-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CRHv9T6tzhrxA0bMs/pxdxiO1k0a7f3mmg7ErW+zutZ32DCqIaVuzijwu9gRICJD skfZ1Ldz3QRXkmFx+iDdDg== 0000950149-00-000784.txt : 20000407 0000950149-00-000784.hdr.sgml : 20000407 ACCESSION NUMBER: 0000950149-00-000784 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20000405 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 20000406 FILER: COMPANY DATA: COMPANY CONFORMED NAME: EFAX COM INC CENTRAL INDEX KEY: 0000872901 STANDARD INDUSTRIAL CLASSIFICATION: COMPUTER PERIPHERAL EQUIPMENT, NEC [3577] IRS NUMBER: 770182451 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 000-22561 FILM NUMBER: 594515 BUSINESS ADDRESS: STREET 1: 1378 WILLOW RD CITY: MENLO PARK STATE: CA ZIP: 94025 BUSINESS PHONE: 6503240600 MAIL ADDRESS: STREET 1: 1378 WILLOW RD CITY: MENLO PARK STATE: CA ZIP: 94025 FORMER COMPANY: FORMER CONFORMED NAME: JETFAX INC DATE OF NAME CHANGE: 19970228 8-K 1 EFAX.COM FORM 8-K 1 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) 2 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. 3 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 4 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. EX-2.1 2 LETTER OF INTENT OF APR. 5, 2000 FROM JFAX.COM 1 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). 2 (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 2 3 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 3 4 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 4 5 400,000 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 5 6 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, 6 7 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. 7 8 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. 8 9 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 9 EX-3.1 3 CERTIFICATE OF DESIGNATIONS, SERIES B 1 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%. 2 (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. -2- 3 (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), -3- 4 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 -4- 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 -5- 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 -6- 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, -7- 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 -8- 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 -9- 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 -10- 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 -11- 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 -12- 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 -13- 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 -14- 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 -15- 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 -16- 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. -17- 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. -18- 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 -19- 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 -20- 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- 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 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] 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: ----------------------- EX-3.2 4 CERTIFICATE OF DESIGNATIONS, SERIES C 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 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- 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- 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- 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- 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- 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- 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- 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 -9- 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. -10- 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 -11- 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. -12- 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 -13- 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 -14- 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 -15- 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 -16- 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 -17- 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 -18- 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- 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 -20- 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 -21- 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 -22- 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. -23- 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 -24- 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. -25- 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- 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 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] 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: ---------------------------------- EX-10.1 5 EXCHANGE AGREEMENT OF APR. 5, 2000 OF SERIES A 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 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 2 3 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 3 4 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 4 5 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, 5 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 6 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 7 8 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. 8 9 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 9 10 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. 10 11 (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, 11 12 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 12 13 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 13 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. 14 15 (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. 15 16 (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. 16 17 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. 17 18 (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. 18 19 (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 19 20 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 20 21 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 21 22 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 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 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 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 26 SCHEDULE OF INVESTORS
NUMBER OF SERIES A PREFERRED INVESTOR ADDRESS SHARES INVESTOR'S REPRESENTATIVES' ADDRESS INVESTOR NAME AND FACSIMILE NUMBER EXCHANGED AND FACSIMILE NUMBER - ------------------- ------------------------------------ --------- ----------------------------------- 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
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 EX-99.1 6 PRESS RELEASE 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. 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 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 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. # # # 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 Jdavis@JFAX.com kcard@shandwick.com bmaxwell@shandwick.com 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 Sturicchi@JFAX.com jbl@abmac.com Wal@abmac.com 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 toddk@EFAX.com (415) 296-7383 jschaffer@mwa-sf.com
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