EXECUTION COPY
VIRTUAL TELECOM, INC.
SERIES B PREFERRED STOCK
PURCHASE AGREEMENT
December 18, 1997
TABLE OF CONTENTS
PAGE
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1. Purchase and Sale of Stock . . . . . . . . . . . . . . . . . . . 2
1.1 Sale and Issuance of Series B Preferred Stock . . . . . . 2
1.2 Closing . . . . . . . . . . . . . . . . . . . . . . . . . 2
2. Representations and Warranties of the Company . . . . . . . . . 2
2.1 Organization; Good Standing; Qualification . . . . . . . . 2
2.2 Authorization . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Valid Issuance of Preferred and Common Stock . . . . . . . 3
2.4 Governmental Consents . . . . . . . . . . . . . . . . . . 4
2.5 Capitalization and Voting Rights . . . . . . . . . . . . . 4
2.6 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . 5
2.7 Contracts and Other Commitments . . . . . . . . . . . . . 5
2.8 Related-Party Transactions . . . . . . . . . . . . . . . . 6
2.9 Registration Rights . . . . . . . . . . . . . . . . . . . 6
2.10 Permits . . . . . . . . . . . . . . . . . . . . . . . . . 6
2.11 Compliance With Other Instruments . . . . . . . . . . . . 6
2.12 Litigation . . . . . . . . . . . . . . . . . . . . . . . . 7
2.13 Customer Complaints . . . . . . . . . . . . . . . . . . . 7
2.14 Disclosure . . . . . . . . . . . . . . . . . . . . . . . . 7
2.15 SEC Filings . . . . . . . . . . . . . . . . . . . . . . . 7
2.16 Offering . . . . . . . . . . . . . . . . . . . . . . . . . 8
2.17 Title to Property and Assets; Leases . . . . . . . . . . . 8
2.18 Financial Statements . . . . . . . . . . . . . . . . . . . 8
2.19 Changes . . . . . . . . . . . . . . . . . . . . . . . . . 9
2.20 Patents and Trademarks . . . . . . . . . . . . . . . . . . 9
2.21 Manufacturing and Marketing Rights . . . . . . . . . . . . 10
2.22 Employees; Employee Compensation . . . . . . . . . . . . . 10
2.23 Proprietary Information Agreements . . . . . . . . . . . . 10
2.24 Tax Returns, Payments and Elections . . . . . . . . . . . 10
2.25 Insurance . . . . . . . . . . . . . . . . . . . . . . . . 11
2.26 Environmental and Safety Laws . . . . . . . . . . . . . . 11
2.27 Section 83(b) Elections . . . . . . . . . . . . . . . . . 11
2.28 Minute Books . . . . . . . . . . . . . . . . . . . . . . . 12
2.29 Real Property Holding Corporation . . . . . . . . . . . . 12
3. Representations and Warranties of Investors . . . . . . . . . . 12
3.1 Authorization . . . . . . . . . . . . . . . . . . . . . . 12
3.2 Restricted Securities . . . . . . . . . . . . . . . . . . 12
3.3 Investor Sophistication and Ability to Bear
Risk of Loss . . . . . . . . . . . . . . . . . . . . . . . 14
3.4 Independent Investigation and Advisors . . . . . . . . . . 14
3.5 Foreign Jurisdictions . . . . . . . . . . . . . . . . . . 14
3.6 Partly Paid Shares . . . . . . . . . . . . . . . . . . . . 15
4. Conditions of Investors' Obligations at Closing . . . . . . . . 15
4.1 Representations and Warranties . . . . . . . . . . . . . . 15
4.2 Performance . . . . . . . . . . . . . . . . . . . . . . . 15
4.3 Compliance Certificate . . . . . . . . . . . . . . . . . . 15
4.4 Qualifications . . . . . . . . . . . . . . . . . . . . . . 15
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4.5 Proceedings and Documents . . . . . . . . . . . . . . . . 15
4.6 Certificate of Designations . . . . . . . . . . . . . . . 15
4.7 Board of Directors . . . . . . . . . . . . . . . . . . . . 16
4.8 Opinion of Company Counsel . . . . . . . . . . . . . . . . 16
4.9 Investors' Rights Agreement . . . . . . . . . . . . . . . 16
4.10 Co-Sale Agreement . . . . . . . . . . . . . . . . . . . . 16
5. Conditions of the Company's Obligations at Closing . . . . . . . 16
5.1 Representations and Warranties . . . . . . . . . . . . . . 16
5.2 Qualifications . . . . . . . . . . . . . . . . . . . . . . 16
6. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . 16
6.1 Entire Agreement . . . . . . . . . . . . . . . . . . . . . 16
6.2 Survival of Warranties . . . . . . . . . . . . . . . . . . 16
6.3 Successors and Assigns . . . . . . . . . . . . . . . . . . 17
6.4 Governing Law . . . . . . . . . . . . . . . . . . . . . . 17
6.5 Counterparts . . . . . . . . . . . . . . . . . . . . . . . 17
6.6 Titles and Subtitles . . . . . . . . . . . . . . . . . . . 17
6.7 Notices . . . . . . . . . . . . . . . . . . . . . . . . . 17
6.8 Finders' Fees . . . . . . . . . . . . . . . . . . . . . . 17
6.9 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . 18
6.10 Attorneys' Fees . . . . . . . . . . . . . . . . . . . . . 18
6.11 Amendments and Waivers . . . . . . . . . . . . . . . . . . 18
6.12 Severability . . . . . . . . . . . . . . . . . . . . . . . 18
Schedule A - List of Investors
Exhibit A - Restated Certificate
Exhibit B - Schedule of Exceptions
Exhibit C - Investors' Rights Agreement
Exhibit D - List of Stockholders
Exhibit E - Form of Legal Opinion of Company Counsel
Exhibit F - Co-Sale Agreement
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VIRTUAL TELECOM, INC.
