EXHIBIT 10.16
FRANKLIN TELECOMMUNICATIONS CORP.
REGULATION D SUBSCRIPTION AGREEMENT
THE SECURITIES OFFERED HEREBY HAVE NOT BEEN REGISTERED WITH THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE OR OTHER SECURITIES AUTHORITIES. THEY
MAY NOT BE SOLD OR TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT OR AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THOSE
SECURITIES LAWS.
THIS SUBSCRIPTION AGREEMENT DOES NOT CONSTITUTE AN OFFER TO SELL, OR A
SOLICITATION OF AN OFFER TO PURCHASE, ANY OF THE SECURITIES DESCRIBED
HEREIN BY OR TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WOULD BE UNLAWFUL. THESE SECURITIES HAVE NOT BEEN RECOMMENDED
BY ANY FEDERAL OR STATE SECURITIES AUTHORITIES, NOR HAVE SUCH AUTHORITIES
REVIEWED OR DETERMINED THE ACCURACY OF THIS DOCUMENT. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
AN INVESTMENT IN THESE SECURITIES INVOLVES A HIGH DEGREE OF RISK.
SUBSCRIBERS MUST RELY ON THEIR OWN ANALYSIS OF THE INVESTMENT AND
ASSESSMENT OF THE RISKS INVOLVED. SEE THE RISK FACTORS SET FORTH IN THE
ATTACHED DISCLOSURE DOCUMENTS AS EXHIBIT G.
SEE ADDITIONAL LEGENDS AT SECTIONS 3.7 and 9.
THIS REGULATION D SUBSCRIPTION AGREEMENT (this "Agreement") is made as
of the 31st day of October, 1997, by and between Franklin Telecommunications
Corp., a corporation duly organized and existing under the laws of the State of
California (the "Company"), and the undersigned subscriber executing this
Agreement ("Subscriber").
THE PARTIES HEREBY AGREE AS FOLLOWS:
This Agreement is executed by Subscriber in connection with the offer by
the Company and the purchase by Subscriber of Series A Preferred Stock (the
"Preferred Stock"), of the Company. The Preferred Stock is being offered at a
purchase price of Ten Thousand Dollars ($10,000), U.S., per share, in minimum
subscription amounts of at least ten (10) shares ($100,000), and increments of
five (5) shares ($50,000) in excess thereof, with a minimum aggregate offering
amount of Five Hundred (500) shares of Preferred Stock, or Five Million Dollars
($5,000,000) (the "Minimum
1
Amount"), and up to a maximum aggregate amount of One Thousand (1,000) shares of
Preferred Stock, or Ten Million Dollars ($10,000,000) (the "Maximum Amount")
(collectively, the "Offering"). The terms of the Preferred Stock, including the
terms on which the Preferred Stock may be converted into common stock of the
Company (the "Common Stock"), are set forth in the Certificate of Determination
of Series A Preferred Stock (the "Certificate of Determination"), substantially
in the form attached hereto as Composite Exhibit A. The Preferred Stock is
-------------------
accompanied by a warrant or warrants, in the form of Exhibit B annexed hereto
(the "Series A Common Warrants"), that entitles the holder thereof to purchase a
number of shares of the common stock of the Company's subsidiary, FNet Corp.
(hereinafter "FNet") equal to one hundred percent (100%) of the aggregate
purchase price of the Subscriber's Preferred Stock divided by the Fixed
Conversion Price, as defined in the Certificate of Determination of the Series A
Preferred Stock, at an exercise price of $1.00 ("Series A Exercise Option #1).
However, if FNet fails to complete a public offering by June 30, 1998, the
Holder has the option, upon written notice to FNet and FTEL no later than July
31, 1998, to convert to "Series A Exercise Option #2" (in lieu of Series A
Exercise Option #1), which entitles the holder to purchase a number of shares of
Common Stock of the Company, equal to one hundred percent (100%) of the
aggregate purchase price of the Subscriber's Preferred Stock divided by the
Fixed Conversion Price exercisable at the Fixed Conversion Price. The Preferred
Stock is also accompanied by an option to purchase an amount of shares of Series
B Preferred Stock up to fifty percent (50%) of the principal amount of Series A
Preferred Stock purchased by Subscriber in the Offering (the "Preferred Option")
in a second closing (the "Second Closing"), as further described in Section 4.12
below. The terms of the Series B Preferred Stock, including the terms on which
the Series B Preferred Stock may be converted into Common Stock, are set forth
in the form of the Certificate of Determination for the Series B Preferred Stock
(the "Series B Certificate of Determination") attached hereto as Composite
---------
Exhibit A. Each share of Series B Preferred Stock is accompanied by a warrant
---------
or warrants, in the form of Exhibit C annexed hereto, (the "Series B Common
Warrants") that entitles the holder thereof to purchase a number of shares of
the common stock of FNet equal to one hundred percent (100%) of the aggregate
purchase price of the Subscriber's Series B Preferred Stock divided by the Fixed
Conversion Price, at an exercise price of (x) 80% of the average closing bid
price of FNet's common stock for the five (5) trading days prior to issuance, or
(y) if FNet common stock is not then publicly traded, then the price of the most
recent private placement of one million dollars ($1,000,000) or more by FNet
("Series B Exercise Option #1"). However, if FNet fails to complete a public
offering by June 30, 1998, Holder has the option, upon written notice to FNet
and FTEL no later than July 31, 1998, to convert to "Series B Exercise Option
#2" (in lieu of Series B Exercise Option #1), which entitles the holder to
purchase a number of shares of Common Stock of the Company, equal to one hundred
percent (100%) of the aggregate purchase price of the Subscriber's Preferred
Stock divided by the Fixed Conversion Price exercisable at the Fixed Conversion
Price.
The Series A Common Warrants may be referred to hereinafter as the "Common
Warrants" or the "Warrants." The solicitation of this subscription and, if
accepted by the Company, the offer and sale of the Preferred Stock are being
made in reliance upon the provisions of Regulation D ("Regulation D")
promulgated under the Securities Act of 1933, as amended ("the Act"). The
Preferred Stock and the Common Stock issuable upon conversion thereof (the
"Conversion Shares"), together with the Common Warrants and the Common Stock
issuable upon exercise thereof (the "Warrant Shares")
2
are sometimes referred to herein singularly as "Security" and collectively as
the "Securities."
It is agreed as follows:
1. Offering
1.1 Offer to Subscribe; Purchase Price and Closing; and Placement
-------------------------------------------------------------
Fees.
----
Subject to satisfaction of the conditions to closing set forth in Section 1.2
below, Subscriber hereby offers to subscribe for and purchase Preferred Stock
and accompanying Warrants, for the aggregate purchase price in the amount set
forth in Section 10 of this Agreement, in accordance with the terms and
conditions of this Agreement. Assuming that the Minimum Amount and
corresponding subscription agreements accepted by the Company are received into
the Company's designated escrow account for this Offering established pursuant
to the Escrow Agreement and Instructions (the "Escrow Agreement") by and among
the Company, First Union National Bank of Georgia (the "Escrow Agent") and the
Placement Agent (as defined below) (the "Escrow Account"), the closing of a sale
and purchase of Preferred Stock as to each Subscriber (the "Closing") shall be
deemed to occur when this Agreement has been executed by both Subscriber and the
Company and full payment shall have been made by Subscriber, by wire transfer to
the Escrow Account as set forth in Section 7.1(a) for payment in consideration
for the Company's delivery of certificates representing the Preferred Stock
subscribed for.
The parties hereto acknowledge that ▇▇▇▇▇▇ Investments, LLC is acting as
placement agent (the "Placement Agent") for this Offering and will be
compensated by the Company in cash and warrants to purchase Common Stock. The
Placement Agent has acted solely as placement agent in connection with the
Offering by the Company of the Preferred Stock pursuant to this Agreement. The
information and data contained in the Disclosure Documents (as defined in
Section 2.2.4) have not been subjected to independent verification by the
Placement Agent, and no representation or warranty is made by the Placement
Agent as to the accuracy or completeness of the information contained in the
Disclosure Documents.
The Company and Subscriber acknowledge that the ▇▇▇▇▇▇▇ Fund, N.V. (the "Fund"),
which is managed by affiliates of the Placement Agent, may subscribe for
securities in the Offering. The parties acknowledge that neither the Placement
Agent nor any of its affiliates shall be under any obligation to advise the
Company or Subscriber of the activities of the Fund with respect to such
securities following the consummation of the Offering. Such acknowledgment
shall not act as a waiver of any obligation required by law or written agreement
of which the Fund is a party. It is understood that the Fund will act
independently of the Placement Agent and may take action with respect to such
investment which may be inconsistent or contrary to any action or interest of
the Placement Agent, the Company or any of the other Subscribers.
