactory to such Investor
and in substantially the form of Schedule 7(v) attached hereto.
(vi) The Company shall have executed and delivered to such
Investor the Stock Certificates (in such denominations as such Investor
shall request) for the Series B Preferred Shares.
(vii) The Board of Directors of the Company shall have adopted
resolutions consistent with Section 3(b)(ii) above and in a form
reasonably acceptable to such Investor (the "RESOLUTIONS").
(viii) As of the Closing Date, the Company shall have reserved
out of its authorized and unissued Common Stock, solely for the purpose
of effecting the conversion of the Series B Preferred Shares, at least
that number of shares of Common Stock required to be reserved by the
Company pursuant to Section 4(e).
(ix) The Irrevocable Transfer Agent Instructions, in the form
set forth in Exhibit C attached hereto, shall have been delivered
to and acknowledged in writing by the Company's transfer agent.
(x) The Company shall have delivered to such Investor a
certificate evidencing the incorporation and good standing of the
Company in Delaware and the qualification and good standing of the
Company in California issued by the Secretary of State of each such
state as of a date within ten days of the Closing Date.
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(xi) The Company shall have delivered to such Investor a
secretary's certificate certifying as to (A) the Resolutions, (B)
certified copies of its Certificate of Incorporation and (C) By-laws,
each as in effect at the Closing.
(xii) The Company shall have delivered to such Investor a
certified copy of its Certificate of Incorporation as certified by the
Secretary of State of the State of Delaware within ten days of the
Closing Date.
(xiii) The Company shall have delivered to such Investor a
letter from the Company's transfer agent certifying the number of shares
of Common Stock outstanding as of a date within five (5) days of the
Closing Date.
(xiv) No statute, rule, regulation, executive order, decree,
ruling or injunction shall have been enacted, entered, promulgated or
endorsed by any court or governmental authority of competent
jurisdiction which prohibits or adversely affects any of the
transactions contemplated by this Agreement, nor shall any proceeding
have been commenced which may have the effect of prohibiting or
adversely affecting any of the transactions contemplated by this
Agreement.
(xv) The Company and JFAX.COM or an affiliate of JFAX.COM shall
have executed a letter of intent for a proposed merger between the
Company and JFAX.COM or an affiliate of JFAX.COM on substantially the
same terms described in the Disclosed Information (as defined in Section
3(f)) and, if requested by such Investor, the Company shall delivered a
copy of such executed letter of intent to such Investor.
(xvi) The Company shall have delivered to such Investor such
other documents relating to the transactions contemplated by the
Transaction Documents as such Investor or its counsel may reasonably
request.
8. INDEMNIFICATION. In consideration of each Investor's execution and
delivery of the Transaction Documents and acquiring the Securities thereunder
and in addition to all of the Company's other obligations under the Transaction
Documents and the Certificate of Designations, the Company shall defend,
protect, indemnify and hold harmless each Investor and each other holder of the
Securities and all of their stockholders, officers, directors, employees and
direct or indirect investors and any of the foregoing person's agents or other
representatives (including, without limitation, those retained in connection
with the transactions contemplated by this Agreement) (collectively, the
"INDEMNITEES") from and against any and all actions, causes of action, suits,
claims, losses, costs, penalties, fees, liabilities and damages, and expenses in
connection therewith (irrespective of whether any such Indemnitee is a party to
the action for which indemnification hereunder is sought), and including
reasonable attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"),
incurred by any Indemnitee as a result of, or arising out of, or relating to (a)
any misrepresentation or breach of any representation or warranty made by the
Company in the Transaction Documents or the Certificate of Designations or any
other certificate, instrument or document contemplated hereby or thereby, (b)
any breach of any covenant, agreement or obligation of the Company contained in
the Transaction Documents or the
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Certificate of Designations or any other certificate, instrument or document
contemplated hereby or thereby, (c) any cause of action, suit or claim brought
or made against such Indemnitee (other than a cause of action, suit or claim by
another Investor) and arising out of or resulting from the execution, delivery
or performance by such Investor of the Transaction Documents or the enforcement
of the Transaction Documents by such Investor. To the extent that the foregoing
undertaking by the Company may be unenforceable for any reason, the Company
shall make the maximum contribution to the payment and satisfaction of each of
the Indemnified Liabilities which is permissible under applicable law.