SERIES B PREFERRED STOCK
PURCHASE AGREEMENT
THIS SERIES B PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is
made as of the 18th day of December, 1997, by and between VIRTUAL TELECOM,
INC., a Delaware corporation (the "Company"), and each of the persons listed
on Schedule A hereto, each of which is herein referred to as an "Investor."
RECITALS
A. The Company desires to issue and sell to the Investors and the
Investors wish to purchase from the Company, in the manner set forth below,
an aggregate of 1,923,716 shares of the Company's Series B Preferred Stock.
B. Pursuant to three separate Certificates For Loan Stock, each dated
as of December 18, 1997, by and between Firstquote Limited, a wholly owned
subsidiary of the Company incorporated under the laws of England
("Firstquote"), and each of the Investors, respectively, the Investors loaned
to Firstquote an aggregate amount equivalent to US$1,000,000 (based upon an
exchange rate of 1.64 U.S. dollars per British pound sterling) in
consideration of Firstquote Unsecured Loan Stock 1998 (collectively, the
"Loan Stock").
C. Pursuant to three separate Put & Call Option Deeds, each dated as
of December 18, 1997, by and between the Company and each of the Investors,
respectively (collectively, the "Deeds"), the Investors have the right, among
other things, to require the Company to issue and sell to them an aggregate
of 1,923,716 shares of the Company's Series B Preferred Stock in accordance
with the terms of this Agreement.
D. Upon the Closing, as defined below, each of the Investors desires
and intends to exercise its right under the Deeds to require the Company to
issue and sell to it that number of shares of the Company's Series B
Preferred Stock set forth opposite such Investor's name on Schedule A hereto
on the terms and subject to the conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants and conditions set forth in this Agreement, the parties hereby
agree as follows:
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1. PURCHASE AND SALE OF STOCK.
1.1 SALE AND ISSUANCE OF SERIES B PREFERRED STOCK.
(a) The Company shall adopt and file with the Secretary of State of
Delaware on or before the Closing an Amended and Restated Certificate of
Designations in the form attached hereto as EXHIBIT A (the "Restated
Certificate").
(b) Subject to the terms and conditions of this Agreement, each
Investor agrees, severally and not jointly, to purchase at the Closing and
the Company agrees to sell and issue to each Investor, severally and not
jointly, at the Closing that number of shares of the Company's Series B
Preferred Stock set forth opposite each Investor's name on Schedule A hereto
at a price of US$1.5595 per share. The Series B Preferred Stock will have the
rights, preferences, privileges and restrictions set forth in the Restated
Certificates.