1.2 Conditions to Subscriber's Obligations. Subscriber's obligations
--------------------------------------
hereunder are conditioned upon all of the following:
3
(a) the following documents shall have been deposited with the Escrow
Agent: the Registration Rights Agreement, substantially in the form
attached hereto as Exhibit D (the "Registration Rights Agreement")
---------
(executed by the Company), an opinion of counsel, substantially in the
form attached hereto as Exhibit E (the "Opinion of Counsel") (signed
---------
by the Company's counsel), the Irrevocable Instructions to Transfer
Agent, substantially in the form attached hereto as Exhibit F (the
---------
"Irrevocable Instructions to Transfer Agent")(executed by the Company
and the Company's transfer agent, the "Transfer Agent"), the
Certificate of Determination of Series A Preferred Stock,
substantially in the form attached hereto as Composite Exhibit A
-------------------
(together with evidence showing that it has been filed with the
Secretary of State of California), a form of the Series B Certificate
of Designation, substantially in the form attached as Composite
---------
Exhibit A; certificates representing the Preferred Stock issued in the
-----------
name of the Subscriber; the Common Warrants issued in the name of the
Subscriber;
(b) the Company's Common Stock shall be actively trading on the OTC
Bulletin Board;
(c) other than losses described in the Risk Factors as set forth in
Section 2.2.4 below there have been no material adverse changes in the
Company's business prospects or financial condition since the date of
the last balance sheet included in the Disclosure Documents (defined
below in Section 2.2.4), including but not limited to incurring
material liabilities;
(d) the representations and warranties of the Company are true and
correct in all material respects at the Closing as if made on such
date, and the Company shall deliver a certificate, signed by an
officer of the Company, to such effect to the Escrow Agent;
(e) the Minimum Amount and corresponding subscription agreements
accepted by the Company shall have been received by the Escrow Agent;
and
(f) the Company shall have reserved for issuance a sufficient number
of shares of Common Stock to effect conversions of the Preferred Stock
and exercise of the Common Warrants, which number of shares shall
initially be equal to Five Million Five Hundred Thousand (5,500,000)
shares.
2. Representations and Warranties of Subscriber. Subscriber hereby
represents and warrants to the Company as follows:
2.1 Accredited Investor. Subscriber is an accredited investor, as
-------------------
defined in Rule 501 of Regulation D, and has checked the applicable box set
forth in Section 10 of this Agreement.
2.2 Investment Experience; Access to Information; Independent
---------------------------------------------------------
Investigation.
--------------
2.2.1 Access to Information. Subscriber or Subscriber's
professional advisor has been granted the opportunity to ask questions of and
receive answers from representatives of the
4
Company, its officers, directors, employees and agents concerning the terms and
conditions of this Offering, the Company and its business and prospects, and to
obtain any additional information which Subscriber or Subscriber's professional
advisor deems necessary to verify the accuracy and completeness of the
information received.
2.2.2 Reliance on Own Advisors. Subscriber has relied completely
on the advice of, or has consulted with, Subscriber's own personal tax,
investment, legal or other advisors and has not relied on the Company or any of
its affiliates, officers, directors, attorneys, accountants or any affiliates of
any thereof and each other person, if any, who controls any thereof, within the
meaning of Section 15 of the Act for any tax or legal advice (other than
reliance on information in the Disclosure Documents as defined in Section 2.2.4
below and on the Opinion of Counsel). The foregoing, however, does not limit or
modify Subscriber's right to rely upon representations and warranties of the
Company in Section 4 of this Agreement.
2.2.3 Capability to Evaluate. Subscriber has such knowledge and
experience in financial and business matters so as to enable such Subscriber to
utilize the information made available to it in connection with the Offering in
order to evaluate the merits and risks of the prospective investment, which are
substantial, including without limitation those set forth in the Disclosure
Documents (as defined in Section 2.2.4 below).
2.2.4 Disclosure Documents. Subscriber, in making Subscriber's
investment decision to subscribe for the Securities hereunder, represents that
(a) Subscriber has received and had an opportunity to review (i) Amendment No. 1
to the Company's Registration Statement on Form S-1, as filed with the
Securities and Exchange Commission on October 1, 1997, (ii) the Risk Factors,
attached as Exhibit G, (iii) the Capitalization Schedule, attached as Exhibit H
--------- ---------
(the "Capitalization Schedule") and (iv) the Use of Proceeds Schedule, attached
as Exhibit I (the "Use of Proceeds Schedule"); (b) Subscriber has read,
---------
reviewed, and relied solely on the documents described in (a) above, the
Company's representations and warranties and other information in this
Agreement, including the exhibits, any other written information prepared by the
Company which has been specifically provided to Subscriber in connection with
this Offering (the documents described in Section 2.2.4 (a) and (b) are
collectively referred to as the "Disclosure Documents"), and an independent
investigation made by Subscriber and Subscriber's representatives, if any; (c)
Subscriber has, prior to the date of this Agreement, been given an opportunity
to review material contracts and documents of the Company which have been filed
as exhibits to the Company's Registration Statement on From S-1 and has had an
opportunity to ask questions of and receive answers from the Company's officers
and directors; and (d) is not relying on any oral representation of the Company
or any other person, nor any written representation or assurance from the
Company other than those referred to in Section 4 or otherwise contained in the
Disclosure Documents or incorporated herein or therein. The foregoing, however,
does not limit or modify Subscriber's right to rely upon representations and
warranties of the Company in Section 4 of this Agreement. Subscriber
acknowledges and agrees that the Company has no responsibility for, does not
ratify, and is under no responsibility whatsoever to comment upon or correct any
reports, analyses or other comments made about the Company by any third parties,
including, but not limited to, analysts' research reports or comments
(collectively, "Third Party Reports"), and Subscriber has not relied upon any
Third Party
5
Reports, including any provided by the Placement Agent, in making the decision
to invest.
2.2.5 Investment Experience; Fend for Self. Subscriber has
substantial experience in investing in securities and he, she or it has made
investments in securities other than those of the Company. Subscriber
acknowledges that Subscriber is able to fend for Subscriber's self in the
transaction contemplated by this Agreement, that Subscriber has the ability to
bear the economic risk of Subscriber's investment pursuant to this Agreement and
that Subscriber is an "Accredited Investor" by virtue of the fact that
Subscriber meets the investor qualification standards set forth in Section 2.1
above. Subscriber has not been organized for the purpose of investing in
securities of the Company, although such investment is consistent with
Subscriber's purposes.
2.3 Exempt Offering Under Regulation D.
-----------------------------------
2.3.1 Investment; No Distribution. Subscriber is acquiring the
Securities to be issued and sold hereunder for his, her or its own account (or a
trust account if such Subscriber is a trustee) for investment and not as a
nominee and not with a present view to the distribution thereof. Subscriber is
aware that there are legal and practical limits on Subscriber's ability to sell
or dispose of the Securities and, therefore, that Subscriber must bear the
economic risk of the investment for an indefinite period of time and has
adequate means of providing for Subscriber's current needs and possible personal
contingencies and has need for only limited liquidity of this investment.
Subscriber's commitment to illiquid investments is reasonable in relation to
Subscriber's net worth. By making the representations in this Section 2.3.1,
the Subscriber does not agree to hold the Securities for any minimum or other
specific term and reserves the right to dispose of the Securities at any time in
accordance with or pursuant to a registration statement or an exemption from
registration under the Act, except as otherwise required in this Agreement or in
the Registration Rights Agreement.
2.3.2 No General Solicitation. The Securities were not offered
to Subscriber through, and Subscriber is not aware of, any form of general
solicitation or general advertising, including, without limitation, (i) any
advertisement, article, notice or other communication published in any
newspaper, magazine or similar media or broadcast over television or radio, and
(ii) any seminar or meeting whose attendees have been invited by any general
solicitation or general advertising.
2.3.3 Restricted Securities. Subscriber understands that the
Preferred Stock and the Common Warrants issued at Closing are, and the
Conversion Shares, the Warrant Shares and the Series B Preferred Stock issued
upon exercise of the Preferred Option will be, characterized as "restricted
securities" under the federal securities laws inasmuch as they are being
acquired from the Company in a transaction not involving a public offering and
that under such laws and applicable regulations such securities may not be
transferred or resold without registration under the Act or pursuant to an
exemption therefrom. In this connection, Subscriber represents that Subscriber
is familiar with Rule 144 under the Act, as presently in effect, and understands
the resale limitations imposed thereby and by the Act.
