No.:
Name:
Number of Units Subscribed for:

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

SUBSCRIPTION AND RIGHTS AGREEMENT

November 17, 2006

 

OFFERING INFORMATION, LEGENDS, AND NOTICES

 

THE SECURITIES OFFERED HEREBY, HAVE NOT BEEN FILED OR REGISTERED WITH OR APPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (THE “COMMISSION”), NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE OFFERING MATERIALS. NO STATE SECURITIES LAW ADMINISTRATOR HAS PASSED ON OR ENDORSED THE MERITS OF THIS OFFERING OR THE ACCURACY OR THE ADEQUACY OF THE OFFERING MATERIALS. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.

 

IT IS INTENDED THAT THE SECURITIES OFFERED HEREBY WILL BE MADE AVAILABLE TO ACCREDITED INVESTORS, AS DEFINED IN REGULATION D AND RULE 501 PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”). THE SECURITIES OFFERED HEREBY ARE BEING OFFERED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND APPLICABLE STATE SECURITIES LAWS FOR NONPUBLIC OFFERINGS. SUCH EXEMPTIONS LIMIT THE NUMBER AND TYPES OF INVESTORS TO WHICH THE OFFERING WILL BE MADE AND RESTRICT SUBSEQUENT TRANSFERS OF THE INTERESTS.

 

THE SECURITIES OFFERED HEREBY SHOULD BE CONSIDERED ONLY BY PERSONS WHO CAN AFFORD TO SUSTAIN A LOSS OF THEIR ENTIRE INVESTMENT. INVESTORS WILL BE REQUIRED TO REPRESENT THAT THEY ARE FAMILIAR WITH AND UNDERSTAND THE TERMS OF THIS OFFERING.

 

NO SECURITIES MAY BE RESOLD OR OTHERWISE DISPOSED OF BY AN INVESTOR UNLESS, IN THE OPINION OF COUNSEL SATISFACTORY TO THE COMPANY, REGISTRATION UNDER THE APPLICABLE FEDERAL OR STATE SECURITIES LAWS IS NOT REQUIRED OR COMPLIANCE IS MADE WITH SUCH REGISTRATION REQUIREMENTS.

 

THE OFFEREE, BY ACCEPTING DELIVERY OF THE OFFERING MATERIALS, AGREES TO RETURN THE OFFERING MATERIALS AND ALL ACCOMPANYING OR RELATED DOCUMENTS TO THE COMPANY UPON REQUEST IF THE OFFEREE DOES NOT AGREE TO PURCHASE ANY OF THE SECURITIES OFFERED HEREBY.

 

ANY OFFERING MATERIALS SUBMITTED IN CONNECTION WITH THE PRIVATE PLACEMENT OF THE SECURITIES DO NOT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED. ANY REPRODUCTION OR DISTRIBUTION OF ANY OFFERING MATERIALS IN WHOLE OR IN PART, OR THE DIVULGENCE OF ANY OF THEIR CONTENTS, WITHOUT THE PRIOR WRITTEN CONSENT OF THE COMPANY, IS PROHIBITED. ANY PERSON ACTING CONTRARY TO THE FOREGOING RESTRICTIONS MAY PLACE HIM/HERSELF AND THE COMPANY IN VIOLATION OF FEDERAL OR STATE SECURITIES LAWS.

 

NASAA UNIFORM LEGEND

IN MAKING AN INVESTMENT DECISION INVESTORS MUST RELY ON THEIR OWN EXAMINATION OF THE COMPANY AND THE TERMS OF THE OFFERING, INCLUDING THE MERITS AND RISKS INVOLVED. THESE SECURITIES HAVE NOT BEEN RECOMMENDED BY ANY FEDERAL OR STATE SECURITIES COMMISSION OR REGULATORY AUTHORITY. FURTHERMORE, THE FOREGOING AUTHORITIES HAVE NOT CONFIRMED THE ACCURACY OR DETERMINED THE ADEQUACY OF THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THESE SECURITIES ARE SUBJECT TO RESTRICTIONS ON TRANSFERABILITY AND RESALE AND MAY NOT BE TRANSFERRED OR RESOLD EXCEPT AS PERMITTED UNDER THE ACT, AND THE APPLICABLE STATE SECURITIES LAWS, PURSUANT TO REGISTRATION OR EXEMPTION THEREFROM. INVESTORS SHOULD BE AWARE THAT THEY WILL BE REQUIRED TO BEAR THE FINANCIAL RISKS OF THIS INVESTMENT FOR AN INDEFINITE PERIOD OF TIME.

FOR RESIDENTS OF PENNSYLVANIA

THE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE PENNSYLVANIA SECURITIES ACT AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF WITHIN 12 MONTHS AFTER THE DATE OF PURCHASE, UNLESS SUBSEQUENTLY REGISTERED UNDER THE PENNSYLVANIA SECURITIES ACT OR UNDER THE SECURITIES ACT OF 1933, AS AMENDED.

EACH PERSON WHO ACCEPTS AN OFFER TO PURCHASE SECURITIES EXEMPTED FROM REGISTRATION BY SECTION 203(d), DIRECTLY FROM THE ISSUER OR AFFILIATE OF THE ISSUER, SHALL HAVE THE RIGHT TO WITHDRAW HIS ACCEPTANCE WITHOUT INCURRING ANY LIABILITY TO THE SELLER, UNDERWRITER (IF ANY) OR ANY OTHER PERSON WITHIN 2 BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE ISSUER OF HIS WRITTEN BINDING CONTRACT OF PURCHASE OR, IN THE CASE OF A TRANSACTION IN WHICH THERE IS NO BINDING CONTRACT OF PURCHASE, WITHIN 2 BUSINESS DAYS AFTER HE MAKES THE INITIAL PAYMENT FOR THE SECURITIES BEING OFFERED.

FOR RESIDENTS OF GEORGIA

THESE SECURITIES HAVE BEEN ISSUED OR SOLD IN RELIANCE ON PARAGRAPH THIRTEEN (13) OF CODE SECTION 10-5-9 OF THE GEORGIA SECURITIES ACT OF 1973, AND MAY NOT BE SOLD OR TRANSFERRED EXCEPT IN A TRANSACTION WHICH IS EXEMPT UNDER SUCH ACT OR PURSUANT TO AN EFFECTIVE REGISTRATION UNDER SUCH ACT.

FOR RESIDENTS OF FLORIDA

PURSUANT TO THE LAWS OF THE STATE OF FLORIDA, IF SALES ARE MADE TO FIVE (5) OR MORE INVESTORS IN FLORIDA, ANY FLORIDA INVESTOR MAY, AT ITS OPTION, WITHDRAW, UPON WRITTEN (OR TELEGRAPHIC) NOTICE, ANY PURCHASE HEREUNDER WITHIN A PERIOD OF THREE (3) DAYS AFTER (A) THE INVESTOR FIRST TENDERS OR PAYS TO THE COMPANY AN AGENT OF THE COMPANY OR AN ESCROW AGENT THE CONSIDERATION REQUIRED HEREUNDER, (B) THE INVESTOR DELIVERS ITS EXECUTED SUBSCRIPTION AGREEMENT, OR (C) THE AVAILABILITY OF THAT PRIVILEGE IS COMMUNICATED TO SUCH INVESTOR, WHICHEVER OCCURS LATER.

SUBSCRIPTION AND RIGHTS AGREEMENT

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

Subscription and Rights Agreement (this “ Subscription Agreement ”) with respect to the offering (the “ Offering ”) of up to 70 units (the “ Units ”) of FUSION TELECOMMUNICATIONS INTERNATIONAL, INC., a Delaware corporation (the “ Company ”), each such Unit consisting of 100 shares of Series A-1 Cumulative Convertible Preferred Stock (“ Convertible Preferred Stock ”) and accompanying Warrants to purchase shares of the Company’s common stock, par value $.01 per share ¹   (the “ Common Stock ”). The conversion shares and the warrant shares underlying each Unit may not be separately transferred. The Units together with the Convertible Preferred Stock, the Warrants and the securities underlying each Unit are sometimes collectively referred to as “ Securities ”). The Certificate of Rights and Designations of the Convertible Preferred Stock and the form of Warrant are included in the Booklet, which accompanies this Subscription Agreement.

For purposes of this Offering, the minimum offering shall mean thirty (30) Units (the “ Minimum Offering ”) and a minimum gross amount raised of $3,000,000 (the “ Minimum Amount ”). The maximum offering shall mean seventy (70) Units (the “ Maximum Offering ”) and a maximum gross amount raised of $7,000,000 (the “ Maximum Amount ”). The minimum investor subscription amount is $100,000 to purchase one (1) Unit (“ Minimum Investor Subscription Amount ”); the Company reserves the right to accept subscriptions for lesser amounts.

The Company, on notice to the purchasers of Units, may, within 30 days of the last closing with respect to the Maximum, exercise its option to sell an additional $3,000,000 of Units (30 Units), upon the same terms and conditions as set forth herein (the “ Over Allotment Option ”). If the Company exercises its Over Allotment Option, then the Offering Period defined below may be extended for a period not to exceed an additional 30 days.

The Units are being offered by the Company. The Company, however, reserves the right to retain registered broker-dealers, “finders”, and other individuals and entities authorized by federal and applicable state securities laws to assist with the distribution of the Securities offered hereby. In such event, the Company shall pay a selling commission or finders fees to registered broker-dealers, “finders”, individuals and entities legally authorized to receive such commissions or fees, as applicable (collectively, the “ Selling Agents ”) of a sum ordinarily not to exceed ten percent (10%) of the investor subscription amount received, provided that such payments are permitted under federal and applicable state securities laws. Such broker’s compensation may include warrants as well.

Subscriptions to purchase Units will be solicited until the earliest of: (i) November 30, 2006, unless extended by the Company in its sole discretion without notice for a period of up to an additional 90 days, (ii) the sale of the entire Offering, or (iii) if the Company elects to exercise its Over Allotment Option, for a period of up to an additional 30 days (the “ Offering Period ”).

¹ 50% of the number of shares of Common Stock into which Holder's Preferred Stock is convertible.

A.       General.

(1)   The undersigned hereby subscribes for and agrees to purchase from the Company, and the Company agrees to sell to the undersigned, such number of Units as is set forth on the signature page hereof at a price per Unit of $100,000.

(2)   The undersigned herewith tenders to the Company the entire amount of the purchase price by check made payable to the order of “JP Morgan Chase f/b/o Fusion Telecommunications International, Inc.” or by wire transfer of immediately available funds to:

 

(3)   The undersigned herewith delivers the completed and signed Subscription Agreement and completed and signed Qualified Prospective Purchaser Questionnaire for Units of Fusion Telecommunications International, Inc. (“ Qualified Purchaser Questionnaire ”) to the Company at:

Fusion Telecommunications International, Inc.