(c) CLOSING. The purchase and sale of the Series B Preferred Stock
shall take place at the offices of the Company, 12 Avenue Des Morgines, 1213
▇▇▇▇▇-▇▇▇▇▇ ▇, ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇▇, at 9:00 A.M. on December 30, 1997, or at
such other time and place as the Company and Investors acquiring in the
aggregate more than half the shares of Series B Preferred Stock sold pursuant
hereto shall mutually agree, either orally or in writing (which time and
place are designated as the "Closing"). At the Closing, the Company shall
deliver to each Investor a certificate representing the shares of Series B
Preferred Stock that such Investor is purchasing against payment of one-third
(1/3) of the purchase price therefor by cancellation of the indebtedness
evidenced by such Investor's entire share of the Loan Stock. Such Investor
shall surrender to the Company for cancellation at the Closing its entire
share of the Loan Stock and shall execute an instrument of transfer or
cancellation in form and substance acceptable to the Company. Within ninety
(90) days after the Closing, each Investor shall deliver to the Company, by
check, wire transfer or such other form of payment as shall be mutually
agreed upon by such Investor and the Company, payment of the remaining
two-thirds (2/3) of the purchase price.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to each Investor that, except as set forth on a
Schedule of Exceptions furnished to Investors and counsel to Investors and
attached hereto as EXHIBIT B, specifically identifying the relevant
subparagraph(s) hereof, which exceptions shall be deemed to be
representations and warranties as if made hereunder:
2.1 ORGANIZATION; GOOD STANDING; QUALIFICATION. The Company is a
corporation duly organized, validly existing and in good standing under the
laws of the State of Delaware, has all requisite corporate power and
authority to own and operate its
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properties and assets and to carry on its business as now conducted, to
execute and deliver this Agreement, the Investors' Rights Agreement dated as
of the date hereof, by and among the Company and those parties listed on
Exhibit A thereto (the "Investors' Rights Agreement"), the form of which is
attached hereto as EXHIBIT C, and any other agreement to which the Company is
a party the execution and delivery of which is contemplated hereby (the
"Ancillary Agreements"), to issue and sell the Series B Preferred Stock and
the Common Stock issuable upon conversion thereof, and to carry out the
provisions of this Agreement, the Investors' Rights Agreement, the Restated
Certificate and any Ancillary Agreement. The Company is duly qualified and
is authorized to transact business and is in good standing as a foreign
corporation in each jurisdiction in which the failure so to qualify would
have a material adverse effect on its business, properties, or financial
condition.
2.2 AUTHORIZATION. All corporate action on the part of the Company,
its officers, directors and stockholders necessary for the authorization,
execution and delivery of this Agreement, the Investors' Rights Agreement and
any Ancillary Agreement, the performance of all obligations of the Company
hereunder and thereunder at the Closing and the authorization, issuance (or
reservation for issuance), sale and delivery of the Series B Preferred Stock
being sold hereunder and the Common Stock issuable upon conversion thereof
has been taken or will be taken prior to the Closing, and this Agreement, the
Investors' Rights Agreement and any Ancillary Agreement constitute valid and
legally binding obligations of the Company, enforceable in accordance with
their respective terms except (a) as limited by applicable bankruptcy,
insolvency, reorganization, moratorium and other laws of general application
affecting enforcement of creditors' rights generally, (b) as limited by laws
relating to the availability of specific performance, injunctive relief or
other equitable remedies, and (c) to the extent the indemnification provisions
contained in the Investors' Rights Agreement may be limited by applicable
federal or state securities laws.
2.3 VALID ISSUANCE OF PREFERRED AND COMMON STOCK. The Series B
Preferred Stock that is being purchased by each Investor hereunder, when
issued, sold and delivered in accordance with the terms of this Agreement
for the consideration expressed herein (consisting either of cash or
cancellation of indebtedness), will be duly and validly issued, fully paid
and nonassessable, and will be free of restrictions on transfer other than
restrictions on transfer under this Agreement and the Investors' Rights
Agreement and under applicable state and federal securities laws.
Notwithstanding the preceding sentence, until such time as the full purchase
price set forth in Section 1.2 has been delivered by the Investors to the
Company, the shares of the Series B Preferred Stock shall be partly paid
shares and shall be subject to the provisions of Section 156 of the Delaware
General Corporation Law. The Common Stock issuable upon conversion of the
Series B Preferred Stock
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purchased under this Agreement has been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the Restated
Certificate, will be duly and validly issued, fully paid and nonassessable,
and will be free of restrictions on transfer other than restrictions on
transfer under this Agreement and the Investors' Rights Agreement and under
applicable state and federal securities laws.
2.4 GOVERNMENTAL CONSENTS. No consent, approval, qualification, order
or authorization of, or filing with, any local, state or federal governmental
authority is required on the part of the Company in connection with the
Company's valid execution, delivery or performance of this agreement, the
offer, sale or issuance of the Series B Preferred Stock by the Company or the
issuance of Common Stock upon conversion of the Series B Preferred Stock,
except (a) the filing of the Restated Certificate with the Secretary of State
of the State of Delaware, and (b) such filings as have been made prior to the
Closing, except for any notices of sale required to be filed with the
Securities and Exchange Commission ("SEC") under the Securities Act of 1933,
as amended (the "Securities Act"), or such post-closing filings as may be
required under applicable state securities laws, which will be timely filed
within the applicable periods therefor.
2.5 CAPITALIZATION AND VOTING RIGHTS. The authorized capital of the
Company consists, or will consist prior to the Closing, of:
(a) PREFERRED STOCK. 10,000,000 shares of Preferred Stock, par value
US$.001 (the "Preferred Stock"), of which (i) 750,000 shares have been
designated Series A Preferred Stock, 147,938 shares of which are issued and
outstanding, and (ii) 1,923,716 shares have been designated Series B
Preferred Stock, up to all of which will be sold pursuant to this Agreement.