2.3.4 Disposition. Without in any way limiting the
representations set forth
6
above, Subscriber further agrees not to make any disposition of all or any
portion of the Securities unless and until:
(a) There is then in effect a registration statement under the
Act covering such proposed disposition and such disposition is made in
accordance with such registration statement; or
(b) (i) Subscriber shall have notified the Company of the
proposed disposition and shall have furnished the Company with a detailed
statement of the circumstances surrounding the proposed disposition, and (ii) if
reasonably requested by the Company, Subscriber shall have furnished the Company
with an opinion of counsel, reasonably satisfactory to the Company, that such
disposition will not require registration of the Securities under the Act. It is
agreed that the Company will not require opinions of counsel for transactions
made pursuant to Rule 144 unless the exempted nature of the transaction is
reasonably self-evident.
2.4 Due Authorization.
-----------------
2.4.1 Authority. Subscriber, if executing this Agreement in a
representative or fiduciary capacity, has full power and authority to execute
and deliver this Agreement and each other document included herein for which a
signature is required in such capacity and on behalf of the subscribing
individual, partnership, trust, estate, corporation or other entity for whom or
which Subscriber is executing this Agreement. Subscriber has reached the age of
majority (if an individual) according to the laws of the state in which he
resides, has adequate means for providing for his current needs and personal
contingencies, is able to bear the economic risk of his investment in the
Securities for an indefinite period of time and could afford a complete loss of
such investment. Subscriber's commitment to illiquid investments is reasonable
in relation to Subscriber's net worth.
2.4.2 Due Authorization. If Subscriber is a corporation,
Subscriber is duly and validly organized, validly existing and in good tax and
corporate standing as a corporation under the laws of the jurisdiction of its
incorporation with full power and authority to purchase the Securities to be
purchased by Subscriber and to execute and deliver this Agreement.
2.4.3 Partnerships. If Subscriber is a partnership, the
representations, warranties, agreements and understandings set forth above are
true with respect to all partners of Subscriber (and if any such partner is
itself a partnership, all persons holding an interest in such partnership,
directly or indirectly, including through one or more partnerships), and the
person executing this Agreement has made due inquiry to determine the
truthfulness of the representations and warranties made hereby.
2.4.4 Representatives. If Subscriber is purchasing in a
representative or fiduciary capacity, the representations and warranties shall
be deemed to have been made on behalf of the person or persons for whom
Subscriber is so purchasing.
3. Acknowledgments Subscriber is aware that:
7
3.1 Risks of Investment. Subscriber recognizes that an investment in
-------------------
the Company involves substantial risks, including the potential loss of
Subscriber's entire investment herein. Subscriber recognizes that this
Agreement and the exhibits hereto do not purport to contain all the information
which would be contained in a registration statement under the Act;
3.2 No Government Approval. No federal or state agency has passed
----------------------
upon the Securities, recommended or endorsed the Offering, or made any finding
or determination as to the fairness of this transaction;
3.3 No Registration. The Securities and any component thereof have
---------------
not been registered under the Act or any applicable state securities laws by
reason of exemptions from the registration requirements of the Act and such
laws, and may not be sold, pledged, assigned or otherwise disposed of in the
absence of an effective registration of the Securities and any component thereof
under the Act or unless an exemption from such registration is available;
3.4 Restrictions on Transfer. Subscriber may not attempt to sell,
------------------------
transfer, assign, pledge or otherwise dispose of all or any portion of the
Securities or any component thereof in the absence of either an effective
registration statement or an exemption from the registration requirements of the
Act and applicable state securities laws;
3.5 No Assurances of Registration. There can be no assurance that
-----------------------------
any registration statement will become effective at the scheduled time.
Therefore, Subscriber may bear the economic risk of Subscriber's investment for
an indefinite period of time;
3.6 Exempt Transaction. Subscriber understands that the Securities
------------------
are being offered and sold in reliance on specific exemptions from the
registration requirements of federal and state law and that the representations,
warranties, agreements, acknowledgments and understandings set forth herein are
being relied upon by the Company in determining the applicability of such
exemptions and the suitability of Subscriber to acquire such Securities;
3.7 Legends. It is understood that the certificates evidencing the
-------
Preferred Stock, the Common Warrants, the Conversion Shares and the Warrant
Shares shall bear the following legend (the "Legend") (unless legend removal is
allowed under Section 5.9 below or otherwise allowed by applicable law):
"The securities represented hereby have not been registered under the
Securities Act of 1933, as amended, or applicable state securities
laws, nor the securities laws of any other jurisdiction. They may not
be sold or transferred in the absence of an effective registration
statement under those securities laws or pursuant to an exemption
therefrom."
4. Representations and Warranties of the Company . The Company hereby
makes the following representations and warranties to Subscriber (which shall be
true at the signing of this
8
Agreement, as of Closing, and as of any such later date as contemplated
hereunder) and agrees with Subscriber that:
4.1 Organization, Good Standing, and Qualification. The Company is a
----------------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of California USA and has all requisite corporate power and
authority to carry on its business as now conducted and as proposed to be
conducted. The Company is duly qualified to transact business and is in good
standing in each jurisdiction in which the failure to so qualify would have a
material adverse effect on the business or properties of the Company and its
subsidiaries taken as a whole. The Company is not the subject of any pending,
threatened or, to its knowledge, contemplated investigation or administrative or
legal proceeding by the Internal Revenue Service, the taxing authorities of any
state or local jurisdiction, or the Securities and Exchange Commission ("SEC"),
or any state securities commission, or any other governmental entity, which have
not been disclosed in the Disclosure Documents.
4.2 Corporate Condition. The Company's condition is, in all material
-------------------
respects, as described in the Disclosure Documents, except for changes in the
ordinary course of business and normal year-end adjustments that are not, in the
aggregate, materially adverse to the Company. There have been no material
adverse changes to the Company's business, financial condition, or prospects
since the date of such Disclosure Documents. The financial statements contained
in the Disclosure Documents have been prepared in accordance with generally
accepted accounting principles, consistently applied (except as otherwise
permitted by Regulation S-X of the Securities Exchange Act of 1934, as amended
(the "Exchange Act")), and fairly present the consolidated financial condition
of the Company as of the dates of the balance sheets included therein and the
consolidated results of its operations and cash flows for the periods then
ended. Without limiting the foregoing, there are no material liabilities,
contingent or actual, that are not disclosed in the Disclosure Documents (other
than liabilities incurred by the Company in the ordinary course of its business,
consistent with its past practice, after the period covered by the Disclosure
Documents). The Company has paid all material taxes which are due, except for
taxes which it reasonably disputes. There is no material claim, litigation, or
administrative proceeding pending, or, to the best of the Company's knowledge,
threatened against the Company, except as disclosed in the Disclosure Documents.
This Agreement and the Disclosure Documents do not contain any untrue statement
of a material fact and do not omit to state any material fact required to be
stated therein or herein necessary to make the statements contained therein or
herein not misleading in the light of the circumstances under which they were
made. No event or circumstance exists relating to the Company which under
applicable law, requires public disclosure but which has not been so publicly
announced or disclosed.
4.3 Authorization. Except for the filing of the Certificate of
-------------
Determination, all corporate action on the part of the Company by its officers,
directors and shareholders necessary for the authorization, execution and
delivery of this Agreement, the performance of all obligations of the Company
hereunder and the authorization, issuance and delivery of the Preferred Stock
being sold hereunder and the issuance (and/or the reservation for issuance) of
the Conversion Shares, the Common Warrants, and the Warrant Shares have been
taken, and this Agreement, the Certificate of Determination, the Irrevocable
Instructions to Transfer Agent, the Escrow Agreement and the
9
Registration Rights Agreement constitute valid and legally binding obligations
of the Company, enforceable in accordance with their terms, except insofar as
the enforceability may be limited by applicable bankruptcy, insolvency,
reorganization, or other similar laws affecting creditors' rights generally or
by principles governing the availability of equitable remedies. The Company has
obtained all consents and approvals required for it to execute, deliver and
perform each agreement referenced in the previous sentence.