420 Lexington Avenue, Suite 1718

New York, NY 10170

Attn:   Matthew D. Rosen, President and CEO

B.       Securities offered will not be registered under the Securities Act of 1933, as amended

The undersigned acknowledges that (i) the Securities will not be registered under the Securities Act of 1933, as amended, and the rules and regulations promulgated thereunder (the “ 1933 Act ”), or the securities laws of any state; (ii) absent an exemption, any transfer of the Securities would require registration; (iii) the Securities are being offered for sale in reliance upon exemptions from registration contained in the 1933 Act and applicable state laws; and (iv) the Company's reliance upon such exemption is based in part upon the undersigned's representations, warranties and agreements contained in this Subscription Agreement and in the Qualified Purchaser Questionnaire that the undersigned is also delivering to the Company.

C.       Representations, Warranties, Acknowledgements and Agreements

In order to induce the Company to accept this Subscription Agreement, the undersigned represents, warrants, acknowledges and covenants to the Company as follows:

(1)   The undersigned understands that (i) this Subscription Agreement may be accepted or rejected in whole or in part by the Company in its sole and absolute discretion, and (ii) this Subscription Agreement shall survive the undersigned's death, disability or insolvency, except that the undersigned shall have no obligation in the event that this Subscription Agreement is rejected by the Company. In the event that the Company does not accept the undersigned's subscription, or if the Offering is terminated for any reason, the undersigned's subscription payment (or portion thereof, as the case may be) will be returned to the undersigned without interest or deduction.

(2)   The undersigned has carefully read this Subscription Agreement (including, without limitation, the Appendix A entitled “ Risk Factors ”), the Qualified Purchaser Questionnaire, the Outline of Proposed Terms, the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005 (including, without limitation, the risks set forth under the heading “ Risk Factors ”), and the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006, its exhibits attached hereto and thereto, as well as such other materials as the Company deems necessary to the Offering (collectively, the “ Offering Materials ”). In making the decision to invest in the Securities, the undersigned has relied solely upon the information provided by the Company in the Offering Materials. To the extent necessary, the undersigned has discussed with his, her or its counsel the representations, warranties and agreements which the undersigned makes by signing this Subscription Agreement, the applicable limitations upon the undersigned's resale of the Securities, and the investment, tax and legal consequences of this Subscription Agreement. The undersigned disclaims reliance on any statements made or information provided by any person or entity in the course of the undersigned’s consideration of an investment in the Securities other than the Offering Materials.

(3)   The undersigned understands that no federal or state agency has made any finding or determination regarding the fairness of the Offering, or any recommendation or endorsement of the Offering.

(4)   The undersigned is purchasing the Securities for the undersigned's own account, with the intention of holding the Securities for investment purposes, with no present intention of dividing or allowing others to participate in this investment or of reselling or otherwise participating, directly or indirectly, in a distribution of the Securities; and shall not make any sale, transfer or other disposition of the Securities without registration under the 1933 Act and applicable state securities laws unless an exemption from registration is available under those laws. The undersigned is not acquiring any portion of the Securities, or any interest therein, on behalf of another person. No person other than the undersigned has any direct or indirect beneficial interest in the Securities subscribed for hereunder by the undersigned. The undersigned, if an entity, was not formed for the purpose of purchasing the Securities.

(5)   The undersigned's overall commitment to investments which are not readily marketable is not disproportionate to the undersigned's net worth, and the undersigned's investment in the Securities will not cause such overall commitment to become excessive.

(6)   The undersigned, if an individual, has adequate means of providing for his or her current needs and personal and family contingencies and has no need for liquidity in his or her investment in the Securities.

(7)   The undersigned is an “accredited investor” as that term is defined in Rule 501(a) under Regulation D promulgated by the Securities and Exchange Commission (the “ SEC ”) under the 1933 Act. The undersigned is financially able to bear the economic risk of this investment, including the ability to afford holding the Securities for an indefinite period or to afford a complete loss of this investment.

(8)   The address shown under the undersigned's signature at the end of this Subscription Agreement is the undersigned's principal residence if he or she is an individual, or its principal business address if a corporation or other entity.

(9)   The undersigned, together with any offeree representatives of the undersigned (as identified in the Qualified Purchaser Questionnaire) has such knowledge and experience in financial business matters as to be capable of evaluating the merits and risks of an investment in the Securities. The undersigned acknowledges that the Offering Materials may not contain all information that is necessary to make an investment decision with respect to the Company and the Securities and that the undersigned must rely on his, her or its own examination of the Company and the terms and conditions of the Offering prior to making any investment decision with respect to the Securities.

(10)   The undersigned has been given the opportunity to ask questions of and receive answers from the Company and its executive officers concerning the business and operations of the Company and the terms, provisions, and conditions of the Offering and to obtain any such additional information that the undersigned deems necessary or advisable to verify the accuracy of the information contained in the Memorandum, or such other information as the undersigned desired in order to evaluate an investment in the Company; and the undersigned availed himself, herself or itself of such opportunity to the extent considered appropriate in order to evaluate the merits and risks of the proposed investment.

(11)   The undersigned has made an independent evaluation of the merits of the investment and acknowledges the high risk nature of the investment including, without limitation, the Risk Factors set forth in Appendix A.

(12)   The undersigned has accurately completed the Qualified Purchaser Questionnaire provided herewith and has executed such Qualified Purchaser Questionnaire and any applicable exhibits thereto.

(13)  

(i)   The undersigned understands that none of the Securities have been registered under the 1933 Act or any state securities laws in reliance on exemptions for private offerings; the Securities cannot be resold or otherwise disposed of unless they are subsequently registered under the 1933 Act and applicable state securities laws or an exemption from registration is available. The certificate(s) representing the Securities will bear a legend substantially similar to the legend set forth immediately below until (i) such Securities shall have been registered under the 1933 Act and effectively disposed of in accordance with a registration statement, or (ii) in the opinion of counsel reasonably satisfactory to the Company such securities may be sold without registration under the 1933 Act:

“THESE SECURITIES HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "1933 ACT"), OR THE "BLUE SKY" OR SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD, PLEDGED, HYPOTHECATED, ASSIGNED OR TRANSFERRED EXCEPT (i) PURSUANT TO A REGISTRATION STATEMENT UNDER THE 1933 ACT WHICH HAS BECOME EFFECTIVE AND IS CURRENT WITH RESPECT TO THESE SECURITIES, OR (ii) PURSUANT TO A SPECIFIC EXEMPTION FROM REGISTRATION UNDER THE 1933 ACT BUT ONLY UPON A HOLDER THEREOF FIRST HAVING OBTAINED THE WRITTEN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, THAT THE PROPOSED DISPOSITION IS CONSISTENT WITH ALL APPLICABLE PROVISIONS OF THE 1933 ACT AS WELL AS ANY APPLICABLE "BLUE SKY" OR SIMILAR SECURITIES LAWS."

(ii)   The undersigned understands that in the absence of registration by the Company, the Securities will not be, and, except as set forth in Section D of this Subscription Agreement, the undersigned will have no rights to require that the Securities shall be, registered under the 1933 Act or any state securities laws; the undersigned may have to hold the Securities indefinitely and it may not be possible for the undersigned to liquidate his, her or its investment in the Company; and the undersigned should not purchase any Securities unless he, she or it can afford a complete loss of his, her or its investment and bear the burden of such loss for an indefinite period of time.

(iii)   The undersigned understands there is no public market for the Securities and that no public market may develop for any such Securities. The undersigned understands that the provisions of Rule 144 promulgated under the 1933 Act to permit resales of the Securities are not available for at least one (1) year after the same class of securities is registered under the 1933 Act and the Securities Exchange Act of 1934, as amended (the “ 1934 Act ”), and there can be no assurances that any such class of securities will ever be registered under the 1933 Act or the 1934 Act, or even if such class of securities is registered under the 1933 Act and the 1934 Act, that the conditions necessary thereafter to permit routine sales of the Securities under Rule 144 will ever be satisfied, and, if Rule 144 should become available, routine sales made in reliance on its provisions could be made only in limited amounts and in accordance with the terms and conditions of Rule 144. The undersigned further understands that in connection with the sale of securities for which Rule 144 is not available, compliance with some other exemption from registration will be required. The undersigned understands, subject to the provisions of Section D of this Subscription Agreement, that the Company is under no obligation to the undersigned to register any such class of securities or to comply with the conditions of Rule 144 or take any other action necessary in order to make available any exemption for the resale of the Securities without registration.

(14)   The undersigned, if an individual, is at least 21 years of age.

(15)   If at any time prior to issuance of the Securities to the undersigned, any representation or warranty of the undersigned shall no longer be true, the undersigned promptly shall give written notice thereof to the Company specifying which representations and warranties are not true and the reason therefore, whereupon the undersigned's subscription may be rejected by the Company in whole or in part.

(16)   Notwithstanding the place where this Subscription Agreement may be executed by any of the parties hereto, all of the terms, provisions, and conditions hereof shall be construed in accordance with and governed by the laws of the State of New York, without giving effect to its conflict of laws principles. Any dispute that may arise out of or in connection with this Subscription Agreement shall be adjudicated before a court located in New York City and the parties hereto submit to the exclusive jurisdiction and venue of the state and local courts of the State of New York located in New York City and of the federal courts in the Southern District of New York with respect to any action or legal proceeding commenced by any party, and irrevocably waive any objection they now or hereafter may have respecting the venue of any action or proceeding brought in such a court or respecting the fact that such court is an inconvenient forum, relating to or arising out of this Subscription Agreement or any acts or omissions relating to the sale of the Securities, and the undersigned consents to the service of process in any such action or legal proceeding by means of registered or certified mail, return receipt requested, in care of the address set forth below or such other address as the undersigned shall furnish in writing to the Company.

(17)   THE UNDERSIGNED HEREBY WAIVES TRIAL BY JURY IN ANY ACTION OR PROCEEDING INVOLVING, DIRECTLY OR INDIRECTLY, ANY MATTER (WHETHER SOUNDING IN TORT, CONTRACT, FRAUD OR OTHERWISE) IN ANY WAY ARISING OUT OF OR IN CONNECTION WITH THIS SUBSCRIPTION AGREEMENT OR THE UNDERSIGNED'S PURCHASE OF THE SECURITIES.