The rights, privileges and preferences of the Series A and Series B
Preferred Stock will be as stated in the Restated Certificate.
(b) COMMON STOCK. 20,000,000 shares of common stock ("Common Stock"),
par value US$.001, of which 5,375,272 shares are issued and outstanding.
The outstanding shares of Series A Preferred Stock and Common Stock are
owned by the stockholders and in the numbers specified in EXHIBIT D, which in
the case of the Common Stock is accurate as of November 18, 1997. The
outstanding shares of Series A Preferred Stock and Common Stock have been
duly authorized and validly issued, are fully paid and nonassessable, and
were issued in accordance with the registration or qualification provisions
of the Securities Act and any relevant state securities laws or pursuant to
valid exemptions therefrom. Except for (i) the conversion privileges of the
Series A and Series B Preferred Stock, (ii) the rights provided in
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paragraph 2.3 of the Investors' Rights Agreement, (iii) currently outstanding
warrants to purchase 487,781 shares of Common Stock, and (iv) currently
outstanding options to purchase 310,000 shares of Common Stock granted to
employees pursuant to the Company's 1997 Stock Option Plan (the "Option
Plan"), there are not outstanding any options, warrants, rights (including
conversion or preemptive rights and rights of first refusal), proxy or
stockholder agreements or agreements of any kind for the purchase or
acquisition from the Company of any shares of its capital stock. In addition
to the aforementioned options, the Company has reserved an additional 190,000
shares of its Common Stock for purchase upon exercise of options to be
granted in the future under the Option Plan. The Company is not a party or
subject to any agreement or understanding, and, to the best of the Company's
knowledge, there is no agreement or understanding between any persons that
affects or relates to the voting or giving of written consents with respect
to any security or the voting by a director of the Company.
2.6 SUBSIDIARIES. Except for Firstquote and Virtual Telecom SA, a
Swiss corporation wholly owned by the Company (together, the "Subsidiaries"),
the Company does not own or control, directly or indirectly, any interest in
any other corporation, association or other business entity. The Company is
not a participant in any joint venture, partnership or similar arrangement.
Each of the Subsidiaries is duly organized and existing under the laws
of its jurisdiction of organization and is in good standing under such laws.
Neither of the Subsidiaries owns or leases property or engages in any
activity in any jurisdiction that might require its qualification to do
business as a foreign corporation and in which the failure to do so to
qualify would have a material adverse effect upon the Company's business,
properties, prospects, or financial condition.
2.7 CONTRACTS AND OTHER COMMITMENTS. The Company does not have and is
not bound by any contract, agreement, lease, commitment or proposed
transaction, judgment, order, writ or decree, written or oral, absolute or
contingent, other than (a) contracts for the purchase of supplies and
services that were entered into in the ordinary course of business and that
do not involve more than US$100,000 and do not extend for more than one (1)
year beyond that date hereof, (b) sales contracts entered into in the
ordinary course of business, and (c) contracts terminable at will by the
Company on no more than thirty (30) days notice without cost or liability to
the Company and that do not involve any employment or consulting arrangement
and are not material to the conduct of the Company's business. For the
purpose of this paragraph, employment and consulting contracts and contracts
with labor unions, and license agreements and any other agreements relating
to the acquisition or disposition of the Company's technology, shall not be
considered to be contracts entered into in the ordinary course of business.
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2.8 RELATED PARTY TRANSACTION. No employee, officer, stockholder or
director of the Company or member of his or her immediate family is indebted
to the Company, nor is the Company indebted (or committed to make loans or
extend or guarantee credit) to any of them. To the best of the Company's
knowledge, none of such persons has any direct or indirect ownership in any
firm or corporation with which the Company is affiliated or with which the
Company has a business relationship, or any firm or corporation that competes
with the Company, except that employees, officers or directors of the Company
and members of their immediate families may own stock in publicly traded
companies that may compete with the Company. To the best of the Company's
knowledge, no officer, director, stockholder or any member of their immediate
families is, directly or indirectly, interested in any material contract with
the Company (other than such contracts as relate to any such person's
ownership of capital stock or other securities of the Company).
2.9 REGISTRATION RIGHTS. Except as provided in the Investors' Rights
Agreement, the Company is not obligated and has not granted any rights to
register under the Securities Act any of its presently outstanding securities
or any of its securities that may subsequently be issued.
2.10 PERMITS. The Company has all franchises, permits, licenses and
any similar authority necessary for the conduct of its business as now being
conducted by it, the lack of which could materially and adversely affect the
business, properties, prospects or financial condition of the Company and
believes it can obtain, without undue burden or expense, any similar
authority for the conduct of its business as planned to be conducted. The
Company is not in default in any material respect under any of such
franchises, permits, licenses or other similar authority.