9. GOVERNING LAW; MISCELLANEOUS.
a. Governing Law; Jurisdiction; Jury Trial. All questions concerning
the construction, validity, enforcement and interpretation of this Agreement
shall be governed by the internal laws of the State of California, without
giving effect to any choice of law or conflict of law provision or rule (whether
of the State of California or any other jurisdictions) that would cause the
application of the laws of any jurisdictions other than the State of California.
Each party hereby irrevocably waives any right it may have, and agrees not to
request, a jury trial for the adjudication of any dispute hereunder or in
connection with or arising out of this agreement or any transaction contemplated
hereby.
b. Counterparts. This Agreement may be executed in two or more
identical counterparts, all of which shall be considered one and the same
agreement and shall become effective when counterparts have been signed by each
party and delivered to the other party; provided that a facsimile signature
shall be considered due execution and shall be binding upon the signatory
thereto with the same force and effect as if the signature were an original, not
a facsimile signature.
c. Headings. The headings of this Agreement are for convenience of
reference and shall not form part of, or affect the interpretation of, this
Agreement.
d. Severability. If any provision of this Agreement shall be invalid
or unenforceable in any jurisdiction, such invalidity or unenforceability shall
not affect the validity or enforceability of the remainder of this Agreement in
that jurisdiction or the validity or enforceability of any provision of this
Agreement in any other jurisdiction.
e. Entire Agreement; Amendments. This Agreement supersedes all other
prior oral or written agreements between the Investors, the Company, their
affiliates and persons acting on their behalf with respect to the matters
discussed herein, and this Agreement and the instruments referenced herein
contain the entire understanding of the parties with respect to the matters
covered herein and therein and, except as specifically set forth herein or
therein, neither the Company nor any Investor makes any representation,
warranty, covenant or undertaking with respect to such matters. The Series A
Purchase Agreement, the Series A Warrants (as defined in the Series A Purchase
Agreement) and the Registration Rights Agreement (as defined in the Series A
Purchase Agreement) shall remain in full force and effect with respect to the
securities and the transactions contemplated thereby. No provision of this
Agreement may be amended other than
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by an instrument in writing signed by the Company and the holders of at least
two-thirds (2/3) of the Preferred Shares then outstanding, and no provision
hereof may be waived other than by an instrument in writing signed by the party
against whom enforcement is sought. No such amendment shall be effective to the
extent that it applies to less than all of the holders of the Preferred Shares
then outstanding. No consideration shall be offered or paid to any person to
amend or consent to a waiver or modification of any provision of any of the
Transaction Documents or the Certificate of Designations unless the same
consideration also is offered to all of the parties to the Transaction Documents
or holders of Preferred Shares, as the case may be.
f. Notices. Any notices, consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered: (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile (provided
confirmation of transmission is mechanically or electronically generated and
kept on file by the sending party); or (iii) one business day after deposit with
a nationally recognized overnight delivery service, in each case properly
addressed to the party to receive the same. The addresses and facsimile numbers
for such communications shall be:
If to the Company:
eFax.com
1378 Willow Road
Menlo Park, California 94025
Telephone: 650-688-6810
Facsimile: 650-470-6969
Attention: Todd J. Kenck, Chief Financial Officer
With a copy to:
Howard, Rice, Nemerovski, Canady, Falk & Rabkin,
A Professional Corporation
Three Embarcadero Center, Seventh Floor
San Francisco, California 94111
Telephone: 415-434-1600
Facsimile: 415-217-5910
Attention: Joseph B. Hershenson, Esq.
If to the Transfer Agent:
American Stock Transfer & Trust Company
6201 15th Avenue
Brooklyn, New York 11219
Telephone: 718-921-8293
Facsimile: 718-921-8334
Attention: Isaac Kagen
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If to an Investor, to it at the address and facsimile number set forth on the
Schedule of Investors, with copies to such Investor's representatives as set
forth on the Schedule of Investors, or at such other address and/or facsimile
number and/or to the attention of such other person as the recipient party has
specified by written notice given to each other party five days prior to the
effectiveness of such change. Written confirmation of receipt (A) given by the
recipient of such notice, consent, waiver or other communication, (B)
mechanically or electronically generated by the sender's facsimile machine
containing the time, date, recipient facsimile number and an image of the first
page of such transmission or (C) provided by a nationally recognized overnight
delivery service shall be rebuttable evidence of personal service, receipt by
facsimile or receipt from a nationally recognized overnight delivery service in
accordance with clause (i), (ii) or (iii) above, respectively.
g. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties and their respective successors and assigns,
including any purchasers of the Preferred Shares. The Company shall not assign
this Agreement or any rights or obligations hereunder without the prior written
consent of the holders of at least two-thirds (2/3) of the Preferred Shares then
outstanding, including by merger or consolidation, except pursuant to a Major
Corporate Event (as defined in Section 4(b) of the Series C Certificate of
Designations), provided that the Company has complied with Section 4(j) of this
Agreement with Section 4 of the Series B Certificate of Designations, with
respect to the Series B Preferred Shares, and Sections 4(a) and 4(b) of the
Series C Certificate of Designations, with respect to the Series C Preferred
Shares, if any. An Investor may assign some or all of its rights hereunder to
(i) a Permitted Transferee (as defined below) without the consent of the Company
and (ii) to a person which is not a Permitted Transferee with the prior consent
of the Company, which consent shall not be unreasonably withheld.
Notwithstanding anything to the contrary contained in the Transaction Documents,
the Investors shall be entitled to pledge the Securities in connection with a
bona fide margin account or other loan secured by such Securities. For purposes
of this Section 9(i), a "PERMITTED TRANSFEREE" shall mean (i) an Investor, (ii)
an Affiliate (as that term is defined in Rule 501(b) under the 1933 act) of an
Investor, (iii) any holder of Preferred Shares or Warrants and (iv) any
Affiliate of a holder of Preferred Shares or Warrants.
h. No Third Party Beneficiaries. This Agreement is intended for the
benefit of the parties hereto and their respective permitted successors and
assigns, and is not for the benefit of, nor may any provision hereof be enforced
by, any other person (other than JFAX.COM with respect to Section 4(r) and
Section 4(s)).
i. Survival. Unless this Agreement is terminated under Section 9(l),
the representations and warranties of the Company and the Investors contained in
Sections 2 and 3, the agreements and covenants set forth in Sections 4, 5 and 9,
and the indemnification provisions set forth in Section 8, shall survive the
Closing and each Series C Closing. Each Investor shall be responsible only for
its own representations, warranties, agreements and covenants hereunder.
j. Publicity. The Company and each Investor shall have the right to
approve before issuance any press releases or any other public statements with
respect to the transactions contemplated hereby; provided, however, that the
Company shall be entitled, without the prior
22
<PAGE> 23
approval of any Investor, to make any press release or other public disclosure
with respect to such transactions as is required by applicable law and
regulations (although each Investor shall be consulted by the Company in
connection with any such press release or other public disclosure prior to its
release and shall be provided with a copy thereof).
k. Further Assurances. Each party shall do and perform, or cause to
be done and performed, all such further acts and things, and shall execute and
deliver all such other agreements, certificates, instruments and documents, as
the other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.
l. Termination. In the event that the Closing shall not have occurred
with respect to an Investor on or before April 14, 2000 due to the Company's or
such Investor's failure to satisfy the conditions set forth in Sections 6 and 7
above (and the nonbreaching party's failure to waive such unsatisfied
condition(s)), the nonbreaching party shall have the option to terminate this
Agreement with respect to such breaching party at any time after 5:00 p.m.,
California time, on April 14, 2000 without liability of any party to any other
party. In the event that the Closing shall not have occurred with respect to an
Investor on or before April 14, 2000 due to the failure of the condition set
forth in Section 6(v), with respect to the Company, and Section 7(xv), with
respect to an Investor, to be satisfied (and such party's failure to waive such
unsatisfied condition), either the Company or any Investor shall have the option
to terminate this Agreement with respect to such party at any time after 5:00
p.m., California time, on April 14, 2000 without liability of any party to any
other party. Notwithstanding the foregoing, that if this Agreement is terminated
by the Investors pursuant to this Section 9(l), the Company shall remain
obligated to reimburse the Investors for the expenses described in Section 4(g)
above.
m. Placement Agent. The Company acknowledges that it has not engaged
any placement agent in connection with the sale of the Preferred Shares. The
Company shall be responsible for the payment of any placement agent's fees or
broker's commissions (other than those of placement agents or brokers engaged by
an Investor) relating to or arising out of the transactions contemplated hereby.