4.4 Valid Issuance of Preferred Stock and Common Stock. The
--------------------------------------------------
Preferred Stock and the Common Warrants, when issued, sold and delivered in
accordance with the terms hereof, for the consideration expressed herein, will
be validly issued, fully paid and nonassessable and, based in part upon the
representations of Subscriber in this Agreement, will be issued in compliance
with all applicable U.S. federal and state securities laws. The Conversion
Shares, when issued in accordance with the terms of the Certificate of
Determination, and the Warrant Shares, when issued upon exercise of the Common
Warrants, as applicable, shall be duly and validly issued and outstanding, fully
paid and nonassessable, and based in part on the representations and warranties
of Subscriber of the Preferred Stock, will be issued in compliance with all
applicable U.S. federal and state securities laws. The Preferred Stock, the
Conversion Shares, the Common Warrants and the Warrant Shares will be issued
free of any preemptive rights. The Company currently has at least Five Million
Five Hundred Thousand (5,500,000) Conversion Shares and Warrant Shares reserved
for issuance upon conversion of the Preferred Stock and upon exercise of the
Common Warrants, respectively.
4.5 Compliance with Other Instruments. The Company is not in
---------------------------------
violation or default of any provisions of its Articles of Incorporation or
Bylaws each as amended, and in effect on and as of the date of the Agreement or
of any material provision of any material instrument or material contract to
which it is a party or by which it is bound or, to its knowledge, of any
provision of any federal or state judgment, writ, decree, order, statute, rule
or governmental regulation applicable to the Company, which would have a
material adverse affect on the Company's business or prospects, except as
described in the Disclosure Documents. The execution, delivery and performance
of this Agreement and the other agreements entered into in conjunction with the
Offering and the consummation of the transactions contemplated hereby will not
result in any such violation or be in conflict with or constitute, with or
without the passage of time and giving of notice, either a default under any
such provision, instrument or contract or an event which results in the creation
of any lien, charge or encumbrance upon any assets of the Company.
4.6 Reporting Company. The Company does not currently have a class
-----------------
of securities registered under Section 12 of the Exchange Act but has filed a
Form 8-A to register its Common Stock under the Exchange Act, which has not yet
become effective.
4.7 Capitalization. The capitalization of the Company as of June 30,
--------------
1997, is, and the capitalization as of the Closing, after taking into account
the offering of the Securities contemplated by this Agreement and all other
share issuances occurring prior to this Offering, will be, as set forth in the
Capitalization Schedule as set forth in Exhibit H. Except as disclosed in the
---------
Capitalization Schedule, as of the date of this Agreement, (i) there are no
outstanding options, warrants, scrip, rights to subscribe for, calls or
commitments of any character whatsoever relating to,
10
or securities or rights convertible into or exercisable or exchangeable for, any
shares of capital stock of the Company or any of its subsidiaries, or
arrangements by which the Company or any of its subsidiaries is or may become
bound to issue additional shares of capital stock of the Company or any of its
subsidiaries, and (ii) other than agreements with ▇.▇. ▇▇▇▇▇▇▇ & Co. and certain
warrant holders, there are no agreements or arrangements under which the Company
or any of its subsidiaries is obligated to register the sale of any of its or
their securities under the Act (except the Registration Rights Agreement).
4.8 Intellectual Property. The Company has valid, unrestricted and
---------------------
exclusive patents, trademarks, trademark registrations, trade names, copyrights,
know-how, technology and other intellectual property necessary to the conduct of
its business as set forth on Exhibit J-1. The Company has granted such licenses
-----------
or has assigned or otherwise transferred a portion of (or all of) such valid,
unrestricted and exclusive patents, trademarks, trademark registrations, trade
names, copyrights, know-how, technology and other intellectual property
necessary to the conduct of its business as set forth on Exhibit J-2. The
-----------
Company has been granted licenses, know-how, technology and/or other
intellectual property necessary to the conduct of its business as set forth on
Exhibit J-3. To the best of the Company's knowledge, the Company is not
-----------
infringing on the intellectual property rights of any third party, nor is any
third party infringing on the Company's intellectual property rights. There are
no restrictions in any agreements, licenses, franchises, or other instruments
which preclude the Company from engaging in its business as presently conducted.
4.9 Use of Proceeds. As of the date hereof, the Company expects to
---------------
use the proceeds from this Offering (less fees and expenses) for the purposes
and in the approximate amounts set forth on the Use of Proceeds Schedule set
forth as Exhibit I hereto. These purposes and amounts are estimates and are
----------
subject to change without notice to any Subscriber.
4.10 No Rights of Participation. No person or entity, including, but
--------------------------
not limited to, current or former shareholders of the Company, underwriters,
brokers, agents or other third parties, has any right of first refusal,
preemptive right, right of participation, or any similar right to participate in
the financing contemplated by this Agreement which has not been waived.
4.11 Company Acknowledgment. The Company hereby acknowledges that
----------------------
Subscriber may elect to hold the Securities for various periods of time, as
permitted by the terms of this Agreement, the Certificate of Determination, the
Common Warrants and other agreements contemplated hereby, and the Company
further acknowledges that Subscriber and the Placement Agent have made no
representations or warranties, either written or oral (other than those in
Section 2.3.1, to the extent applicable), as to how long the Securities will be
held by Subscriber or regarding Subscriber's trading history or investment
strategies.
4.12 Termination Date of Offering. In no event shall the last
----------------------------
Closing ("Last Closing") of a sale and purchase of the Series A Preferred Stock
and accompanying Common Warrants occur later than November 28, 1997, which date
can be extended by up to ten (10) days upon written approval by the Company and
the Placement Agent. The closing of the offering of Series B Preferred Stock
(the "Series B Closing") shall occur on the date that is six (6) months after
the Last Closing
11
(or, if not a business day, the next business day thereafter), which date may be
extended by up to six (6) months upon the written agreement of the Company and
the Placement Agent.
4.13 Underwriter's Fees and Rights of First Refusal. The Company is
----------------------------------------------
not obligated to pay any compensation or other fees, costs or related
expenditures in cash or securities to any underwriter, broker, agent or other
representative other than the Placement Agent in connection with this Offering.
4.14 [Intentionally Omitted].
4.15 No Integrated Offering. Neither the Company, nor any of its
----------------------
affiliates, nor any person acting on its or their behalf, has directly or
indirectly made any offers or sales of any of the Company's securities or
solicited any offers to buy any security under circumstances that would prevent
the parties hereto from consummating the transactions contemplated hereby
pursuant to an exemption from registration under the Act pursuant to the
provisions of Regulation D. The Company has not engaged in any form of general
solicitation or advertising in connection with the offering of the Series A
Preferred Stock.
4.16 Acknowledgment of Dilution. The number of Conversion Shares
--------------------------
issuable upon conversion of the Preferred Stock may increase substantially in
certain circumstances, including the circumstance wherein the trading price of
the Common Stock declines. The Company's executive officers and directors have
studied and fully understand the nature of the Securities being sold hereunder
and recognize that they have a potential dilutive effect. The board of
directors of the Company has concluded in its good faith business judgment that
such issuance is in the best interests of the Company. The Company acknowledges
that its obligation to issue Conversion Shares upon conversion of the Preferred
Stock is binding upon it and enforceable regardless of the dilution that such
issuance may have on the ownership interests of the other stockholders.
4.17 Foreign Corrupt Practices. Neither the Company, nor any of its
-------------------------
subsidiaries, nor any director, officer, agent, employee or other person acting
on behalf of the Company or any subsidiary has, in the course of its actions
for, or on behalf of, the Company, used any corporate funds for any unlawful
contribution, gift, entertainment or other unlawful expenses relating to
political activity; made any direct or indirect unlawful payment to any foreign
or domestic government official or employee from corporate funds; violated or is
in violation of any provision of the U.S. Foreign Corrupt Practices Act of
1977, as amended; or made any bribe, rebate, payoff, influence payment, kickback
or other unlawful payment to any foreign or domestic government official or
employee.
4.18 Key Employees. Each Key Employee (as defined below) is
-------------
currently serving the Company in the capacity disclosed in Exhibit K. No Key
---------
Employee, to the best knowledge of the Company and its subsidiaries, is, or is
now expected to be, in violation of any material term of any employment
contract, confidentiality, disclosure or proprietary information agreement, non-
competition agreement, or any other contract or agreement or any restrictive
covenant, and the continued employment of each Key Employee does not subject the
Company or any of its subsidiaries to any liability with respect to any of the
foregoing matters. No Key Employee has, to the best
12
knowledge of the Company and its subsidiaries, any intention to terminate his
employment with, or services to, the Company or any of its subsidiaries. "Key
Employee" means ▇▇▇▇▇ ▇. ▇▇▇▇▇▇.
4.19 Representations Correct. The foregoing representations,
-----------------------
warranties and agreements are true, correct and complete in all material
respects, and shall survive the Closing and the issuance of the shares of
Preferred Stock.