2.11 COMPLIANCE WITH OTHER INSTRUMENTS. The Company is not in
violation or default in any material respect of any provision of its
Certificate of Incorporation or Bylaws or in any material respect of any
provision of any mortgage, agreement, instrument or contract to which it is a
party or by which it is bound or, to the best of its knowledge, of any
federal or state judgment, order, writ, decree, statute, rule or regulation
applicable to the Company. The execution, delivery and performance by the
Company of this Agreement, the Investors' Rights Agreement and any Ancillary
Agreement, and the consummation of the transactions contemplated hereby and
thereby will not result in any such violation or be in material conflict with
or constitute, with or without the passage of time or giving of notice,
either a material default under any such provision or an event that results
in the creation of any material lien, charge or encumbrance upon any assets
of the Company or the suspension, revocation, impairment, forfeiture or
nonrenewal of any material permit, license, authorization or approval
applicable to the
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Company, its business or operations, or any of its assets or properties.
2.12 LITIGATION. There is no action, suit proceeding or investigation
pending or currently threatened against the Company that questions the
validity of this Agreement, the Investors' Rights Agreement or any Ancillary
Agreement or the right of the Company to enter into such agreements, or to
consummate the transactions contemplated hereby or thereby, or that might
result, either individually or in the aggregate, in any material adverse
change in the assets, business, properties, prospects or financial condition
of the Company, or in any material change in the current equity ownership of
the Company. The foregoing includes, without limitation, any action, suit,
proceeding or investigation pending or currently threatened involving the
prior employment of any of the Company's employees, their use in connection
with the Company's business of any information or techniques allegedly
proprietary to any of their former employers, their obligations under any
agreements with prior employers, or negotiations by the Company with
potential backers of, or investors in, the Company or its proposed business.
The Company is not a party to, or to the best of its knowledge, named in any
order, writ, injunction, judgment or decree of any court, government agency
or instrumentality. There is no action, suit or proceeding by the Company
currently pending or that the Company currently intends to initiate.
2.13 CUSTOMER COMPLAINTS. The Company has received no customer
complaints concerning alleged defects in its products (or the design thereof)
that, if true, would materially adversely affect the operations or financial
condition of the Company.
2.14 DISCLOSURE. The Company has provided Investors with all the
information reasonably available to it without undue expense that Investors
have requested for deciding whether to purchase the Series B Preferred Stock.
To the best of the Company's knowledge after reasonable investigation,
neither this Agreement nor any other written statements or certificates made
or delivered in connection herewith contains any untrue statement of a
material fact or omits to state a material fact necessary to make the
statements herein of therein not misleading.
2.15 SEC FILINGS. The Company has registered its Common Stock pursuant
to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the Common Stock is listed and trades on the OTC
Bulletin Board. The Company has filed all forms, reports and documents
required to be filed pursuant to the federal securities laws and the rules
and regulations promulgated thereunder for a period of at least twelve (12)
months immediately preceding the offer or sale of the Shares (or for such
shorter period that the Company has been required to file such material).
The Company's filings with the SEC complied as of their respective filing
dates, or in the case
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of registration statements, their respective effective dates, in all material
respects with all applicable requirements of the Securities Act and the
Exchange Act and the rules and regulations promulgated thereunder. None of
such filings, including, without limitation, any exhibits, financial
statements or schedules included therein, at the time filed, or in the case
of registration statements, at their respective filing dates, contained any
untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading.
2.16 OFFERING. Subject in part to the truth and accuracy of Investors'
representations set forth in this Agreement, the offer, sale and issuance of
the Series B Preferred Stock as contemplated by this Agreement are exempt
from the registration requirements of the Securities Act, and neither the
Company not any authorized agent acting on its behalf will take any action
hereafter that would cause the loss of such exemption.
2.17 TITLE TO PROPERTY AND ASSETS; LEASES. Except (a) for liens for
current taxes not yet delinquent, (b) for liens imposed by law and incurred
in the ordinary course of business for obligations not past due to carriers,
warehousemen, laborers, materialmen and the like, (c) for liens in respect of
pledges or deposits under workers' compensation laws or similar legislation,
or (d) for minor defects in title, none of which, individually or in the
aggregate, materially interferes with the use of such property, the Company
has good and marketable title to its property and assets free and clear of
all mortgages, liens, claims and encumbrances. With respect to the property
and assets it leases, the Company is in compliance with such leases and, to
the best of its knowledge, holds a valid leasehold interest free of any
liens, claims or encumbrances, subject to clauses (a)-(d) above.