(18)   The undersigned acknowledges that he, she or it understands the meaning and legal consequences of the representations, warranties and acknowledgments contained in this Subscription Agreement and in the Qualified Purchaser Questionnaire, and hereby agrees to indemnify and hold harmless the Company, and each of its stockholders, officers, directors, affiliates, controlling persons, agents and representatives, from and against any and all loss, damage, expense, claim, action, suit or proceeding (including the reasonable fees and expenses of legal counsel) as incurred arising out of or in any manner whatsoever connected with (i) a breach of any representation or warranty of the undersigned contained in this Subscription Agreement or in the Qualified Purchaser Questionnaire (ii) any sale or distribution by the undersigned in violation of the 1933 Act or any applicable state securities laws or (iii) any untrue statement of a material fact made by the undersigned and contained herein or in the Qualified Purchaser Questionnaire, or omission to state herein or in the Qualified Purchaser Questionnaire, a material fact necessary in order to make the statements contained herein or in the Qualified Purchaser Questionnaire, in light of the circumstances under which they were made, not misleading. The undersigned acknowledges that such damage could be substantial since (a) the Securities are being offered without registration under the 1933 Act in reliance upon the exemption pursuant to Section 4(2) and/or Regulation D of the 1933 Act for transactions by an issuer not involving a public offering and, in various states, pursuant to exemptions from registration, (b) the availability of such exemptions is, in part, dependent upon the truthfulness and accuracy of the representations made by the undersigned herein and in its Qualified Purchaser Questionnaire, and (c) the Company will rely on such representations in accepting the undersigned's Subscription Agreement.

(19)   The undersigned is not subscribing for the Securities as a result of or subsequent to any advertisement, article, notice or other communication published in any newspaper, magazine or similar media or broadcast over television or radio, any seminar or meeting, or any solicitation of a subscription by a person not previously known to the undersigned in connection with investments in securities generally.

(20)   Unless otherwise indicated on a separate sheet of paper that details any such affiliation submitted by the undersigned to the Company along with this completed Subscription Agreement, the undersigned is not affiliated directly or indirectly with a member broker-dealer firm of the National Association of Securities Dealers, Inc. as an employee, officer, director, partner or shareholder or as a relative or member of the same household of an employee, director, partner or shareholder of an NASD member broker-dealer firm.

(21)   Except as expressly provided herein, this Subscription Agreement contains the entire agreement between the parties with respect to the transactions contemplated hereunder and may be amended only by a writing executed by all of the parties hereto. The undersigned represents that he, she or it has full power and authority (corporate, statutory or otherwise) to execute and deliver this Subscription Agreement and the other Offering Materials to which the undersigned is a party and to purchase the Securities. The execution, delivery and performance of this Subscription Agreement and the Qualified Purchaser Questionnaire will not: (i) violate, conflict with or result in a default under any provision of the Certificate or By-Laws (or analogous organizational documents), if any, of the undersigned; or (ii) violate or result in a violation of, or constitute a default (whether after the giving of notice, lapse of time or both) under, any provision of any law, regulation or rule, or any order of, or any restriction imposed by any court or other governmental agency applicable to the undersigned, except for those which do not, or are not reasonably likely to, adversely affect the undersigned’s ability to perform its obligations under this Subscription Agreement and the Qualified Purchaser Questionnaire and to consummate the transactions contemplated hereby and thereby. This Subscription Agreement constitutes the legal, valid and binding obligation of the undersigned, enforceable against the undersigned in accordance with its terms. This Subscription Agreement supersedes all prior arrangements or understandings with respect thereto, whether oral or written. The terms and conditions of this Subscription Agreement shall inure to the benefit of and be binding upon the parties and their respective successors, heirs and assigns.

(22)   The undersigned understands that the Company intends to use the net proceeds from the Offering for working capital and general corporate purposes.

In order to induce the undersigned to execute and deliver this Subscription Agreement, the Company represents, warrants, and covenants to the undersigned as follows:

(1)   The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and is duly authorized to transact business as a foreign corporation in the State of New York. The Corporation has full power and authority to own its properties and to carry on its business as currently conducted.

 

(2)   The execution, delivery and performance by the Company of this Subscription Agreement and the Offering and sale of Units to accredited investors contemplated hereby shall, assuming the representations and warranties of the undersigned are correct, be in compliance with the exemptions from registration set forth in Regulation D and/or Section 4(2) of the 1933 Act and applicable state securities “blue sky” laws, and the Company, in reliance on the representations and warranties of the undersigned, shall make all filings required to qualify for such exemptions. No additional permit, license, exemption, consent, authorization or approval of, or the giving of any notice by the Company to, any governmental or regulatory body, agency or authority is required in order for the Company to execute, deliver and perform its obligations hereunder, which has not been made, or will not when required be made, by the Company. No notice by the Company to any third party, and no consent or approval of any third party, of the Company’s execution, delivery and performance of this Subscription Agreement is required which has not been given or obtained.

(3)   The Company has the requisite power and authority to execute and deliver this Subscription Agreement, and perform its obligations herein, and consummate the transactions contemplated hereby. Upon the acceptance of the undersigned’s subscription by the Company and the execution of this Subscription Agreement by the Company, this Subscription Agreement will be a valid, legal and binding obligation of the Company enforceable against the Company in accordance with its terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency or similar laws affecting the enforcement of creditors’ rights generally and subject to general principles of equity (regardless of whether such enforcement is considered in a proceeding at law or at equity).

 

(4)   The Company has reserved sufficient conversion shares and warrant shares for conversion of the Preferred Stock and exercise of the Warrants, respectively.

(5)   The Units and the conversion shares and warrant shares underlying the Units to be issued to the undersigned pursuant to this Subscription Agreement, when issued and delivered in accordance with the terms of this Subscription Agreement, in each case, shall be duly authorized, validly issued, fully paid and non-assessable.

D.       Registration Rights

The undersigned shall have the registration rights set forth in this Section D.

(1)   The Company shall use its best efforts to file a registration statement with the SEC within ninety (90) days of the initial closing date in order to register the resale of the conversion shares and the warrant shares (are hereinafter collectively referred to in this Section D as the “ Registrable Securities ”) under the 1933 Act. In addition, the Company shall use its best efforts to cause such registration statement to become effective as soon as practicable after the date of such initial filing.

The obligation of the Company under this Section D(1) shall be limited to the above described demand registration statement; provided, however, that any registration shall not count as a demand registration under this Section D(1) until a registration statement including all of the Registrable Securities requested to be included thereon has been declared effective by the Staff of the SEC, and such registration statement has remained continuously effective for as long as required by Section D(2)(i) below .

(2)   In addition to the covenants set forth in Section D(1), the Company shall:

(i)   cause registration statement with respect to the Registrable Securities to remain effective for the earliest of (A) the second anniversary of the date the registration statement has been declared effective, (B) such time as all of the Registrable Securities issued or issuable hereunder can be sold by the Participating Holders, herein defined, immediately without compliance with the registration requirements of the Securities Act pursuant to Rule 144(k) under the Securities Act (" Rule 144 ” ) and (C) the date all of the Registrable Securities issued shall have been sold by the Participating Holders (such period, the " Registration Period ”) ;

(ii)   prepare and file with the SEC such amendments to such registration statement and supplements to the prospectus contained therein as may be necessary to keep such registration statement effective for the applicable period in accordance with the provisions of Section D(2)(i) above;

(iii)   furnish to any holder participating in such registration (a “ Participating Holder ”) such reasonable number of copies of the registration statement, preliminary prospectus, final prospectus and such other documents as such holder may reasonably request in order to facilitate the public offering of the Participating Holder’s securities;

(iv)   use its best efforts to register or qualify the Registrable Securities covered by such registration statement under such state securities or blue sky laws of such jurisdictions as such Participating Holders may reasonably request in writing within twenty (20) days following the original filing of such registration statement, except that the Company shall not for any purpose be required to execute a general consent to service of process or to qualify to do business as a foreign corporation in any jurisdiction wherein it is not so qualified;

(v)   notify the Participating Holders, promptly after it shall receive notice thereof, of the time when such registration statement or a supplement to any prospectus forming a part of such registration statement has become effective;

(vi)   notify the Participating Holders promptly of any request by the Staff of the SEC for the amending or supplementing of such registration statement or prospectus or for additional information;

(vii)   prepare and file with the SEC any amendments or supplements to such registration statement or prospectus which is required under the 1933 Act or the rules and regulations promulgated thereunder in connection with the distribution of the Registrable Securities by the Participating Holders;

(viii)   prepare and promptly file with the SEC and promptly notify the Participating Holders of the filing of such amendment or supplement to such registration statement or prospectus as may be necessary to correct any statements or omissions if, at the time when a prospectus relating to such Registrable Securities is required to be delivered under the 1933 Act, any event shall have occurred as the result of which any such prospectus or any other prospectuses then in effect would include an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances in which they were made, not misleading;

(ix)   advise the Participating Holders promptly after it shall receive notice or obtain knowledge thereof, of the issuance of any stop order by the Division of Enforcement of the SEC suspending the effectiveness of such registration statement or the initiation or threatening of any proceeding for that purpose and promptly use its best efforts to prevent the issuance of any stop order or to obtain its withdrawal if such stop order should be issued;

(x)   indemnify and hold harmless each Participating Holder against any and all losses, claims, damages or liabilities to which such Participating Holder shall become subject, under the 1933 Act or otherwise, that arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the effective registration statement or any prospectus that forms a part thereof or any amendment or supplement thereto, or arise out of or are based upon any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements there in not misleading; provided , however , that no such indemnification shall be available to any Participating Holder (and the Participating Holder shall indemnify and hold harmless the Company) with respect to, and to the extent there is liability attributable to, written information provided by a Participating Holder to the Company for use in such registration statement or prospectus thereunder or any amendment or supplement thereto, or any related preliminary prospectus; and

(xi)   cause its executive officers to cooperate in good faith with any managing underwriter in connection with taking all actions reasonably necessary to successfully consummate the public offering, including but not limited to, active participation at so-called “road shows” to the extent requested by the managing underwriter, and using best efforts to obtain as high a valuation of the Company as possible.

(3)

(i)   All fees, costs and expenses of and incidental to the registration of Registrable Securities, shall be borne by the Company; provided , however , that Participating Holders shall bear their pro rata share of the underwriting discount, if any, and commissions and transfer taxes, and any professional fees or costs of accounting, financial or legal advisors to any of the Participating Holders.