5. Covenants of the Company
5.1 Independent Auditors. The Company shall, until at least three
--------------------
(3) years after the date of the Last Closing, maintain as its independent
auditors an accounting firm authorized to practice before the SEC.
5.2 Corporate Existence and Taxes. The Company shall, until at least
-----------------------------
the later of (i) the date that is three (3) years after the date of the Last
Closing or (ii) the conversion or redemption of all of the Preferred Stock
purchased pursuant to this Agreement, including the Series B Preferred Stock
issued upon exercise of the Preferred Option and the exercise of the Common
Warrants, maintain its corporate existence in good standing (provided, however,
that the foregoing covenant shall not prevent the Company from entering into any
merger or corporate reorganization as long as the surviving entity in such
transaction, if not the Company, assumes the Company's obligations with respect
to the Preferred Stock and has Common Stock trading on a stock exchange or on
Nasdaq and is a "Reporting Issuer") and shall pay all its taxes when due except
for taxes which the Company disputes.
5.3 Registration Rights. The Company will enter into a registration
-------------------
rights agreement covering the resale of the Conversion Shares and the Warrant
Shares substantially in the form of the Registration Rights Agreement attached
as Exhibit D.
---------
5.4 Notification of Final Closing Date by Company. Within five (5)
---------------------------------------------
business days after the Last Closing, the Company shall notify Subscriber in
writing that the Last Closing has occurred, the date of the Last Closing, the
dates that Subscriber is entitled to convert Subscriber's Preferred Stock, the
value of the Fixed Conversion Price, as that term is defined in the Certificate
of Determination, and the name and telephone number of an administrative contact
person at the Company whom Subscriber may contact regarding information related
to conversion of the Preferred Stock as contemplated by the Certificate of
Determination.
5.5 Asset Transfers. The Company shall not transfer, sell, convey or
----------------
otherwise dispose of any of its material assets to any Subsidiary or affiliate
except for a cash or cash equivalent consideration and for a proper business
purpose, while any of the Series A Preferred Stock are outstanding; provided,
however, that asset transfers between FTEL and FNet that occur in the ordinary
course of business shall be permissible.
5.6 Capital Raising Limitations; Rights of First Refusal.
----------------------------------------------------
13
5.6.1 Capital Raising Limitations. Except for offerings
contemplated herein, the Company shall not issue any debt or equity securities
for cash in private capital raising transactions ("Future Offerings") for a
period beginning on the date hereof and ending One Hundred and Eighty (180) days
after the Last Closing without obtaining the prior written approval of
Subscribers holding a majority of the purchase price of Preferred Stock then
outstanding.
5.6.2 Right of First Offer. The Company agrees that, during the
period beginning on the date hereof and terminating on the first anniversary of
the date of the Last Closing, the Company will not, without the prior written
consent of each Subscriber (which shall be deemed given for the warrants to
purchase Common Stock issued or to be issued to the Placement Agent in
consideration of its services in connection with this Agreement and the
transactions contemplated hereby) issue or sell, or agree to issue or sell any
equity or debt securities of the Company or any of its subsidiaries (or any
security convertible into or exercisable or exchangeable, directly or
indirectly, for equity or debt securities of the Company or any of its
subsidiaries) ("Future Offerings") unless the Company or its Placement Agent
shall have first delivered to each Subscriber at least thirty (30) days prior to
the closing of such Future Offering, written notice describing the proposed
Future Offering, including the terms and conditions thereof, and providing each
Subscriber and its affiliates an option during the twenty (20) day period
following delivery of such notice to purchase up to the full amount of the
securities being offered in the Future Offering on the same terms as
contemplated by such Future Offering (the limitations referred to in this
sentence are collectively referred to as the "Capital Raising Limitations").
The Subscriber shall notify the Company or the Placement Agent, in writing,
prior to the end of such thirty (30) day period if it desires to participate in
the Future Offering.
5.6.3 Amount of Subscriber's Right of First Refusal. The amount
of securities which a Subscriber is entitled to purchase in such a Future
Offering shall be a number obtained by multiplying the aggregate amount of
securities being offered in the Future Offering by a fraction, the numerator of
which is the purchase price of the Preferred Stock purchased by the Subscriber
pursuant to this Agreement and the denominator of which is the aggregate dollar
amount of Preferred Stock placed in this Offering.
5.6.4 Exceptions to the Capital Raising Limitation. The Capital
Raising Limitations shall not apply to any transaction involving issuances of
securities in connection with a merger, consolidation, acquisition or sale of
assets, or in connection with any strategic partnership or joint venture (the
primary purpose of which is not to raise equity capital), or in connection with
the disposition or acquisition of a business, product or license by the Company
or exercise of options by employees, consultants or directors. The Capital
Raising Limitations also shall not apply to (a) the issuance of securities
pursuant to an underwritten public offering, (b) the issuance of securities upon
exercise or conversion of the Company's options, warrants or other convertible
securities outstanding as of the date hereof or (c) the grant of additional
options or warrants, or the issuance of additional securities, under any Company
stock option or restricted stock plan for the benefit of the Company's
employees, directors or consultants.
5.7 Financial 10-K Statements, Etc. and Current Reports on Form 8-K.
---------------------------------------------------------------
The
14
Company shall make available to the Subscriber copies of its Exchange Act
documents for the period commencing with the Company's registration for its
Common Stock for as long any Preferred Stock may remain outstanding.
5.8 Opinion of Counsel. Subscribers shall, upon purchase of the
------------------
Preferred Stock and accompanying Warrants pursuant to this Agreement, receive an
opinion letter from ▇▇▇▇▇▇▇▇ & ▇▇▇▇▇▇ LLP, ▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇,
▇▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇ ▇▇▇▇▇, Telephone (▇▇▇) ▇▇▇-▇▇▇▇, Telefax (▇▇▇) ▇▇▇-▇▇▇▇
("Counsel"), counsel to the Company, in the form attached as Exhibit E.
----------
5.9 Removal of Legend Upon Conversion. As contemplated by the
---------------------------------
Certificate of Determination, upon conversion of the Preferred Stock, Subscriber
shall submit a Notice of Conversion and Resale, substantially in the form
attached hereto as Exhibit L. The Legend shall be removed and the Company shall
---------
issue a certificate without such Legend to the holder of any Security upon which
it is stamped, and a certificate for a security shall be originally issued
without the Legend, if, unless otherwise required by state securities laws, (a)
the sale of such Security is registered under the Act, and the Holder or its
broker represents to the Company in writing that a current prospectus was
delivered in conjunction with the sale of such Security or (b) if the no
registration statement is then effective for the resale of the Securities, such
holder provides the Company with an opinion of counsel, in form, substance and
scope customary for opinions of counsel in comparable transactions (the
reasonable cost of which shall be borne by the Company), to the effect that a
public sale or transfer of such Security may be made without registration under
the Act, or (c) such holder provides the Company with reasonable assurances that
such Security can be sold pursuant to Rule 144. Each Subscriber agrees to sell
all Securities, including those represented by a certificate(s) from which the
Legend has been removed, or which were originally issued without the Legend,
pursuant to an effective registration statement and to deliver a prospectus in
connection with such sale or in compliance with an exemption from the
registration requirements of the Act. In the event the Legend is removed from
any Security or any Security is issued without the Legend and thereafter the
effectiveness of a registration statement covering the resale of such Security
is suspended or the Company determines that a supplement or amendment thereto is
required by applicable securities laws, then upon reasonable advance notice to
Subscriber holding such Security, the Company may require that the Legend be
placed on any such Security that cannot then be sold pursuant to an effective
registration statement or Rule 144 or with respect to which the opinion referred
to in clause (b) next above has not been rendered, which Legend shall be removed
when such Security may be sold pursuant to an effective registration statement
or Rule 144 or such holder provides the opinion with respect thereto described
in clause (b) next above.
5.10 Listing. Subject to the remainder of this Section 5.10, the
-------
Company shall ensure that its shares of Common Stock (including all Conversion
Shares and Warrant Shares) are available for trading on the OTC Bulletin Board.
Thereafter, the Company shall (i) use its best efforts to continue the trading
of its Common Stock on the OTC Bulletin Board, or on the Nasdaq Small Cap
Market ("NASDAQ"), Nasdaq National Market System ("NMS"), the New York Stock
Exchange ("NYSE"), or the American Stock Exchange ("AMEX") or any other national
exchange or over-the-counter market system; (ii) take all action necessary to
cause and maintain the trading of its Common Stock on the OTC Bulletin Board at
any time the Common Stock is not traded on NASDAQ, NMS,
15
NYSE or AMEX; and (iii) comply in all respects with the Company's reporting,
filing and other obligations under the by-laws or rules of the National
Association of Securities Dealers ("NASD") and such exchanges, as applicable.