2.18 FINANCIAL STATEMENTS. The Company has delivered to Investors its
audited financial statements (balance sheet and profit and loss statement,
statement of stockholders' equity and statement of cash flows, including
notes thereto) at December 31, 1996 and for the fiscal year then ended and
its unaudited financial statements (balance sheet and profit and loss
statement) as at, and for the nine (9) month period ended September 30, 1997
(the "Financial Statements"). The Financial Statements have been prepared in
accordance with generally accepted accounting principles applied on a
consistent basis throughout the periods indicated and with each other, except
that the unaudited Financial Statements do not contain all footnotes required
by generally accepted accounting principles. The Financial Statements fairly
present the financial condition and operating results of the Company as of
the dates, and for the periods, indicated therein, subject in the case of the
unaudited Financial Statements to normal year-end audit adjustments. Except
as set forth in the Financial Statements,
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the Company has no material liabilities, contingent or otherwise, other than
(i) liabilities incurred in the ordinary course of business subsequent to
September 30, 1997, and (ii) obligations under contracts and commitments
incurred in the ordinary course of business and not required under generally
accepted accounting principles to be reflected in the Financial Statements,
which, in both cases, individually or in the aggregate, are not material to
the financial condition or operating results of the Company. Except as
disclosed in the Financial Statements, the Company is not a guarantor or
indemnitor of any indebtedness of any other person, firm or corporation. The
Company maintains and will continue to maintain a standard system of
accounting established and administered in accordance with generally accepted
accounting principles.
2.19 CHANGES. To the best knowledge of the Company, and except as
disclosed in the Company's filings with the SEC, since September 30, 1997,
there has not been any event or condition of any type that has materially and
adversely affected the business, properties, prospects or financial condition
of the Company.
2.20 PATENTS AND TRADEMARKS. To the best of its knowledge (but without
having conducted any special investigation or patent search) the Company owns
or possesses sufficient legal rights to all patents, trademarks, service
marks, trade names, copyrights, trade secrets, licenses, information and
proprietary rights and processes necessary for its business as now conducted
and as proposed to be conducted without any conflict with, or infringement of
the rights of, others. The Schedule of Exceptions contains a complete list
of patents and pending patent applications of the Company. Except for
agreements with its own employees or consultants, substantially in the form
referenced in Section 2.23 below, there are no outstanding options, licenses
or agreements of any kind relating to the foregoing, nor is the Company bound
by or a party to any options, licenses or agreements of any kind with respect
to the patents, trademarks, service marks, trade names, copyrights, trade
secrets, licenses, information and proprietary rights and processes of any
other person or entity. The Company has not received any communications
alleging that the Company has violated or, by conducting its business as
proposed, would violate any of the patents, trademarks, service marks, trade
names, copyrights, trade secrets or other proprietary rights or processes of
any other person or entity. The Company is not aware that any of its
employees is obligated under any contract (including licenses, covenants or
commitments of any nature) or other agreement, or subject to any judgment,
decree or order of any court or administrative agency, that would interfere
with the use of such employee's best efforts to promote the interests of the
Company or that would conflict with the Company's business as proposed to be
conducted. Neither the execution nor delivery of this Agreement, nor the
carrying on of the Company's
-9-
business by the employees of the Company, nor the conduct of the Company's
business as proposed, will, to the best of the Company's knowledge, conflict
with or result in a breach of the terms, conditions or provisions of, or
constitute a default under, any contract, covenant or instrument under which
any of such employees is now obligated. The Company does not believe it is or
will be necessary to use any inventions of any of its employees (or persons
it currently intends to hire) made prior to their employment by the Company,
other than those which have been assigned to the Company.
2.21 MANUFACTURING AND MARKETING RIGHTS. The Company has not granted
rights to manufacture, produce, assemble, license, market, or sell its
products to any other person and is not bound by any agreement that affects
the Company's exclusive right to develop, manufacture, assemble, distribute,
market, or sell its products.
2.22 EMPLOYEES; EMPLOYEE COMPENSATION. To the best of the Company's
knowledge, there is no strike, or labor dispute or union organization
activities pending or threatened between it and its employees. None of the
Company's employees belongs to any union or collective bargaining unit. To
the best of its knowledge, the Company has complied in all material respects
with all applicable state and federal equal opportunity and other laws
related to employment. To the best of the Company's knowledge, no employee of
the Company is or will be in violation of any judgment, decree or order, or
any term of any employment contract, patent disclosure agreement, or other
contract or agreement relating to the relationship of any such employee with
the Company or any other party because of the nature of the business
conducted or to be conducted by the Company or to the use by the employee of
his best efforts with respect to such business. The Company is not a party to
or bound by any currently effective employment contract, deferred
compensation agreement, bonus plan, incentive plan, profit sharing plan,
retirement agreement, or other employee compensation agreement. The Company
is not aware that any officer or key employee, or any group of key employees,
intends to terminate their employment with the Company, nor does the Company
have a present intention to terminate the employment of any of the foregoing.
Subject to general principles related to wrongful termination of employees,
the employment of each officer and employee of the Company is terminable at
the will of the Company.