(ii)   The fees, costs and expense of registration to be borne by the Company as provided in Section D(3)(i) above shall include, without limitation, all registration, filing fees, exchange or market listing fees, printing expenses, fees and disbursements of counsel and accountants for the Company, and all legal fees and disbursements and other expenses of complying with state securities or blue sky laws of any jurisdictions in which the securities to be offered are to be registered and qualified.

(4)   Upon the proper and lawful transfer of any of the Securities by any holder thereof prior to such time as the Securities have been resold pursuant to a registration statement contemplated by this Section D, the registration rights attendant to such Securities shall be transferable hereunder if:

(i)   such Participating Holder gives prior written notice to the Company;

(ii)   such transferee agrees to execute a counterpart to this Subscription Agreement agreeing to comply with the terms and provisions of this Subscription Agreement, whereupon such transferee shall have the benefits of, and shall be subject to the restrictions contained in, this Subscription Agreement as if such transferee had originally been a party hereto;

(iii)   such transfer is otherwise in compliance with this Subscription Agreement; and

(iv)   such transfer is otherwise effected in accordance with applicable securities laws.

E.       Notice Provisions

Any and all notices, demands or requests required or permitted to be given under this Subscription Agreement shall be given in writing and sent, by registered or certified U.S. mail, return receipt requested, by hand, or by overnight courier, addressed to the parties hereto at their addresses set forth above or such other addresses as they may from time-to-time designate by written notice, given in accordance with the terms of this Section E, together with copies thereof as follows:

In the case of the Company to:

Fusion Telecommunications International, Inc.

420 Lexington Avenue, Suite 1718

New York, NY 10170

Attn:   Matthew D. Rosen, President and CEO

Fax: (212) 972-7884

with a copy to:

Gersten Savage LLP

600 Lexington Avenue, 9 ^th Floor

New York, New York 10022-6018

Attention: Jay Kaplowitz, Esq.

Fax: (212) 980-5192

In the case of any owner of equity securities of the Company, to:

The address of such equity owner on the books and records of the Company.

 

Notice given as provided in this Section shall be deemed effective: (i) on the business day hand delivered (or, if it is not a business day, then the next succeeding business day thereafter), (ii) on the first business day following the sending thereof by overnight courier, and (iii) on the seventh calendar day (or, if it is not a business day, then the next succeeding business day thereafter) after the depositing thereof into the exclusive custody of the U.S. Postal Service. As used herein, the term business day (other than Saturday or Sunday) shall mean any day when commercial banks are open in the State of New York to accept deposits.

 

ALL SUBSCRIBERS MUST COMPLETE THIS PAGE .

_________________________________

Exact Name in Which Title is to be Held

Amount Subscribed for: $ __________

Units Subscribed for: ______________

Type of Ownership (Check One):

                     Individual

                     Joint tenants with rights of survivorship

                     Tenants in common

                     Tenants by the entirety

                     Corporation

                     Limited Liability Company

                     Partnership

                     Limited Liability Partnership

                     Limited Partnership

                     Trust

                     Other (specify)

 

Residence Address		City, State and Zip Code
Mailing Address (if not residence)		City, State and Zip Code

 

 

 

IN WITNESS WHEREOF, the undersigned has executed this Subscription and Rights Agreement on this        day of ________, 2006.

PURCHASER:

 

ACCEPTED as of the        day of _________, 2006

 

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

By: _________________________________

       Matthew D. Rosen, President and CEO

 

REGISTERED REPRESENTATIVE:		BRANCH OFFICE MANAGER:
(Sign and Print Name)		(Sign and Print Name)

 

EXECUTION BY SUBSCRIBER WHO IS A NATURAL PERSON

                                                                                      

Exact Name in Which Title is to be Held

 

(If Joint Tenant or Tenants in Common, both persons must sign and this page must contain all information for both persons.)

 

 

ACCEPTED this         day      , 2006, on behalf of the Company.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

By:   _________________________________

Matthew D. Rosen, President and CEO

EXECUTION BY SUBSCRIBER WHICH IS AN ENTITY

(Corporation, Partnership, Trust, Etc.)

                                                                                                       

Name of Entity (Please Print)

                                                                                                                                     

Address of Principal Office of Entity

BY: ___________________________

NAME:

TITLE:

(seal)

Attest:         

          (If Entity is a Corporation)

Address                                                                  Telephone Number                                                                  Taxpayer Identification Number

ACCEPTED this          day of     , 2006, on behalf of the Company.

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

By:              

Matthew D. Rosen, President and CEO

 

Appendix A

Risk Factors

If the Company does not sell at least 30 Units with gross proceeds of $3,000,000, then it may have to modify its business plan and/or seek to raise additional capital from equity or debt sources, which may impose limits on its financial and operating flexibility. The Company cannot assure prospective investors that any financing arrangements will be available or, if available, that it will be on acceptable terms.

Even if the Company sells the Maximum and the entire Over Allotment, the Company’s ability to meet its projected growth plans may require additional cash resources from equity or debt sources, which also may impose limits on its financial and operating flexibility. Again, the Company cannot assure you that any financing arrangements will be available or, if available, that it will be on acceptable terms.

 

See also the Risk Factors set forth in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2006 and the Risk Factors set forth the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

 

 

THE SECURITIES REPRESENTED BY THIS WARRANT HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), OR APPLICABLE STATE SECURITIES LAWS. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR ASSIGNED UNLESS (1) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT COVERING SUCH SECURITIES, (2) THE SALE IS MADE IN ACCORDANCE WITH RULE 144 OR A BONA FIDE PLEDGE OR CUSTODIAL ARRANGEMENT WITH RESPECT TO SUCH SECURITIES OR (3) AN OPINION OF COUNSEL REASONABLY SATISFACTORY TO THE COMPANY IS DELIVERED STATING THAT SUCH REGISTRATION IS NOT REQUIRED.

 

 

Warrant No. 1

Up to [_________] shares of Common Stock, subject to adjustment

Warrant

Fusion Telecommunications International, Inc.

Fusion Telecommunications International, Inc. (the " Company " or the " Issuer "), a Delaware corporation, for value received, hereby certifies that _____, or its registered permitted assigns, is the registered holder (the " Holder ") of rights to purchase from the Issuer up to [___________(_____)] ¹   (the " Warrant Number ") duly authorized, validly issued, fully paid and nonassessable shares of common stock, par value $0.01 per share (the " Common Stock "), of the Issuer at a price per share equal to the Warrant Price (as defined herein), subject to the terms, conditions and adjustments set forth below in this warrant (this " Warrant ").

 

 

 

---

 

1.         Warrant .   The Warrant represented hereby has been issued pursuant to the Subscription and Rights Agreement dated December 14, 2006 (the “ Subscription Agreement ”), and is subject to the terms and conditions thereof. Unless otherwise defined herein, capitalized terms used herein shall have the meanings set forth in the Subscription Agreement.

 

1.1 Warrant Number and Price; Warrant Term .

 

(a) Warrant Number and Price . Subject to the provisions of this Warrant:

 

(i) this Warrant entitles the Holder to purchase at any time during the Warrant Term for the Warrant Price up to the Warrant Number of shares of Common Stock, subject to adjustment as set forth herein;

 

(ii) The " Warrant Price " shall be a price per share equal to one dollar and sixty-seven cents ($1.67) ²   .

 

(b) Warrant Term . The " Warrant Term " shall mean from and after the Closing Date (herein defined) until June 13 ^th , 2014 ³   .

1.2 Manner of Exercise . The Warrant may be exercised by the Holder, in whole or in part, from time to time during the Warrant Term, by presentation and surrender hereof to the Issuer at its principal office with of a notice in substantially the form attached to this Warrant as Exhibit 1 duly executed by such Holder (a " Warrant Notice ") and accompanied by payment of the Warrant Price for the number of shares of Common Stock specified in such form. Any such exercise shall be irrevocable. As soon as practicable after each such exercise of this Warrant, but not later than five (5) Business Days from the receipt the Warrant Notice, the Issuer shall issue and deliver to the Holder a certificate or certificates for the shares of Common Stock issuable upon such exercise, registered in the name of the Holder or its designee.

---

 

2.         Reservation of Shares .   For so long as this Warrant has not been exercised in full, the Issuer shall, at all times prior to the end of the Warrant Term, reserve and keep available free from any pre-emptive rights that would reduce the number of shares issuable to the Holder under this Warrant, out of its authorized but unissued capital stock, the number of shares of Common Stock available for exercise hereunder. In the event the number of Common Shares plus all other shares of Common Stock outstanding and otherwise reserved for issuance exceeds the total authorized number of shares of Common Stock, the Issuer shall promptly take all actions necessary to increase the authorized number of shares of Common Stock, including causing its board of directors to call a special meeting of stockholders and recommend such increase.

 

3.         Transfer and Assignment .   By accepting delivery of this Warrant, the Holder covenants and agrees with the Issuer not to exercise the Warrant or transfer the Warrant or the Common Shares represented hereby except in compliance with the terms of this Warrant. By accepting delivery of this Warrant, the Holder further covenants and agrees with the Issuer that the Warrant may not be sold or assigned, in whole or in part, unless such sale or assignment complies with applicable federal and state securities laws and the terms of this Warrant. As condition precedent to any transfer, the Holder shall provide the Issuer with an opinion of counsel in such form as the Issuer may reasonably require. If a portion of the Warrant evidenced hereby is transferred in compliance with the terms of this Warrant, all rights of the Holder hereunder may be exercised by the transferee provided that any Holder of the Warrant may deliver a Warrant Notice only with respect to such Holder's portion of the Warrant.

 

4.       Taxes .   The Issuer will pay all documentary stamp taxes (if any) attributable to the issuance of Common Stock upon the exercise of the Warrant by the Holder; provided , however , that the Issuer shall not be required to pay any tax or taxes which may be payable in respect of any transfer involved in the registration of the Warrant or any certificates for Common Shares in a name other than that of the Holder of the Warrant surrendered upon the exercise of the Warrant, and the Issuer shall not be required to issue or deliver a Warrant evidencing rights thereunder or certificates for Common Shares unless or until the person or persons requesting the issuance thereof shall have paid to the Issuer the amount of such tax or shall have established to the reasonable satisfaction of the Issuer that such tax has been paid.

 

5.         Adjustments . The number of share of Common Stock issuable upon exercise of the Warrant is subject to adjustment for stock splits, recombinations, stock dividends and the like.