5.11 The Company's Instructions to Transfer Agent. The Company will
--------------------------------------------
issue to its Transfer Agent the Irrevocable Instructions to Transfer Agent
substantially in the form of Exhibit F instructing the Transfer Agent to issue
---------
certificates, registered in the name of each Subscriber or its nominee, for the
Conversion Shares and Warrant Shares in such amounts as specified from time to
time by such Subscriber to the Company upon conversion of the Preferred Stock,
including the Series B Preferred Stock issued upon the exercise of the Preferred
Option and exercise of the Common Warrants. Such certificates shall bear a
Legend only to the extent permitted by Section 5.9 hereof. The Company warrants
that no instruction, other than such instructions referred to in Section 5.9
hereof or in this Section 5.11 and stop transfer instructions to give effect to
Section 3.7 hereof in the case of Conversion Shares and Warrant Shares prior to
registration of the Conversion Shares and Warrant Shares under the Act, will be
given by the Company to its Transfer Agent and that the Securities shall
otherwise be freely transferable on the books and records of the Company as and
to the extent provided in this Agreement and the Registration Rights Agreement.
Nothing in this Section shall affect in any way each Subscriber's obligations
and agreement set forth in Sections 2.3.3 or 2.3.4 hereof to resell the
Securities pursuant to an effective registration statement and to deliver a
prospectus in connection with such sale or in compliance with an exemption from
the registration requirements of applicable securities laws. If (a) a
Subscriber provides the Company with an opinion of counsel, which opinion of
counsel shall be in form, substance and scope customary for opinions of counsel
in comparable transactions (the reasonable cost of which shall be borne by the
Company), to the effect that the Securities to be sold or transferred may be
sold or transferred pursuant to an exemption from registration or (b) a
Subscriber transfers Securities to an affiliate which is an accredited investor
pursuant to Rule 144, the Company shall permit the transfer, and, in the case of
Conversion Shares and Warrant Shares, promptly instruct its transfer agent to
issue one or more certificates in such name and in such denomination as
specified by such Subscriber. The Company acknowledges that a breach by it of
its obligations hereunder will cause irreparable harm to a Subscriber by
vitiating the intent and purpose of the transaction contemplated hereby.
Accordingly, the Company acknowledges that the remedy at law for a breach of its
obligations under this Section 5.11 will be inadequate and agrees, in the event
of a breach or threatened breach by the Company of the provisions of this
Section 5.11, that a Subscriber shall be entitled, in addition to all other
available remedies, to an injunction restraining any breach and requiring
immediate issuance and transfer, without the necessity of showing economic loss
and without any bond or other security being required. The Company hereby
agrees that, without the written approval of the Placement Agent, it will not
unilaterally terminate its relationship with the Transfer Agent for any reason
prior to the date which is three (3) years after the Last Closing or one (1)
month after the first date that no Preferred Stock and no Warrants are
outstanding, whichever is earlier (the "Ending Date"). In the event the
Company's agency relationship with the Transfer Agent should be terminated for
any other reason prior to the date which is three (3) years after the Last
Closing, the Company's Transfer Agent shall continue acting as transfer agent
pursuant to the terms of the Irrevocable Instructions to Transfer Agent until
such time that a successor transfer agent (i) is appointed by the Company; (ii)
is approved by seventy-five percent (75%) of the Subscribers of outstanding
Preferred Stock; and (iii)
16
executes and agrees to be bound by the terms of the Irrevocable Instructions to
Transfer Agent.
5.12 Terms of Series B Preferred Option. In conjunction with the
-----------------------------------
issuance of the Series B Preferred Stock and the accompanying Series B Common
Warrants, the Company agrees to execute agreements substantially similar to this
Subscription Agreement, the Registration Rights Agreement, the Irrevocable
Instructions to Transfer Agent and other applicable agreements from the Series A
offering.
6. Subscriber Covenant/Miscellaneous
6.1 Representations and Warranties Survive the Closing; Severability.
----------------------------------------------------------------
Subscriber's and the Company's representations and warranties shall survive the
Closing of the transactions contemplated by this Agreement notwithstanding any
due diligence investigation made by or on behalf of the party seeking to rely
thereon. In the event that any provision of this Agreement becomes or is
declared by a court of competent jurisdiction to be illegal, unenforceable or
void, this Agreement shall continue in full force and effect without said
provision; provided that no such severability shall be effective if it
materially changes the economic benefit of this Agreement to any party.
6.2 Successors and Assigns. The terms and conditions of this
----------------------
Agreement shall inure to the benefit of and be binding upon the respective
successors and assigns of the parties. Nothing in this Agreement, express or
implied, is intended to confer upon any party other than the parties hereto or
their respective successors and assigns any rights, remedies, obligations, or
liabilities under or by reason of this Agreement, except as expressly provided
in this Agreement. Subscriber may assign Subscriber's rights hereunder, in
connection with any private sale of the Preferred Stock of such Subscriber, so
long as, as a condition precedent to such transfer, the transferee executes an
acknowledgment agreeing to be bound by the applicable provisions of this
Agreement.
6.3 Governing Law. This Agreement shall be governed by and construed
-------------
under the laws of the State of California without respect to conflict of laws
principles.
6.4 Execution in Counterparts Permitted. This Agreement may be
-----------------------------------
executed in any number of counterparts, each of which shall be enforceable
against the parties actually executing such counterparts, and all of which
together shall constitute one (1) instrument.
6.5 Titles and Subtitles; Gender. The titles and subtitles used in
----------------------------
this Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement. The use in this Agreement of a
masculine, feminine or neither pronoun shall be deemed to include a reference to
the others.
6.6 Written Notices, Etc. Any notice, demand or request required or
--------------------
permitted to be given by the Company or Subscriber pursuant to the terms of this
Agreement shall be in writing and shall be deemed given when delivered
personally, or by facsimile (with a hard copy to follow by two (2) day courier),
addressed to the parties at the addresses and/or facsimile telephone number of
the parties set forth at the end of this Agreement or such other address as a
party may request by
17
notifying the other in writing.
6.7 Expenses. Each of the Company and Subscriber shall pay all costs
--------
and expenses that it respectively incurs, with respect to the negotiation,
execution, delivery and performance of this Agreement.
6.8 Entire Agreement; Written Amendments Required. This Agreement,
---------------------------------------------
including the Exhibits attached hereto, the Certificate of Determination, the
Preferred Stock certificates, the Common Warrants, the Registration Rights
Agreement, the Escrow Agreement, the Irrevocable Instructions to Transfer Agent
and the other documents delivered pursuant hereto constitute the full and entire
understanding and agreement between the parties with regard to the subjects
hereof and thereof, and no party shall be liable or bound to any other party in
any manner by any warranties, representations or covenants except as
specifically set forth herein or therein. Except as expressly provided herein,
neither this Agreement nor any term hereof may be amended, waived, discharged or
terminated other than by a written instrument signed by the party against whom
enforcement of any such amendment, waiver, discharge or termination is sought.
6.9 Arbitration. Any controversy or claim arising out of or related
-----------
to this Agreement or the breach thereof, shall be settled by binding arbitration
in Los Angeles, California in accordance with the Expedited Procedures (Rules
53-57) of the Commercial Arbitration Rules of the American Arbitration
Association ("AAA"). A proceeding shall be commenced upon written demand by
Company or any Subscriber to the other. The arbitrator(s) shall enter a
judgment by default against any party which fails or refuses to appear in any
properly noticed arbitration proceeding. The proceeding shall be conducted by
one (1) arbitrator, unless the amount alleged to be in dispute exceeds two
hundred fifty thousand dollars ($250,000), in which case three (3) arbitrators
shall preside. The arbitrator(s) will be chosen by the parties from a list
provided by the AAA, and if they are unable to agree within ten (10) days, the
AAA shall select the arbitrator(s). The arbitrators must be experts in
securities law and financial transactions. The arbitrators shall assess costs
and expenses of the arbitration, including all attorneys' and experts' fees, as
the arbitrators believe is appropriate in light of the merits of the parties'
respective positions in the issues in dispute. Each party submits irrevocably
to the jurisdiction of any state court sitting in Los Angeles, California or to
the United States District Court sitting in California for purposes of
enforcement of any discovery order, judgment or award in connection with such
arbitration. The award of the arbitrator(s) shall be final and binding upon the
parties and may be enforced in any court having jurisdiction. The arbitration
shall be held in such place as set by the arbitrator(s) in accordance with Rule
55.