2.23 PROPRIETARY INFORMATION AGREEMENTS. Prior to or as promptly as
practicable following the Closing, the Company shall use its best efforts to
cause each employee and officer of the Company to execute a Proprietary
Information Agreement substantially in the form or forms which have been
delivered to counsel for the Investors.
2.24 TAX RETURNS, PAYMENTS AND ELECTIONS. The Company has filed all tax
returns and reports as required by law. These
-10-
returns and reports are true and correct in all material respects. The
Company has paid all taxes and other assessments due, except those contested
by it in good faith. The provision for taxes of the Company as shown in the
Financial Statements is adequate for taxes due or accrued as of the date
thereof. The Company has not elected pursuant to the Internal Revenue Code of
1986, as amended ("Code"), to be treated as an S corporation or a collapsible
corporation pursuant to Section 1362(a) or Section 341(f) of the Code, nor
has it made any other elections pursuant to the Code (other than elections
that relate solely to methods of accounting, depreciation or amortization)
that would have a material effect on the business, properties, prospects or
financial condition of the Company. The Company has never had any tax
deficiency proposed or assessed against it and has not executed any waiver of
any statute of limitations on the assessment or collection of any tax or
governmental charge. None of the Company's federal income tax returns and
none of its state income or franchise tax or sales or use tax returns has
ever been audited by governmental authorities. Since the date of the
Financial Statements, the Company has made adequate provisions on its books
of account for all taxes, assessments and governmental charges with respect
to its business, properties and operations for such period. The Company has
withheld or collected from each payment made to each of its employees, the
amount of all taxes, including, but not limited to, federal income taxes,
Federal Insurance Contribution Act taxes and Federal Unemployment Tax Act
taxes required to be withheld or collected therefrom, and has paid the same
to the proper tax receiving officers or authorized depositaries.
2.25 INSURANCE. The Company has in full force and effect fire and
casualty insurance policies, with extended coverage, sufficient in amount
(subject to reasonable deductibles) to allow it to replace any of its
properties that might be damaged or destroyed. Prior to or as promptly as
practicable following the Closing, the Company shall use its best efforts to
obtain term life insurance, payable to the Company, on the lives of ▇▇▇▇
▇▇▇▇▇▇▇ and ▇▇▇▇▇▇ ▇▇▇▇▇ in the amount of US$1,500,000 each. The Company has
in full force and effect products liability and errors and omissions
insurance in amounts customary for companies similarly situated.
2.26 ENVIRONMENTAL AND SAFETY LAWS. To the best of its knowledge, the
Company is not in violation of any applicable statute, law or regulation
relating to the environment or occupational health and safety, and to the
best of its knowledge, no material expenditures are or will be required in
order to comply with any such existing statute, law or regulation.
2.27 SECTION 83(b) ELECTIONS. To the best of the Company's knowledge,
all individuals who have purchased shares of the Company's Common Stock have
timely filed elections under section 83(b) of the Internal Revenue Code and
any analogous provisions of applicable state tax laws.
-11-
2.28 MINUTE BOOKS. The copy of the minute books of the Company provided
to the Investors' counsel contains minutes of all meetings of directors and
stockholders and all actions by written consent without a meeting by the
directors and stockholders since the date of incorporation and reflects all
actions by the directors (and any committee of directors) and stockholders
with respect to all transactions referred to in such minutes accurately in
all material respects.
2.29 REAL PROPERTY HOLDING CORPORATION. The Company is not a "United
States real property holding corporation" within the meaning of Internal
Revenue Code section 897(c)(2) and any regulations promulgated thereunder.
3. REPRESENTATIONS AND WARRANTIES OF INVESTORS. Each Investor hereby
represents and warrants, severally and not jointly, that:
3.1 AUTHORIZATION. Investor has full power and authority to enter into
this Agreement and that this Agreement constitutes a valid and legally
binding obligation of Investor.
3.2 RESTRICTED SECURITIES. Investor has been advised that the Series B
Preferred Stock have not been registered under the Securities Act or any
other applicable securities laws and that the Series B Preferred Stock are
being offered and sold pursuant to Regulation S under the Securities Act and
that the Company's reliance upon Regulation S is predicated in part on
Investors's representations as contained herein.
(a) Investor is acquiring the Series B Preferred Stock for its own
account, not as a nominee or agent, for investment and not with a view to or
for resale, except as contemplated by Section 6.3 and in all events in
compliance with this Section 3.2. Investor is not a U.S. Person (as defined
in Regulation S) and at the time of the origination of contact concerning
this subscription and at the date of execution and delivery of this Agreement
Investor was outside the United States, its territories and possessions.
(b) Investor:
(i) will not, during the period commencing on the Closing and
ending on the fortieth day after the Closing (the "Restricted Period"), offer
or sell the Series B Preferred Stock or any part thereof, including the
shares of Common Stock issuable upon conversion of the Series B Preferred
Stock ("Underlying Common Shares"), in the United States, its territories or
possessions, or to a U.S. Person or for the account or benefit of a U.S.