 

6.         Business Combinations . In case the Issuer on or after the date hereof is party to any (a) acquisition of the Issuer by means of merger or other form of corporate reorganization in which outstanding shares of the Issuer are exchanged for securities or other consideration issued, or caused to be issued, by the Acquiring Person, herein defined, or its Parent, herein defined, Subsidiary, herein defined, or affiliate, (b) a sale of all or substantially all of the assets of the Issuer (on a consolidated basis) in a single transaction or series of related transactions, (c) any other transaction or series of related transactions by the Issuer or relating to the Common Stock (including without limitation, any stock purchase or tender or exchange offer) in which the power to cast the majority of the eligible votes at a meeting of the Issuer's stockholders at which directors are elected is transferred to a single entity or group acting in concert, or (d) a capital reorganization or reclassification of the Common Stock or other securities (other than a reorganization or reclassification in which the Common Stock or other securities are not converted into or exchanged for cash or other property, and, immediately after consummation of such transaction, the stockholders of the Issuer immediately prior to such transaction own the Common Stock, other securities or other voting stock of the Issuer in substantially the same proportions relative to each other as such stockholders owned immediately prior to such transaction), then, and in the case of each such transaction (each of which is referred to herein as " Change in Control "), proper provision shall be made so that, at the option of the Acquiring Person and upon fifteen days’ notice to the Issuer and the Holder prior to the consummation of the Change of Control, either (i) the Acquiring Person expressly agrees to assume all of the Issuer’s obligations under the Warrant or (ii) the Holder has fifteen (15) days in which to exercise its rights under the Warrant. If Holder does not exercise its rights during such fifteen (15) day period, all rights under the Warrant shall terminate and the Warrant shall be of no further force and effect. The Issuer, to the extent feasible, shall provide the Holder with thirty (30) days’ notice of the consummation of any Change of Control. Subject to the foregoing, on or before the closing date under the agreement entered into with an Acquiring Person resulting in a Change in Control, the Issuer, if applicable, shall deliver to the Holder written notice that the Acquiring Person has assumed such obligations. " Acquiring Person " means, in connection with any Change in Control, (i) the continuing or surviving corporation of a consolidation or merger with the Issuer (if other than the Issuer), (ii) the transferee of all or substantially all of the properties or assets of the Issuer, (iii) the corporation consolidating with or merging into the Issuer in a consolidation or merger in connection with which the Common Stock is changed into or exchanged for stock or other securities of any other Person or cash or any other property, (iv) the entity or group (other than Holder or any of its affiliates) acting in concert acquiring or possessing the power to cast the majority of the eligible votes at a meeting of the Issuer 's stockholders at which directors are elected, or, (v) in the case of a capital reorganization or reclassification, the Issuer, or (vi) at the Holder's election, any Person that (A) controls the Acquiring Person directly or indirectly through one or more intermediaries, (B) is required to include the Acquiring Person in the consolidated financial statements contained in such Parent's Annual Report on Form 10-K (if such Person is required to file such a report) or would be required to so include the Acquiring Person in such Person's consolidated financial statements if they were prepared in accordance with U.S. GAAP and (C) is not itself included in the consolidated financial statements of any other Person (other than its consolidated subsidiaries). " Parent " shall mean any corporation (other than the Acquiring Person) in an unbroken chain of corporations ending with the Acquiring Person, provided each corporation in the unbroken chain (other than the Acquiring Person) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. " Subsidiary " shall mean any corporation at least 50% of whose outstanding voting stock shall at the time be owned directly or indirectly by the Acquiring Person or by one or more Subsidiaries.

 

7.         Lost or Stolen Warrant .   In case this Warrant shall be mutilated, lost, stolen or destroyed, the Issuer may in its discretion issue in exchange and substitution for and upon cancellation of the mutilated Warrant, or in lieu of and substitution for the Warrant lost, stolen or destroyed, a new Warrant of like tenor, but only upon receipt of evidence reasonably satisfactory to the Issuer of such loss, theft or destruction of such Warrant. Applicants for a substitute Warrant shall also comply with such other reasonable regulations and pay such other reasonable charges as the Issuer may prescribe.

 

8.         Agent .   The Issuer (and any successor) shall at all times maintain a register of the holders of the Warrant.

 

9.         Notice .   All notices and other communications from the Issuer to the Holder, or vice versa, shall be deemed delivered and effective when given personally or mailed by first-class registered or certified mail, postage prepaid, or overnight courier, at such address as may have been furnished to the Issuer or the Holder, as the case may be, in writing by the Issuer or such Holder from time to time.

 

10.     Miscellaneous .

 

10.1 This Warrant shall be governed by, and construed in accordance with, the internal laws of the State of New York (including Sections 5-1401 and 5-1402 of the New York General Obligation Law), and the Issuer hereby submits to the non-exclusive jurisdiction of any state or federal court in the Southern District of New York and any court hearing any appeal therefrom, over any suit, action or proceeding against it arising out of or based upon this Warrant (a " Related Proceeding "). The Issuer hereby waives any objection to any Related Proceeding in such courts whether on the grounds of venue, residence or domicile or on the ground that the Related Proceeding has been brought in an inconvenient forum.

 

10.2 Any and all remedies set forth in this Warrant: (i) shall be in addition to any and all other remedies the Holder or the Issuer may have at law or in equity, (ii) shall be cumulative, and (iii) may be pursued successively or concurrently as each of Holder and the Issuer may elect. The exercise of any remedy by the Holder or the Issuer shall not be deemed an election of remedies or preclude the Holder or the Issuer, respectively, from exercising any other remedies in the future.

 

10.3 For purposes of this Warrant, except as otherwise expressly provided or unless the context otherwise requires: (i) the terms defined in this Warrant have the meanings assigned to them in this Warrant and include the plural as well as the singular, and the use of any gender herein shall be deemed to include the other gender and neuter gender of such term; (ii) accounting terms not otherwise defined herein have the meanings assigned to them in accordance with U.S. GAAP; (iii) references herein to "Articles", "Sections", "Subsections", "Paragraphs" and other subdivisions without reference to a document are to designated Articles, Sections, Subsections, Paragraphs and other subdivisions of this Warrant, unless the context shall otherwise require; (iv) a reference to a Subsection without further reference to a Section is a reference to such Subsection as contained in the same Section in which the reference appears, and this rule shall also apply to Paragraphs and other subdivisions; (v) the words "herein", "hereof", "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular provision; (vi) the term "include" or "including" shall mean without limitation; (vii) any agreement, instrument or statute defined or referred to herein means such agreement, instrument or statute as from time to time amended, modified or supplemented, including (in the case of agreements or instruments) by waiver or consent and (in the case of statutes) by succession of comparable successor statues and references to all attachments thereto and instruments incorporated therein; and (viii) references to a Person are also to its permitted successors and assigns and, in the case of an individual, to his or her heirs and estate, as applicable.

 

10.4 If any term or other provision of this Warrant is invalid, illegal or incapable of being enforced by any rule of law or public policy all other conditions and provisions of this Warrant shall nevertheless remain in full force and effect. If the final judgment of a court of competent jurisdiction or other authority declares that any term or provision hereof is invalid, void or unenforceable, the undersigned agrees that the court making such determination shall have the power to reduce the scope, duration, area or applicability of the term or provision, to delete specific words or phrases, or to replace any invalid, void or unenforceable term or provision with a term or provision that is valid and enforceable and that comes closest to expressing the intention of the invalid or unenforceable term or provision. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Issuer shall negotiate in good faith to modify this Warrant so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible.

 

10.5 All dollar ($) amounts set forth herein refer to United States dollars. All payments hereunder and thereunder will be made in lawful currency of the United States of America.

 

10.6 The Issuer may not assign its obligations under this Warrant other than by operation of law or in connection with a merger or sale of all or substantially all of the Issuer's assets or stock or a Change in Control of the Issuer. Subject to the terms hereof, Holder may assign, pledge, hypothecate or transfer any of the rights and associated obligations contemplated by this Warrant, in whole or in part, at its sole discretion (including, but not limited to, assignments, pledges, hypothecations and transfers in connection with hedging transactions with respect to this Warrant).

 

10.7 Under the Subscription Agreement, the Issuer is only required to use its best efforts to cause a registration statement covering the issuance of the Registrable Securities to be declared effective, and once effective, only to use its best efforts to maintain the effectiveness of the registration statement. The Issuer will not be obligated to deliver any Registrable Securities, and there are no contractual penalties for failure to deliver any such securities, if a registration statement is not effective at the time of exercise. The failure or inability of the Issuer to maintain the effectiveness of such registration statement shall not in any way prevent the expiration of this Warrant at the end of the Warrant Term.

 

Notwithstanding anything herein to the contrary, if a Holder upon any Warrant exercise does not consent to accept unregistered Common Stock in lieu of Registered Common Stock (as defined in the Issuer’s Certificate of Rights and Preferences of Series A-1 Cumulative Convertible Preferred Stock, as amended), then such Holder’s Warrant Notice shall be deemed, without any further action, to have been withdrawn. Moreover, in no event is the Issuer obligated to settle any Warrant exercise, in whole or in part, for cash.

 

This Warrant shall not be valid unless signed by the Issuer.

 

[Remainder of Page Left Blank Intentionally]

 

 

 

 

 

 

IN WITNESS WHEREOF, the Issuer has caused this Warrant to be signed by its duly authorized officer.

Dated: ________, 2006

                 FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

                 By: ______________________

                 Name:

                 Title:

 

Exhibit 1

[FORM OF WARRANT NOTICE]

(To Be Executed Upon Exercise Of Warrant)

                     [DATE]

Fusion Telecommunications International, Inc.

420 Lexington Avenue, Suite 1718

New York, New York 10170

Attention:             [____________]

Re:

Exercise of Warrant

Ladies and Gentlemen:

The undersigned is the registered holder of a warrant (the " Warrant ") evidencing certain rights to purchase shares of Fusion Telecommunications International, Inc. (the " Issuer ") and hereby elects to exercise the Warrant to purchase ______ shares of Common Stock (as defined in the Warrant) and hereby delivers via wire transfer of immediately available United States funds $____________ in exchange for such shares of Common Stock, all in accordance with the terms of such Warrant.

In accordance with the terms of the attached Warrant, the undersigned requests that certificates for such shares be registered in the name of and delivered to the undersigned at the following address:

[TO BE ADDED]

[ If the number of shares of Common Stock specified above is less than the total number of shares of Common Stock remaining under the Warrant, insert the following -- The undersigned requests that a new Warrant substantially identical to the attached Warrant be issued to the undersigned evidencing rights to exercise additional Warrants equal to the number of shares of Common Stock called for on the face of the current Warrant, as adjusted, minus the gross number of shares of Common Stock delivered to the undersigned in accordance with this Notice.]