The Company shall pay, and hold each Investor harmless against, any liability,
loss or expense (including, without limitation, attorneys' fees and out of
pocket expenses) arising in connection with any such claim. Each Investor,
severally and not jointly, represents that it has not engaged any placement
agent or broker for the exchange of the Series A Preferred Shares for the Series
B Preferred Shares.
n. No Strict Construction. The language used in this Agreement will
be deemed to be the language chosen by the parties to express their mutual
intent, and no rules of strict construction will be applied against any party.
o. Remedies. Each Investor and each holder of the Securities shall
have all rights and remedies set forth in the Transaction Documents and all
rights and remedies which such holders have been granted at any time under any
other agreement or contract and all of the rights which such holders have under
any law. Any person having any rights under any provision of this Agreement
shall be entitled to enforce such rights specifically (without posting a bond or
other
23
<PAGE> 24
security), to recover damages by reason of any breach of any provision of this
Agreement and to exercise all other rights granted by law.
p. Payment Set Aside. To the extent that the Company makes a payment
or payments to the Investors hereunder or pursuant to the Certificate of
Designations or the Investors enforce or exercise their rights hereunder or
thereunder, and such payment or payments or the proceeds of such enforcement or
exercise or any part thereof are subsequently invalidated, declared to be
fraudulent or preferential, set aside, recovered from, disgorged by or are
required to be refunded, repaid or otherwise restored to the Company, a trustee,
receiver or any other Person under any law (including, without limitation, any
bankruptcy law, state or federal law, common law or equitable cause of action),
then to the extent of any such restoration the obligation or part thereof
originally intended to be satisfied shall be revived and continued in full force
and effect as if such payment had not been made or such enforcement or setoff
had not occurred.
* * * * * *
24
<PAGE> 25
IN WITNESS WHEREOF, the Investors and the Company have caused this
Exchange Agreement to be duly executed as of the date first written above.
COMPANY: INVESTORS:
EFAX.COM FISHER CAPITAL LTD.
By: /s/ TODD J. KENCK By: /s/ DANIEL J. HOPKINS
---------------------------- ----------------------------
Name: Todd J. Kenck Name: Daniel J. Hopkins
Its: Chief Financial Officer Its: Authorized Signatory
WINGATE CAPITAL LTD.
By: /s/ DANIEL J. HOPKINS
----------------------------
Name: Daniel J. Hopkins
Its: Authorized Signatory
<PAGE> 26
SCHEDULE OF INVESTORS
<TABLE>
<CAPTION>
NUMBER OF
SERIES A
PREFERRED
INVESTOR ADDRESS SHARES INVESTOR'S REPRESENTATIVES' ADDRESS
INVESTOR NAME AND FACSIMILE NUMBER EXCHANGED AND FACSIMILE NUMBER
- ------------------- ------------------------------------ --------- -----------------------------------
<S> <C> <C> <C>
Fisher Capital Ltd. c/o Citadel Investment Group, L.L.C. 975 Katten Muchin & Zavis
225 West Washington Street 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Daniel Hopkins Attention: Robert J. Brantman, Esq.
Facsimile: (312) 338-0780 Facsimile: (312) 902-1061
Telephone: (312) 696-2100 Telephone: (312) 902-5200
Residence: Illinois
Wingate Capital Ltd. c/o Citadel Investment Group, L.L.C. 525 Katten Muchin & Zavis
225 West Washington Street 525 W. Monroe Street
Chicago, Illinois 60606 Chicago, Illinois 60661-3693
Attention: Daniel Hopkins Attention: Robert J. Brantman, Esq.
Facsimile: (312) 338-0780 Facsimile: (312) 902-1061
Telephone: (312) 696-2100 Telephone: (312) 902-5200
Residence: Illinois
</TABLE>
<PAGE> 27
LIST OF SCHEDULES
SCHEDULE 3(a) Subsidiaries
SCHEDULE 3(c) Capitalization
SCHEDULE 3(e) Conflicts
SCHEDULE 3(j) Transactions with Affiliates
SCHEDULE 7(v) Legal Opinion
LIST OF EXHIBITS
EXHIBIT A Form of Certificate of Designations, Preferences and
Rights of the Series B Preferred Stock
EXHIBIT B Form of Certificate of Designations, Preferences and
Rights of the Series C Preferred Stock
EXHIBIT C Form of Irrevocable Transfer Agent Instructions
<PAGE> 1
EXHIBIT 99.1
JFAX.COM SIGNS LETTER OF INTENT TO ACQUIRE EFAX.COM,
CREATING STRONG POSITION IN INTERNET COMMUNICATIONS
Combined Installed Base of Over 125,000 Paying Subscribers and Over 2.8 Million
Free Users Establishes Platform for Increased Revenue Generation
Consideration to Consist of Approximately 18.5 Million JFAX.COM Common Shares
HOLLYWOOD AND MENLO PARK, CALIF. (APRIL 6, 2000) - JFAX.COM (NASDAQ: JFAX) and
EFAX.COM (NASDAQ: EFAX), two of the world's largest unified messaging services
providers, today announced that they have signed a letter of intent to merge.