6.10 Voting Trust Agreement. Upon issuance of Conversion Shares upon
----------------------
any conversion of Preferred Stock, or issuance of Warrant Shares upon exercise
of the Common Warrants, the Subscribers shall execute and deliver a Voting Trust
Agreement in the form of Exhibit M hereto, covering the Excess Shares, as that
term is defined below. As used herein, the term "Excess Shares" shall mean all
shares of Common Stock of the Company acquired by Subscribers in excess of the
number obtained by dividing the aggregate purchase price of all Series A
Preferred Stock issued to such Subscriber by the Fixed Conversion Price of the
Series A Preferred Stock. When and to the extent that the Conversion Shares and
Warrant Shares which are subject to the
18
Voting Trust are sold in a public market transaction, such shares shall
thereafter no longer be subject to the Voting Trust Agreement.
7. Subscription and Wiring Instructions; Irrevocability.
7.1 Subscription
------------
(a) Wire transfer of Subscription Funds. Subscriber shall send this
signed Agreement by facsimile to the Placement Agent at (770)
640-7150, and send the subscription funds by wire transfer, to
the Escrow Agent as follows:
First Union National Bank
ABA No. ▇▇▇▇▇▇▇▇▇
Account No. 465946
Account Name: Trust Ledger
Attn: ▇▇▇▇▇▇ ▇▇▇▇▇/▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
Telephone No.: (▇▇▇) ▇▇▇-▇▇▇▇
Reference: Franklin Esc #3072236887
Ref: Subscriber's Name
(b) Irrevocable Subscription. Subscriber hereby acknowledges and
agrees, subject to the provisions of any applicable laws
providing for the refund of subscription amounts submitted by
Subscriber, that this Agreement is irrevocable and that
Subscriber is not entitled to cancel, terminate or revoke this
Agreement or any other agreements executed by such Subscriber and
delivered pursuant hereto, and that this Agreement and such other
agreements shall survive the death or disability of such
Subscriber and shall be binding upon and inure to the benefit of
the parties and their heirs, executors, administrators,
successors, legal representatives and assigns. If the Securities
subscribed for are to be owned by more than one person, the
obligations of all such owners under this Agreement shall be
joint and several, and the agreements, representations,
warranties and acknowledgments herein contained shall be deemed
to be made by and be binding upon each such person and his heirs,
executors, administrators, successors, legal representatives and
assigns. Notwithstanding the foregoing, (i) if the conditions to
Closing are not satisfied or (ii) if the Disclosure Documents are
discovered prior to Closing to contain statements which are
materially inaccurate, or omit statements of material fact,
Subscriber may revoke or cancel this Agreement.
(c) Company's Right to Reject Subscription. Subscriber understands
that this Agreement is not binding on the Company until the
Company accepts it. This Agreement shall be accepted by the
Company when the Company countersigns this Agreement. Subscriber
hereby confirms that the Company
19
has full right in its sole discretion to accept or reject the
subscription of Subscriber, in whole or in part, provided that,
if the Company decides to reject such subscription, the Company
must do so promptly and in writing. In the case of rejection, the
Company will promptly return any rejected payments and (if
rejected in whole) copies of all executed subscription documents
(including without limitation this Agreement) to Subscriber. In
the event of rejection, no interest will be payable by the
Company to Subscriber on any return of payment, provided however,
that any such interest accrued on such funds in the Escrow
Account shall be returned to the Subscriber by the Escrow Agent.
7.2 Acceptance of Subscription. In the case of acceptance of
--------------------------
Subscriber's subscription, ownership of the number of securities being purchased
hereby will pass to Subscriber upon the Closing.
7.3 Subscriber to Forward Original Signed Subscription Agreement to
---------------------------------------------------------------
Company. Subscriber agrees to courier to Company his, her or its original inked
-------
signed Subscription Agreement within two (2) days after faxing said signed
agreement to Placement Agent.
8. Indemnification.
The Company agrees to indemnify and hold harmless Subscriber and the
Placement Agent and each of their respective officers, directors, employees and
agents, and each person who controls Subscriber or the Placement Agent within
the meaning of the Act or the Exchange Act (each, a "Subscriber Indemnified
Party") against any losses, claims, damages or liabilities, joint or several, to
which it, they or any of them, may become subject and not otherwise reimbursed
arising from or due to any untrue statement of a material fact or the omission
to state any material fact required to be stated in order to make the statements
not misleading in any representation or warranty made by the Company contained
in this Agreement or in any statements contained in the Disclosure Documents.
Subscriber agrees to indemnify and hold harmless the Company and the
Placement Agent and each of their respective officers, directors, employees and
agents, and each person who controls Company or the Placement Agent within the
meaning of the Act or the Exchange Act (each, a "Company Indemnified Party") (a
Subscriber Indemnified Party or a Company Indemnified Party may be hereinafter
referred to singularly as "Indemnified Party") against any losses, claims,
damages or liabilities, joint or several, to which it, they or any of them, may
become subject and not otherwise reimbursed arising from or due to any untrue
statement of a material fact or the omission to state any material fact required
to be stated in order to make the statements not misleading in any
representation or warranty made by Subscriber contained in this Agreement.
Promptly after receipt by an Indemnified Party of notice of the
commencement of any action pursuant to which indemnification may be sought, such
Indemnified Party will, if a claim in respect thereof is to be made against the
other party (hereinafter "Indemnitor") under this Section 8, deliver to the
Indemnitor a written notice of the commencement thereof and the Indemnitor shall
have the
20
right to participate in and to assume the defense thereof with counsel
reasonably selected by the Indemnitor, provided, however, that an Indemnified
Party shall have the right to retain its own counsel, with the reasonably
incurred fees and expenses of such counsel to be paid by the Indemnitor, if
representation of such Indemnified Party by the counsel retained by the
Indemnitor would be inappropriate due to actual or potential conflicts of
interest between such Indemnified Party and any other party represented by such
counsel in such proceeding. The failure to deliver written notice to the
Indemnitor within a reasonable time of the commencement of any such action, if
prejudicial to the Indemnitor's ability to defend such action, shall relieve the
Indemnitor of any liability to the Indemnified Party under this Section 8, but
the omission to so deliver written notice to the Indemnitor will not relieve it
of any liability that it may have to any Indemnified Party other than under this
Section 8 to the extent it is prejudicial.
9. Certain Additional Legends and Information.
FOR FLORIDA RESIDENTS:
THE SECURITIES REFERRED TO HEREIN WILL BE SOLD TO, AND ACQUIRED BY,
THE HOLDER IN A TRANSACTION EXEMPT UNDER SECTION 517.061 OF THE FLORIDA
SECURITIES ACT. THE SECURITIES HAVE NOT BEEN REGISTERED UNDER SAID ACT IN THE
STATE OF FLORIDA. IN ADDITION, ALL FLORIDA RESIDENTS SHALL HAVE THE PRIVILEGE
OF VOIDING THE PURCHASE WITHIN THREE (3) DAYS AFTER THE FIRST TENDER OF
CONSIDERATION IS MADE BY SUCH SUBSCRIBER TO THE ISSUER, AN AGENT OF THE ISSUER,
OR AN ESCROW AGENT OR WITHIN THREE DAYS AFTER THE AVAILABILITY OF THAT PRIVILEGE
IS COMMUNICATED TO SUCH SUBSCRIBER, WHICHEVER OCCURS LATER.
FOR MAINE RESIDENTS:
THESE SECURITIES ARE BEING SOLD PURSUANT TO AN EXEMPTION FROM
REGISTRATION WITH THE BANK SUPERINTENDENT OF THE STATE OF MAINE UNDER SECTION
10502(2)(R) OF TITLE 32 OF THE MAINE REVISED STATUTES. THESE SECURITIES MAY BE
DEEMED RESTRICTED SECURITIES AND AS SUCH THE HOLDER MAY NOT BE ABLE TO RESELL
THE SECURITIES UNLESS PURSUANT TO REGISTRATION UNDER STATE OR FEDERAL SECURITIES
LAWS OR UNLESS AN EXEMPTION UNDER SUCH LAWS EXISTS.
FOR PENNSYLVANIA RESIDENTS:
EACH PENNSYLVANIA RESIDENT WHO SUBSCRIBES FOR THE SECURITIES BEING
OFFERED HEREBY AGREES NOT TO SELL THESE SECURITIES FOR A PERIOD OF TWELVE MONTHS
AFTER THE DATE OF PURCHASE UNLESS SUCH SECURITIES HAVE BEEN REGISTERED FOR SALE.