                       HOLDER

                       By:____________________________________          

                           Name:

                           Title:

                       By:____________________________________          

                           Name:

                           Title:

Table of Contents

		Page
1.	Warrant	2
2.	Reservation of Shares	3
3.	Transfer and Assignment	3
4.	Taxes	3
5.	Adjustments	3
6.	Business Combinations	4
7.	Lost or Stolen Warrant	5
8.	Agent	5
9.	Notice	5
10.	Miscellaneous	5

 

 

CERTIFICATE OF RIGHTS AND PREFERENCES

OF

SERIES A-1 CUMULATIVE CONVERTIBLE PREFERRED STOCK

OF

FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

 

DECEMBER 14, 2006

 

Pursuant to Section 151 of the Delaware General Corporation Law and Article Fourth, Section 2 of the Certificate of Incorporation (as amended, the " Certificate of Incorporation "), of Fusion Telecommunications International, Inc. (the " Company "), a corporation organized and existing under the laws of the State of Delaware, hereby certifies that the following resolution was duly adopted by the board of directors of the Company (the " Board ") effective as of December 14, 2006 pursuant to authority conferred upon the Board by the Certificate of Incorporation, which authorizes the issuance of up to ten million (10,000,000) shares of preferred stock, par value $0.01 per share.

 

RESOLVED, that pursuant to authority expressly granted to and vested in the Board and pursuant to the provisions of the Certificate of Incorporation, the Board hereby creates a series of preferred stock, herein designated and authorized as the Series A-1 Cumulative Convertible Preferred Stock, par value $0.01 per share, which shall consist of ten thousand (10,000) of the ten million (10,000,000) shares of preferred stock (the " Series A-1 Preferred Stock ") which the Company now has authority to issue, and the Board of Directors hereby fixes the powers, designations and preferences and the relative, participating, optional and other special rights of the shares of such series, and the qualifications, limitations and restrictions thereof as follows:

 

1.         Number . The number of shares constituting the Series A-1 Cumulative Convertible Preferred Stock shall be ten thousand (10,000).

 

2.         Definitions . Unless the context otherwise requires, when used herein the following terms shall have the meaning indicated.

 

" Acquiring Person " is defined in Section 6(G).

 

" AMEX " means the American Stock Exchange, provided , however , that if the American Stock Exchange is not then the principal U.S. trading market for the Common Stock, then " AMEX " shall be deemed to mean the principal U.S. national securities exchange (as defined in the Securities Exchange Act of 1934, as amended (the " Exchange Act ") on which the Common Stock is then traded, or if such Common Stock is not then listed or admitted to trading on any national securities exchange but is designated as a Nasdaq Capital Market Security by the National Association of Securities Dealers, Inc. (" NASD "), then such market system, or if such Common Stock is not listed or quoted on any of the foregoing, then the OTC Bulletin Board.

 

" Board " means the Board of Directors of the Company.

 

" Business Day " means any day on which the Common Stock may be traded on the AMEX, or, if not admitted for trading on the AMEX, any day other than a Saturday, Sunday or holiday on which banks in New York City are required or permitted to be closed.

 

“ Call Notice ” is defined in Section 6(C) .

 

" Capital Stock " means (i) with respect to any Person that is a corporation, any and all shares, interests, participations or other equivalents (however designated) of capital or capital stock of such Person and (ii) with respect to any Person that is not a corporation, any and all partnership, limited partnership, limited liability company or other equity interests of such Person.

 

" Certificate " means this Certificate of Rights and Preferences of the Series A-1 Cumulative Convertible Preferred Stock.

 

" Certificate of Incorporation " means the Certificate of Incorporation of the Company, as amended.

 

" Change of Control " is defined in Section 6G .

 

" Common Stock " means the Company's common stock, par value $0.01 per share, and any Capital Stock for or into which such Common Stock hereafter is exchanged, converted, reclassified or recapitalized by the Company or pursuant to a Change of Control to which the Company is a party (or, at the election of the Acquiring Person, the capital stock of any Acquiring Person from and after the consummation of a Change of Control).

 

" Common Stock Equivalents " means (without duplication with any other Common Stock or common stock, as the case may be, or Common Stock Equivalents) rights, warrants, options, convertible securities or exchangeable securities, exercisable for or convertible or exchangeable into, directly or indirectly, Common Stock, or common stock, as the case may be, whether at the time of issuance or upon the passage of time or the occurrence of some future event.

 

" Company " means Fusion Telecommunications International, Inc., a Delaware corporation (or, if, as, and when applicable, any Acquiring Person from and after the consummation of a Change of Control).

 

" Company Conversion " is defined in Section 6(B)(i) .

 

" Company Conversion Notice " is defined in Section 6(B)(i) .

 

" Conversion Notice " is defined in Section 6(A)(i) .

 

" Conversion Price " means $1.67, subject to adjustment for stock splits, recombinations, stock dividends and the like as provided herein.

 

" Conversion Stock Amount " is defined in Section 6(A)(ii) .

 

" Daily Market Price " means, on any date, the amount per share of the Common Stock equal to (i) the daily volume-weighted average price on the AMEX or, if no sale takes place on such date, the closing bid prices on the AMEX thereof on such date, in each case as reported by Bloomberg, L.P. (or by such other Person as the Company may select), or (ii) if such Common Stock is not then listed or admitted to trading on the AMEX, the higher of (x) the book value per share thereof as determined by any firm of independent public accountants of recognized standing selected by the Board as of the last calendar day of the most recent month ending before the date as of which the determination is to be made or (y) the fair value per share thereof determined in good faith by an independent, nationally recognized appraisal firm selected by the Board, subject to adjustment for stock splits, recombinations, stock dividends and the like.

 

" Dividend Payment Date " is defined in Section 3(A) .

 

" Dividend Period " is defined in Section 3(A) .

 

" Dividend Rate " means a rate equal to the Stated Value multiplied by eight percent (8%) per annum.

 

" Exchange Act " means the Securities Exchange Act of 1934, as amended.

 

" Holder " shall mean a holder of the Series A-1 Preferred Stock.

 

" Issue Date " means with respect to shares of the Series A-1 Preferred Stock the initial date of issuance of any of such shares of the Series A-1 Preferred Stock.

 

“ Issue Date Price ” means the price of Issuer’s Common Stock determined on the date of the initial issuance of the shares of the Series A-1 Preferred Stock.

 

" Junior Securities " means Capital Stock that, with respect to dividends and distributions upon Liquidation, ranks junior to the Series A Preferred Shares, including but not limited to Common Stock and any other class or series of Capital Stock issued by the Company or any Subsidiary of the Company on or after the Issue Date, but excluding any Parity Securities and Senior Securities issued (i) to Holders of the Series A-1 Preferred Stock, (ii) with the approval of the Holders of a Majority of the Series A-1 Preferred Stock or (iii) upon the conversion, redemption or exercise of securities described in clause (i) or (ii) in accordance with the terms thereof.

 

" Liquidation " means the voluntary or involuntary liquidation, dissolution or winding up of the Company; provided , however , that a consolidation, merger or share exchange shall not be deemed a Liquidation, nor shall a sale, assignment, conveyance, transfer, lease or other disposition by the Company of all or substantially all of its assets, which does not involve a substantial distribution by the Company of cash or other property to the holders of Common Stock, be deemed to be a Liquidation.

 

" Liquidation Preference " is defined in Section 4 .

 

" Majority of the Series A-1 Preferred Stock " means more than fifty percent (50%) of the then outstanding shares of the Series A-1 Preferred Stock.

 

" Other Securities " means any stock (other than Common Stock) and other securities of the Company or any other Person which the Holders of the Series A-1 Preferred Stock at any time shall be entitled to receive, or shall have received, upon conversion or redemption of the Series A-1 Preferred Stock in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities.

 

" Parity Securities " means any class or series of Capital Stock that, with respect to dividends or distributions upon Liquidation, is pari   passu with all Series A-1 Preferred Shares. For the avoidance of doubt, each series of Series A Preferred Shares is a Parity Security with respect to each other series of Series A Preferred Shares.

 

" Person " means an individual, corporation, partnership, limited liability company, joint venture, association, trust, unincorporated organization or other entity.

 

" Prevailing Price " means, with respect to any reference date, the average of the Daily Market Prices of the Common Stock for the thirty (30) Business Days ending on and including the third (3 ^rd ) Business Day before such reference date.

 

" Qualified Public Company " means a corporation meeting all of the following criteria: (i) the common stock of the corporation is registered under Section 12 of the Securities Exchange Act of 1934, as amended, (ii) the Prevailing Price shall be an amount greater than one dollar ($1) per share of Common Stock, and (iii) the average daily reported volume of trading in such common stock on all national securities exchanges, markets, services, and/or reported through the AMEX as reported by Bloomberg L.P. (or by such other Person as the Company may select) during the ninety (90) calendar days preceding the reference date exceeds twenty thousand (20,000) shares of Common Stock.

 

" Registered Common Stock " means Common Stock the resale of which has been registered under the Securities Act and is freely tradable upon delivery.

 

" Securities Act " means the Securities Act of 1933, as amended, or any successor statute, and the rules and regulations promulgated thereunder.

 

" Senior Securities " means any class or series of Capital Stock that, with respect to dividends or distributions upon Liquidation, ranks senior to the Series A-1 Preferred Stock.

 

" Series A-1 Preferred Stock " means the Series A-1 Cumulative Convertible Preferred Stock of the Company or any successor.

 

" Stated Value " is an amount equal to one thousand dollars ($1,000) per share of the Series A-1 Preferred Stock plus any accrued and unpaid dividends, whether or not declared and whether or not earnings are available in respect of such dividends. In the event the Company shall declare a distribution on the Common Stock payable in securities or property other than cash, the value of such securities or property will be the fair market value. Any securities shall be valued as follows: (i) if traded on a national securities exchange or through a Nasdaq market, the value shall be deemed to be the average of the closing prices of the securities on such exchange or system over the thirty (30) Business Day period ending three (3) calendar days prior to such declaration; (ii) if actively traded over-the-counter, the value shall be deemed to be the average of the closing bid or sale prices (whichever is applicable) over the thirty (30) Business Day period ending three (3) calendar days prior to such declaration; and (iii) if there is no active public market, the value shall be the fair market value thereof, as determined in good faith by the Board.

 

" Subsidiary " of a Person means (i) a corporation, a majority of whose stock with voting power, under ordinary circumstances, to elect directors is at the time of determination, directly or indirectly, owned by such Person or by one or more Subsidiaries of such Person, or (ii) any other entity (other than a corporation) in which such Person or one or more Subsidiaries of such Person, directly or indirectly, at the date of determination thereof has a least a majority ownership interest.