The proposed merger transaction will establish the combined company as the clear
industry leader in Internet-based unified messaging services worldwide.
JFAX.COM, the combined company, will have over 125,000 paid subscribers
generating monthly subscription and usage revenue and over 2.8 million free
users who represent an attractive advertising audience and are prime candidates
for a range of revenue-generating products and services that the combined
company will offer.
"Combining the resources of EFAX.COM with JFAX.COM will allow us to
achieve critical mass in the Internet communications marketplace," said Steven
J. Hamerslag, CEO and president of JFAX.COM. "We will have a substantial
installed base of business users on the Internet with an extensive range of
communication service offerings. EFAX.COM has done a great job of establishing a
strong brand and growing a large base of customers. Their paid subscriber base
has accelerated, growing 45% quarter-to-quarter to 66,000. We now have the
additional opportunity to enhance revenue generation by leveraging the EFAX
subscriber base with our previously announced plans for call management services
that build off our global Internet Protocol (IP) network."
"JFAX has a proven management team, a strong cash position and a global
network with innovative telecom solutions," said Ronald Brown, president of
EFAX.COM. "EFAX.COM has concentrated on Internet document delivery, brand-name
partnerships, and a new wireless initiative for mobile users. JFAX.COM has the
technology platform to tie it all together and expand services even further. We
welcome this opportunity to consolidate a powerful position," he added.
<PAGE> 2
JFAX.COM has committed to loan EFAX.COM, subject to satisfactory
documentation, up to $5 million on a senior secured basis. This loan will enable
EFAX.COM to fund its working capital needs and continuing growth until the
consummation of the merger. The loan commitment also includes a warrant for
JFAX.COM to purchase 250,000 shares of EFAX.COM common stock at yesterday's
close-of-market price. If the merger does not occur, the warrant exercise price
will be reset to $1.00 a share. The proposed merger is subject to negotiation of
definitive agreements, completion of due diligence, and other customary
conditions.
The letter of intent provides that, as total consideration for EFAX.COM,
JFAX.COM will issue approximately 18.5 million shares of its common stock to the
holders of EFAX.COM common and preferred stock, subject to an adjustment of this
number in certain circumstances. EFAX.COM's preferred stockholders have agreed
to exchange their current shares of Series A convertible preferred stock into a
new series of convertible preferred stock. The new series will have a right to
convert into common stock of EFAX.COM at a per-share price based upon the
average trading price for EFAX.COM common stock during the 20-trading-day period
beginning Friday. As a result, the number of shares of JFAX.COM common stock to
be ultimately received by existing holders of EFAX.COM common stock will be
determined following completion of such 20-trading-day period.
For example, as of today, the average closing price of the EFAX.COM
common stock for the last 10 trading days has been $5.46. Assuming this average
continues for the next 20 trading days, and further assuming that no other
adjustment becomes applicable, EFAX.COM common shareholders will receive 1.10
shares of JFAX.COM common stock for each share of EFAX.COM common stock. The
actual number of shares that EFAX.COM shareholders receive will likely differ
from the example and such difference may be material.
In consideration for the letter of intent, JFAX.COM will be granted
warrants to purchase either 750,000 or 1.75 million shares, depending on certain
circumstances, of EFAX.COM common stock at an exercise price of $1.00 per share,
in the event the merger does not occur.
This release will be followed promptly by the filing of reports on Form
8-K which will describe the terms of the transactions in greater detail.
JFAX.COM management has previously encouraged investors to gauge its
<PAGE> 3
progress by its revenues, gross margins and profits, and subscriber base (both
free and paid). For the quarter ended March 31, JFAX.COM said it expects its
gross profits and margins to be at the high end of analysts' expectations.