UNDER PROVISION OF THE PENNSYLVANIA SECURITIES ACT OF 1972 (THE "1972 ACT"),
EACH PENNSYLVANIA RESIDENT SHALL HAVE THE RIGHT TO WITHDRAW HIS ACCEPTANCE
WITHOUT INCURRING ANY LIABILITY, TO THE SELLER, UNDERWRITER (IF ANY) OR ANY
PERSON, WITHIN TWO (2) BUSINESS DAYS FROM THE DATE OF RECEIPT BY THE ISSUER OF
HIS WRITTEN BINDING CONTRACT OF PURCHASE
21
OR IN THE CASE OF A TRANSACTION IN WHICH THERE IS NO WRITTEN BINDING CONTRACT OF
PURCHASE, WITHIN TWO BUSINESS DAYS AFTER HE MAKES THE INITIAL PAYMENT FOR THE
SECURITIES BEING OFFERED. TO ACCOMPLISH THIS WITHDRAWAL, A SUBSCRIBER NEED ONLY
SEND A LETTER OR TELEGRAM TO THE SELLING AGENT AT THE ADDRESS SET FORTH IN THE
TEXT OF THE MEMORANDUM, INDICATING HIS OR HER INTENTION TO WITHDRAW. SUCH LETTER
OR TELEGRAM SHOULD BE SENT AND POSTMARKED PRIOR TO THE END OF THE AFOREMENTIONED
SECOND BUSINESS DAY. IT IS PRUDENT TO SEND SUCH LETTER BY CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, TO ENSURE THAT IT IS RECEIVED AND ALSO TO EVIDENCE THE TIME
WHEN IT WAS MAILED. IF THE REQUEST IS MADE ORALLY (IN PERSON OR BY TELEPHONE, TO
THE SELLING AGENT AT THE NUMBER LISTED IN THE TEXT OF THE MEMORANDUM) A WRITTEN
CONFIRMATION THAT THE REQUEST HAS BEEN RECEIVED SHOULD BE REQUESTED.
FOR NEW HAMPSHIRE RESIDENTS:
NEITHER THE FACT THAT A REGISTRATION STATEMENT OR AN APPLICATION FOR A
LICENSE HAS BEEN FILED WITH THE STATE OF NEW HAMPSHIRE NOR THE FACT THAT A
SECURITY IS EFFECTIVELY REGISTERED OR A PERSON IS LICENSED IN THE STATE OF NEW
HAMPSHIRE CONSTITUTES A FINDING BY THE SECRETARY OF STATE THAT ANY DOCUMENT
FILED UNDER RSA 421-B IS TRUE, COMPLETE AND NOT MISLEADING. NEITHER ANY SUCH
FACT NOR THE FACT THAT AN EXEMPTION OR EXCEPTION IS AVAILABLE FOR A SECURITY OR
A TRANSACTION MEANS THAT THE SECRETARY OF STATE HAS PASSED IN ANY WAY UPON THE
MERITS OR QUALIFICATIONS OF, OR RECOMMENDED OR GIVEN APPROVAL TO, ANY PERSON,
SECURITY, OR TRANSACTION. IT IS UNLAWFUL TO MAKE, OR CAUSE TO BE MADE, TO ANY
PROSPECTIVE PURCHASER, CUSTOMER OR CLIENT ANY REPRESENTATION INCONSISTENT WITH
THE PROVISIONS OF THIS PARAGRAPH.
[INTENTIONALLY LEFT BLANK]
22
10. Number of Shares and Purchase Price. Subscriber subscribes for
_________ shares of Preferred Stock (in the amount of $10,000 per Share) and the
accompanying Common Warrants against payment by wire transfer in the amount of
$___________________ ("Purchase Price").
11. Accredited Investor. Subscriber is an "accredited investor"
because (check all applicable boxes):
(a) [_] it is an organization described in Section 501(c)(3) of the
Internal Revenue Code, or a corporation, business trust, or
partnership not formed for the specific purpose of acquiring
the securities offered, with total assets in excess of
$5,000,000.
(b) [_] any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered,
whose purchase is directed by a sophisticated person who has
such knowledge and experience in financial and business matters
that he is capable of evaluating the merits and risks of the
prospective investment.
(c) [_] a natural person, who
[_] is a director, executive officer or general partner of the issuer
of the securities being offered or sold or a director,
executive officer or general partner of a general partner of
that issuer.
[_] has an individual net worth, or joint net worth with that person's
spouse, at the time of his purchase exceeding $1,000,000.
[_] had an individual income in excess of $200,000 in each of the two
most recent years or joint income with that person's spouse in
excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current
year.
(d) [_] an entity each equity owner of which is an entity described in a -b
above or is an individual who could check one (1) of the last
three (3) boxes under subparagraph (c) above.
(e) [_] other [specify]____________________________________________________
The undersigned acknowledges that this Agreement and the subscription
represented hereby shall not be effective unless accepted by the Company as
indicated below.
IN WITNESS WHEREOF, the undersigned Subscriber does represent and
certify under penalty of perjury that the foregoing statements are true and
correct and that Subscriber by the following signature(s) executed this
Agreement.
Dated this _____ day of October, 1997.
--------------------------------- ------------------------------------------
Your Signature PRINT EXACT NAME IN WHICH YOU WANT
THE SECURITIES TO BE REGISTERED
DELIVERY INSTRUCTIONS:
--------------------------------- ----------------------
Name: Please Print Please type or print address where your
security is to be delivered
ATTN.:
--------------------------------- ------------------------------------
Title/Representative Capacity
(if applicable)
--------------------------------- ------------------------------------------
Name of Company You Represent Street Address
(if applicable)
--------------------------------- ------------------------------------------
Place of Execution of this Agreement City, State or Province, Country,
Offshore Postal Code
------------------------------------------
23
Phone Number (For Federal Express) and Fax Number (re: Notice)
THIS AGREEMENT IS ACCEPTED BY THE COMPANY IN THE AMOUNT OF $ _________________
ON THE ____ DAY OF October, 1997.
Franklin Telecommunications Corp.
By:________________________________
Name:______________________________
Title:_______________________________
NOTICE OF CONVERSION [AND RESALE]
(To be Executed by the Registered Holder
in order to Convert the Preferred Stock)
The undersigned hereby irrevocably elects to convert _____________ shares of
Series A Preferred Stock, represented by stock certificate No(s).
________________ (the "Preferred Stock Certificates") into shares of common
stock ("Common Stock") of Franklin Telecommunications Corp. (the "Company")
according to the conditions of the Certificate of Determination of Series A
Preferred Stock, as of the date written below [in connection with the resale of
the underlying Common Stock unless otherwise indicated below]. If shares are to
be issued in the name of a person other than the undersigned, the undersigned
will pay all transfer taxes payable with respect thereto and is delivering
herewith such certificates. No fee will be charged to the Holder for any
conversion, except for transfer taxes, if any. A copy of each of the Preferred
Stock Certificates being converted is attached hereto. The undersigned agrees
to deliver a Prospectus in connection with any sale made pursuant to the
Registration Statement, as provided in Section 5.10 of the Subscription
Agreement.
____ Check here if this conversion is not being made in connection with the
resale of the Common Stock.
Date of Conversion:____________________
Applicable Conversion Price:___________
Number of Shares of
Common Stock to be Issued:_____________
Signature:_____________________________
Name:__________________________________
Address: ______________________________
24
* No shares of Common Stock will be issued until the original Series A Preferred
Stock Certificate(s) to be converted and the Notice of Conversion are received
by the Company or its Transfer Agent. The Holder shall (i) send via facsimile,
on or prior to 11:59 p.m., New York City time, on the date of conversion, a copy
of this completed and fully executed Notice of Conversion to the Company at the
office of the Company and its designated Transfer Agent for the Series A
Preferred Stock that the Holder elects to convert and (ii) surrender, to a
common courier for either overnight or two (2) day delivery to the office of the
Company or the Transfer Agent, the original Series A Preferred Stock
Certificate(s) representing the Series A Preferred Stock being converted, duly
endorsed for transfer. The Company or its Transfer Agent shall issue shares of
Common Stock and surrender them to a common courier for delivery to the
shareholder within three (3) business days following receipt of a facsimile of
this Notice of Conversion and receipt by the Company or its Transfer Agent of
---
the original Series A Preferred Stock Certificate(s) to be converted, all in
accordance with the terms of the Certificate of Determination and the
Subscription Agreement, and shall make payments for the number of business days
such issuance and delivery is late, pursuant to the terms of the Subscription
Agreement.
EXHIBIT L
25