 

The foregoing definitions will be equally applicable to both the singular and plural forms of the defined terms.

 

3.         Dividends and Distributions .

 

(A)   Holders shall be entitled to receive out of the assets of the Company legally available for that purpose, dividends at the Dividend Rate to be paid in accordance with the terms of this Section 3 . Such dividends shall be fully cumulative from the Issue Date, shall accumulate regardless of whether the Company earns a profit and shall be payable in arrears, when and as declared by the Board (or a duly appointed committee of directors), on January 1   of each year , (each such date being herein referred to as a " Dividend Payment Date "), commencing on January 1, 2008. The period from the Issue Date to January 1, 2008, and each annual period between consecutive Dividend Payment Dates shall hereinafter be referred to as a " Dividend Period ." The dividend for any Dividend Period for any share of Series A-1 Preferred Stock that is not outstanding on every calendar day of the Dividend Period shall be prorated based on the number of calendar days such share was outstanding during the period. Each such dividend shall be paid to the Holders of record of the Series A-1 Preferred Stock as their names appear on the share register of the Company on the Dividend Payment Date. Dividends on account of arrears for any past Dividend Periods may be declared and paid at any time, without reference to any Dividend Payment Date (including, without limitation, for purposes of computing the Stated Value of any shares of Series A-1 Preferred Stock in connection with the conversion or redemption thereof or any Liquidation of the Company), to Holders of record on a date designated by the Board, not exceeding thirty (30) calendar days preceding the payment date thereof, as may be fixed by the Board. For purposes of determining the amount of dividends accrued as of the first Dividend Payment Date and as of any date that is not a Dividend Payment Date, such amount shall be calculated on the basis of the Dividend Rate for the actual number of calendar days elapsed from and excluding the Issue Date (in case of the first Dividend Payment Date and any date prior to the first Dividend Payment Date) or the last preceding Dividend Payment Date (in case of any other date) to the date as of which such determination is to be made, based on a three hundred sixty-five (365) day year.

 

(B)   Subject to the following proviso, dividends payable on the Series A-1 Preferred Stock shall be paid, at the option of the Holder, in cash or by the issuance of Common Stock provided , however , that the Company may elect to make any payment of dividends by the issuance of Registered Common Stock on any Dividend Payment Date with 10 days’ prior written notice to the Holder, if the Company is a Qualified Public Company on the Dividend Payment Date. The number of shares of Registered Common Stock to be issued shall be determined by dividing the cash amount of the dividend otherwise payable by the Prevailing Price calculated as of such Dividend Payment Date, provided , however , except at the Company’s option, in no event shall such price be less than the price set on the Issue Date; provided , further , if the Company shall combine, subdivide or reclassify its Common Stock, or shall declare any dividend payable in shares of its Common Stock, or shall take any other action of a similar nature affecting such shares, the number of shares of Registered Common Stock to be issued shall be adjusted to the extent appropriate to reflect such event, including appropriate adjustments to account for any such event that occurs during the period used for calculating such Prevailing Price. The number of shares of Registered Common Stock to be issued as a dividend shall be rounded to the nearest whole share after aggregating all shares of Series A-1 Preferred Stock owned by a Holder.

 

(C)   If, on any Dividend Payment Date, the Company fails to pay dividends, then until the dividends that were scheduled to be paid on such date are paid, such dividends shall cumulate, but shall not accrue additional dividends. Unpaid dividends for any period less than a full Dividend Period shall cumulate on a day to day basis and shall be computed on the basis of a three hundred sixty-five (365) day year.

 

(D)   So long as any shares of Series A-1 Preferred Stock shall be outstanding, (i) the Company, except for the payment of dividends or other cash distributions under a joint venture agreement or other strategic alliance with respect to which the Company and/or a Subsidiary is a party, shall not and shall not allow its Subsidiaries to declare or pay any dividend whatsoever, whether in cash, property or otherwise, set aside any cash or property for the payment of dividends, or make any other distribution on any Parity Securities, except for dividends paid to the Company or any of its wholly-owned Subsidiaries and dividends paid on the Series A Preferred Shares or (ii) the Company shall not and shall not allow its Subsidiaries to repurchase, redeem or otherwise acquire for value or set aside any cash or property for the repurchase or redemption of any Junior Securities or Parity Securities, unless in each such case all dividends to which the Holders of the Series A-1 Preferred Stock shall have been entitled to receive for all previous Dividend Periods shall have been paid.

 

(E)   Subject to the immediately following sentence, the Company shall be entitled to deduct and withhold from any dividend on the Series A-1 Preferred Stock such amounts as the Company is required to deduct and withhold with respect to such dividend under the Internal Revenue Code of 1986, as amended, or any other provision of state, local or foreign tax law. In the event the Company or the Holder elects, pursuant to Section 3(B), to pay or be paid, as the case may be, a dividend on the Series A-1 Preferred Stock by issuing Registered Common Stock or Common Stock, as the case may be, to a Holder, (i) the Company shall deliver the number of shares of Registered Common Stock or Common Stock, as the case may be, that would be delivered to a Holder pursuant to Section 3(B) in the absence of any requirement under applicable law to deduct and withhold any amount with respect to such dividend and (ii) on the Business Day following the Dividend Payment Date, Holder shall transfer to the Company by wire transfer of immediately available funds an amount equal to what the Company is required under applicable law to deduct and withhold with respect to such dividend. For purposes of determining the withholding amount, the dividend value shall be determined under Section 3(B) hereof.

 

4.         Liquidation Preference . In the event of any Liquidation, after payment or provision for payment by the Company of the debts and other liabilities of the Company and the liquidation preference of any Senior Securities that rank senior to the Series A-1 Preferred Stock with respect to distributions upon Liquidation, each Holder shall be entitled to receive an amount in cash for each share of the then outstanding Series A-1 Preferred Stock held by such Holder equal to the greater of (a) the Stated Value per share to and including the date full payment is tendered to the Holders with respect to such Liquidation, and (b) the amount the Holders would have received if the Holders had converted all outstanding shares of Series A-1 Preferred Stock into Common Stock in accordance with the provisions of Section 6(A) hereof, in each case as of the Business Day immediately preceding the date of such Liquidation (the " Liquidation Preference "), before any distribution shall be made to the holders of any Junior Securities (and any Senior Securities or Parity Securities that, with respect to distributions upon Liquidation, rank junior to the Series A-1 Preferred Stock) upon the Liquidation of the Company. In case the assets of the Company available for payment to the Holders are insufficient to pay the full Liquidation Preference on all outstanding shares of the Series A-1 Preferred Stock and all outstanding shares of Parity Securities and Senior Securities that, with respect to distributions upon Liquidation, are pari   passu with the Series A-1 Preferred Stock in the amounts to which the holders of such shares are entitled, then the entire assets of the Company available for payment to the Holders and to the holders of such Parity Securities and Senior Securities shall be distributed ratably among the Holders of the Series A-1 Preferred Stock and the holders of such Parity Securities and Senior Securities, based upon the aggregate amount due on such shares upon Liquidation. Written notice of any Liquidation of the Company, stating a payment date and the place where the distributable amounts shall be payable, shall be given by facsimile and overnight delivery not less than ten (10) calendar days prior to the payment date stated therein, to the Holders of record of the Series A-1 Preferred Stock, if any, at their respective addresses as the same shall appear on the books of the Company.

 

5.         Voting Rights . The Holders shall have the following voting rights with respect to the Series A-1 Preferred Stock:

 

(A)   Each share of Series A-1 Preferred Stock shall entitle the holder thereof to the voting rights specified in Section 5(B) and no other voting rights except as required by law.

 

(B)   The consent of the Holders of at least a Majority of the Series A-1 Preferred Stock, voting separately as a single class with one vote per share, in person or by proxy, either in writing without a meeting or at an annual or a special meeting of such Holders called for the purpose, shall be necessary to:

 

(i)   amend, alter or repeal, by way of merger or otherwise, any of the provisions of the Certificate of Incorporation, including this Certificate, or Bylaws of the Company so as to:

 

A.   change any of the rights, preferences or privileges of Holders. Without limiting the generality of the preceding sentence, such change includes any action that would:

 

1.   reduce the Dividend Rate on the Series A-1 Preferred Stock, or make such dividends non-cumulative, or defer the date from which dividends will accrue, or cancel accrued and unpaid dividends, or change the relative seniority rights of the holders of Series A-1 Preferred Stock as to the payment of dividends in relation to the holders of any other capital stock of the Company;

 

2.   reduce the amount payable to the holders of the Series A-1 Preferred Stock upon the voluntary or involuntary liquidation, dissolution, or winding up of the Company, or change the relative seniority of the liquidation preferences of the holders of the Series A-1 Preferred Stock to the rights upon liquidation of the holders of any other capital stock of the Company;

 

3.   make the Series A-1 Preferred Stock redeemable at the option of the Company other than in accordance with the terms of this Certificate.

 

B.   authorize, create or issue any shares of Parity Securities or Senior Securities (or amend the provisions of any existing class of Capital Stock to make such class of Capital Stock a class of Parity Securities or Senior Securities).

 

(ii)   permit any Subsidiary of the Company to issue or sell, or obligate itself to issue or sell, except to the Company or any wholly owned Subsidiary, any security of such Subsidiaries or all or substantially all of the assets of any Subsidiary other than sales of assets on an arm's-length, fair market value basis; or

 

(iii)   increase or decrease (other than by redemption or conversion) the total number of authorized shares of Series A-1 Preferred Stock or amend any provisions of any Capital Stock so as to make such Capital Stock redeemable by the Company.

 

6.         Conversion and Call Rights .

 

(A)   Procedure for Conversion .

 

(i)   General . Shares of Series A-1 Preferred Stock are convertible at the option of the Holder thereof at any time, from time to time, in whole or in part, as follows:

 

A.   The conversion of shares of Series A-1 Preferred Stock may be effected by delivering a duly executed written Series A-1 Preferred Stock Conversion Notice, in form and substance as provided by the Company (the " Conversion Notice "), to the Company, at its principal office specifying the number of shares of Series A-1 Preferred Stock to be converted and surrendering the certificate representing the shares of Series A-1 Preferred Stock to be converted.

 

B.   As soon as practicable after each such conversion of Series A-1 Preferred Stock, but not later than five (5) Business Days from the receipt of the Conversion Notice, the Company shall deliver to such Holder at the address specified in the Conversion Notice the Conversion Stock Amount of duly authorized, validly issued, fully paid and nonassessable shares of Registered Common Stock (or Other Securities or, with such Holder's express written consent, unregistered Common Stock).