JFAX.COM also estimated that its subscriber growth exceeded expectations, with
free subscribers growing by 475,000 in the quarter to a total of 820,000. Paid
subscriber levels, however, are estimated to be below estimates for the quarter
following a previously announced decision to defer marketing efforts in the wake
of JFAX.COM's management transition. As a result, quarterly revenues will be
approximately $2.9 million.
"With the combined capabilities of both companies, we will expand our
services beyond message management to a full suite of unified communications
solutions," continued Hamerslag. "This will enable customers to access and
initiate business communications easily and seamlessly through a single
communications provider."
ABOUT JFAX.COM
JFAX.COM (NASDAQ: JFAX) is an award-winning Internet-based messaging and
communications service provider to individuals and businesses throughout the
world. JFAX's services enable the user's email box to function as a single
repository for all email, fax and voicemail and permit convenient advanced
message management through email or by phone. JFAX is a registered trademark of
JFAX. The company is headquartered in Hollywood, California. For more
information on JFAX and its services, see http://www.JFAX.com or call
1-888-GET-JFAX.
ABOUT EFAX.COM
EFAX.COM (NASDAQ: EFAX) is a provider of Internet communication services, and
has provisioned unique telephone numbers to about 2 million members. The Company
continues to expand its range of solutions beyond its initial offering of the
world's first free fax-to-email service. The Company markets its Internet
services via its own EFAX.COM web site and through affiliates and co-brand
partners, including Phone.com, Microsoft, Network Solutions, WebTV,
fortunecity.com, FindLaw, Phoenix Technologies and AllBusiness.com. EFAX.COM is
headquartered in Menlo Park, Calif. For more information, call 1-877-EFAXCOM;
fax (650) 326-6003; or visit: http://www.EFAX.com.
SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS: Certain statements in this news
release constitute "forward-looking
<PAGE> 4
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. These forward-looking statements involve risks and uncertainties that
could cause actual results to differ materially from projected results.
Forward-looking statements include statements about efforts to attract or
prospects for additional subscribers for our services and other statements of a
non-historical nature. Actual results may differ from projected results due to
various risk factors including our limited operating history, our use of third
parties to market our services, competition including competition from companies
offering free services, risks associated with technological change,
uncertainties regarding the protection of proprietary technology and other
factors set forth in the companies' respective filings with the Securities and
Exchange Commission.
NOTICE OF REGISTRATION STATEMENT: JFAX.COM expects to file a
registration statement, which will contain a joint proxy statement/prospectus of
JFAX.COM and EFAX.COM, and other documents with the Securities and Exchange
Commission. INVESTORS AND SECURITY HOLDERS ARE URGED TO READ THE JOINT PROXY
STATEMENT/PROSPECTUS AND ANY OTHER RELEVANT DOCUMENTS FILED WITH THE SEC WHEN
THEY BECOME AVAILABLE BECAUSE THEY WILL CONTAIN IMPORTANT INFORMATION. Investors
and security holders will be able to receive the joint proxy
statement/prospectus and other documents free of charge at the SEC's web site,
www.sec.gov and from JFAX.COM Investor Relations at 6922 Hollywood Boulevard,
Hollywood, California 90028.
(C) 2000 JFAX.COM. ALL RIGHTS RESERVED.
# # #
<TABLE>
<S> <C> <C>
JFAX CONTACTS, MEDIA ONLY:
John Davis Krys Card Bryan Maxwell
JFAX.COM Rogers & Cowan Rogers & Cowan
(323) 860-9469 (310) 201-8838 (310) 201-8892
[email protected] [email protected] [email protected]
JFAX CONTACTS, INVESTOR RELATIONS ONLY:
Scott Turrichi Betsy MacKinnon, Jim Lucas Winnie Lerner
JFAX.COM Abernathy MacGregor Group- West Abernathy MacGregor- New York
(323) 860-9408 (213) 630-6550 (212) 371-5999
[email protected] [email protected] [email protected]
EFAX CONTACTS, MEDIA AND INVESTOR RELEATIONS:
Todd Kenck Peter Delauzon/Christina Newman Jonathan Schaffer, Jill Fatzinger (IR)
EFAX.com (Media) Morgen-Walke Associates, Inc.
650-688-6810 Morgen-Walke Associates, Inc. (415) 296-7383
[email protected] (415) 296-7383 [email protected]
</TABLE>