 

C.   Notwithstanding anything in the Certificate to the contrary, if such Holder does not consent to accept unregistered Common Stock, then such Holder’s Notice of Conversion shall be deemed, without any further action, to have been withdrawn. Moreover, in no event, shall any conversion under the Certificate be settled in cash.

 

(ii)   Conversion for stock . Subject to the previous sub-paragraph, such shares of stock shall be converted into that number of shares of Registered Common Stock (or at the sole election of the Holder, unregistered Common Stock) equal to (A) the aggregate Stated Value of such shares divided by (B) the Conversion Price   (the " Conversion Stock Amount "). It shall be a condition of either the Company or the converting Holder's obligation to close the conversion of the Series A-1 Preferred Stock that such conversion be in accordance with applicable federal and state securities laws and any applicable waiting period (and any extension thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired or been terminated without litigation having been commenced that is continuing, or threat of litigation having been made that remains unresolved, by the United States Department of Justice or the United States Federal Trade Commission.

 

(iii)   Holder of record . Each conversion of Series A-1 Preferred Stock shall be deemed to have been effected immediately before the close of business on the Business Day on which the Conversion Notice is delivered, and at such time the Person or Persons in whose name or names any certificate or certificates for shares of Common Stock (or Other Securities) shall be issuable upon such conversion as provided herein shall be deemed to have become the holder or holders of record thereof.

 

(iv)   Partial conversion . If any conversion is for only part of the shares represented by the certificate surrendered, the Company shall send a new Series A-1 Preferred Stock certificate of like tenor via certified or registered mail RRR or reputable overnight courier to such address specified by the Holder, calling in the aggregate on the face or faces thereof for the number of shares of Series A-1 Preferred Stock which have not been converted.

 

(B)   Procedure for Conversion by the Company .

 

(i)   Conversion by the Company . Shares of Series A-1 Preferred Stock may be converted by the Company (a " Company Conversion ") in whole or in part for Common Stock as follows

 

A.   From and after the first anniversary of the Closing Date, the Company may require the Holders to convert, on a pro   rata basis as among the holders of Series A-1 Preferred Shares, shares of Series A-1 Preferred Shares held by such holders on any of March 31, June 30, September 30 and December 31 of each year by delivering a conversion notice to the Holders, at least ten (10) days prior to such conversion and substantially in the form as provided by the Company (a " Company Conversion Notice "), provided that (x) the average of the Daily Market Prices of the Common Stock for the ninety (90) calendar days ended immediately prior to such Conversion Notice is an amount greater than two hundred twenty percent (220%) of the Conversion Price or (y) after the fifth anniversary of the Closing Date, the Prevailing Price shall be an amount greater than the Issue Date Price. The number of Series A Preferred Shares so converted under clause (x) may not exceed the number that would be converted for a quantity of shares of Common Stock greater than eight (8) times the average daily reported volume of trading in the Common Stock on all national securities exchanges, Nasdaq market, service, and/or reported through the AMEX as reported by Bloomberg L.P. (or by such other Person as the Company may select) during the ninety (90) calendar days ending one day prior to the Conversion Notice Date concerning a conversion under clause (x). The Conversion Price and the Conversion Stock Amount under clause (x) shall be determined in accordance with Section 6(A)(ii) . The conversion price under clause (y) shall be the Prevailing Price, if the Prevailing Price is greater than the Conversion Price and shall be the Conversion Price if the Conversion Price is greater than the Prevailing Price. The Conversion Stock Amount under clause (y) shall be determined in accordance with Section 6(A)(ii) , using the conversion price as determined in accordance with the immediately preceding sentence.

 

(C)   Five Year Call Right . From and after the fifth anniversary of the date on which the Registration Requirement has been satisfied, the Company may from time-to-time issue a call notice to the holders of the Series A-1 Preferred Shares (the “ Call Notice ”). Such Call Notice, at the Company’s discretion, may be for all or a portion of the Series A-1 Preferred Shares. On or before the tenth (10th) Business Day following the date of the Call Notice, the holders of the Series A-1 Preferred Shares shall deliver to the Company, all, or, in the case of a Call Notice concerning a portion of the Series A-1 Preferred Shares, on a pro   rata basis as provided in the Call Notice, based on the number of shares of Series A-1 Preferred Shares held by each holder, Series A-1 Preferred Shares with an aggregate Stated Value equal to the amount designated in the Call Notice. The Company shall promptly thereafter pay, by wire transfer of immediately available funds, an amount to each such holder equal to the aggregate Stated Value of all such Series A-1 Preferred Shares delivered by such holder.

 

(D)   The Company shall at all times reserve for issuance such number of its shares of Common Stock as shall be required hereunder.

 

(E)   The Company will use its best efforts to procure, at its sole expense, the listing of the Common Stock issuable upon conversion or redemption of the Series A-1 Preferred Stock and shares issuable as dividends hereunder, subject to issuance or notice of issuance, on all stock exchanges, markets, and quotation service on which the Common Stock is then listed or quoted, no later than the date on which such Series A-1 Preferred Stock is issued to the Holder and thereafter shall use its best efforts to prevent delisting or removal from quotation of such shares. The Company will pay any and all documentary stamp or similar issue or transfer taxes that may be payable in respect of the issuance or delivery of shares of Common Stock on conversion or redemption of shares of the Series A-1 Preferred Stock. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involving the issue and delivery of shares of Common Stock in a name other than that in which the shares of Series A-1 Preferred Stock so converted or redeemed were registered, and no such issue and delivery shall be made unless and until the person requesting such issue has paid to the Company the amount of any such tax, or has established, to the reasonable satisfaction of the Company, that such tax has been paid.

 

(F)   No fractional shares or scrip representing fractional shares shall be issued upon the conversion or redemption of the Series A-1 Preferred Stock. If any such conversion or redemption would otherwise require the issuance of a fractional share of Common Stock, an amount equal to such fraction multiplied by the current Daily Market Price per share of Common Stock on the date of conversion or redemption shall be paid to the Holder in cash by the Company. If more than one share of Series A-1 Preferred Stock shall be surrendered for conversion or redemption at one time by or for the same Holder, the number of full shares of Common Stock issuable upon conversion or redemption thereof shall be computed on the basis of the aggregate number of shares of Series A-1 Preferred Stock so surrendered.

 

(G)   Change of Control . In case the Company on or after the Issue Date is party to any (a) acquisition of the Company by means of merger or other form of corporate reorganization in which outstanding shares of the Company are exchanged for securities or other consideration issued, or caused to be issued, by the Acquiring Person, herein defined, or its Parent, herein defined, Subsidiary, herein defined, or affiliate, (b) a sale of all or substantially all of the assets of the Company (on a consolidated basis) in a single transaction or series of related transactions, (c) any other transaction or series of related transactions by the Company or relating to the Common Stock (including without limitation, any stock purchase or tender or exchange offer) in which the power to cast the majority of the eligible votes at a meeting of the Company's stockholders at which directors are elected is transferred to a single entity or group acting in concert, or (d) a capital reorganization or reclassification of the Common Stock or other securities (other than a reorganization or reclassification in which the Common Stock or other securities are not converted into or exchanged for cash or other property, and, immediately after consummation of such transaction, the stockholders of the Company immediately prior to such transaction own the Common Stock, other securities or other voting stock of the Company in substantially the same proportions relative to each other as such stockholders owned immediately prior to such transaction), then, and in the case of each such transaction (each of which is referred to herein as " Change in Control "), proper provision shall be made so that, at the option of the Acquiring Person and upon fifteen days’ notice to the Company and the Holder prior to the consummation of the Change of Control, either (i) the Acquiring Person expressly agrees to assume all of the Company’s obligations under the Series A-1 Preferred Stock or (ii) the Holder has fifteen (15) days in which to exercise its conversion rights under the Series A-1 Preferred Stock. If Holder does not exercise its rights during such fifteen (15) day period, all rights under the Series A-1 Preferred Stock shall terminate and the Series A-1 Preferred Stock shall be deemed cancelled. The Company, to the extent feasible, shall provide the Holder with thirty (30) days’ notice of the consummation of any Change of Control. Subject to the foregoing, on or before the closing date under the agreement entered into with an Acquiring Person resulting in a Change in Control, the Company, if applicable, shall deliver to the Holder written notice that the Acquiring Person has assumed such obligations. " Acquiring Person " means, in connection with any Change in Control, (i) the continuing or surviving corporation of a consolidation or merger with the Company (if other than the Company), (ii) the transferee of all or substantially all of the properties or assets of the Company, (iii) the corporation consolidating with or merging into the Company in a consolidation or merger in connection with which the Common Stock is changed into or exchanged for stock or other securities of any other Person or cash or any other property, (iv) the entity or group (other than Holder or any of its affiliates) acting in concert acquiring or possessing the power to cast the majority of the eligible votes at a meeting of the Company 's stockholders at which directors are elected, or, (v) in the case of a capital reorganization or reclassification, the Company, or (vi) at the Holder's election, any Person that (A) controls the Acquiring Person directly or indirectly through one or more intermediaries, (B) is required to include the Acquiring Person in the consolidated financial statements contained in such Parent's Annual Report on Form 10-K (if such Person is required to file such a report) or would be required to so include the Acquiring Person in such Person's consolidated financial statements if they were prepared in accordance with U.S. GAAP and (C) is not itself included in the consolidated financial statements of any other Person (other than its consolidated subsidiaries). " Parent " shall mean any corporation (other than the Acquiring Person) in an unbroken chain of corporations ending with the Acquiring Person, provided each corporation in the unbroken chain (other than the Acquiring Person) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. " Subsidiary " shall mean any corporation at least 50% of whose outstanding voting stock shall at the time be owned directly or indirectly by the Acquiring Person or by one or more Subsidiaries.

 

7.         Status of Converted and Redeemed Shares; Limitations on Series A-1 Preferred Stock . The Company shall return to the status of unauthorized and undesignated shares of Series A-1 Preferred Stock each share of Series A-1 Preferred Stock which shall be converted, redeemed or for any other reason acquired by the Company, and such shares thereafter may have such characteristics and designations as the Board may determine. Without the consent of Majority of the Series A-1 Preferred Stock, the Company will not issue any further shares of Series A-1 Preferred Stock.

 

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IN WITNESS WHEREOF, this Certificate of Rights and Preferences has been signed on behalf of the Company by the undersigned, all as of the date first set forth above.

 

           FUSION TELECOMMUNICATIONS INTERNATIONAL, INC.

           ___________________________________

           Name:   _____________________________

           Title:   _____________________________