Person (other than distributors), other than in accordance with Rules 903 or
904 of Regulation S under the Securities Act; and
-12-
(ii) will, after the expiration of the Restricted Period,
offer, sell, pledge or otherwise transfer the Series B Preferred Stock, the
Underlying Common Shares or any part thereof only pursuant to registration
under the Securities Act or an available exemption therefrom and, in any
case, in accordance with applicable securities laws.
(c) Neither investor, its affiliates or any person acting on
behalf of Investor has engaged, or will engage, in any Directed Selling
Efforts (as defined in Regulation S) with respect to the Series B Preferred
Stock or the Underlying Common Shares or any distribution, as that term is
used in the definition of Distributor in Regulation S, with respect to the
Series B Preferred Stock or Underlying Common Shares.
(d) To the Investor's knowledge, the transactions contemplated by
this Agreement:
(i) have not been pre-arranged with a purchaser located in
the United States, its territories or possessions, or who is a U.S. Person;
and
(ii) are not part of a plan or scheme to evade the
registration provisions of the Securities Act.
(e) Investor is not an entity or group that has been formed
principally for the purpose of investing in securities not registered under
the Securities Act.
(f) Neither Investor, any affiliate of Investor, nor any person
acting on their behalf has undertaken or carried out any activity for the
purpose of, or that could reasonably be expected to have the effect of,
conditioning the market in the United States, its territories or possessions,
for any of the Series B Preferred Stock or the Underlying Common Shares.
(g) If Investor offers and sells the Series B Preferred Stock or
the Underlying Common Shares during the Restricted Period, then it will do so
only: (a) in accordance with the provisions of Regulation S; (b) pursuant to
registration requirements of the Securities Act; or (c) pursuant to an
available exemption from the registration requirements of the Securities Act.
(h) Investor understands that the Series B Preferred Stock and the
Underlying Common Shares have not been registered under the Securities Act
and may not be transferred or resold except pursuant to an effective
registration statement or exemption from registration and each certificate
representing the Series B Preferred Stock and the Underlying Common Shares
may be endorsed with the following legend:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED (THE
-13-
"SECURITIES ACT"), AND SUCH SECURITY MAY NOT BE OFFERED, SOLD, PLEDGED
OR OTHERWISE TRANSFERRED EXCEPT (1) IN AN OFFSHORE TRANSACTION IN
ACCORDANCE WITH RULE 903 OR (2) PURSUANT TO AN EXEMPTION FROM
REGISTRATION AS CONFIRMED IN AN OPINION OF COUNSEL SATISFACTORY TO THE
COMPANY, AND IN EACH CASE IN ACCORDANCE WITH ANY OTHER APPLICABLE LAW.
3.3 INVESTOR SOPHISTICATION AND ABILITY TO BEAR RISK OF LOSS. Investor
acknowledges that it is able to protect its interests in connection with the
acquisition of the Series B Preferred Stock and Underlying Common Shares and
can bear the economic risk of investment in such securities without producing
a material adverse change in Investor's financial condition. Investor
otherwise has such knowledge and experience in financial or business matters
that Investor is capable of evaluating the merits and risks of the investment
in the Series B Preferred Stock and Underlying Common Shares.
3.4 INDEPENDENT INVESTIGATION AND ADVISORS. Investor confirms that (a)
Investor has received, reviewed, and understands the financial statements
included in the SEC filings referred to in Section 2.15; (b) Investor has
been expressly offered the opportunity to be provided a copy of and to review
all reports, documents and exhibits referenced therein and such other
agreements, documents and information as Investor deems necessary or
appropriate in determining to make an investment in the Company, and (c)
Investor is purchasing the Series B Preferred Stock without any offering
memoranda or prospectus of any kind, other than the aforementioned SEC
filings. Investor represents and warrants that in making the decision to
acquire the Series B Preferred Stock, Investor has relied upon its own
independent investigation of the Company and the independent investigations
of the Company by Investor's representatives, including the Purchaser's own
professional accounting advisers, ATAG ▇▇▇▇▇▇ & Young (Geneva), and legal
advisers, Pillsbury, Madison & Sutro LLP, and (d) Investor and Investor's
representatives have been given the opportunity to examine all relevant
documents and to ask questions of and to receive answers from the Company, or
person(s) acting on its behalf, concerning the terms and conditions of
acquisition by the Purchaser of the Series B Preferred Stock and any other
matters concerning an investment in the Company, and to obtain any additional
information Investor deems necessary or appropriate to verify the accuracy of
the information provided.
3.5 FOREIGN JURISDICTIONS. Investor has satisfied itself as to the
full observance of the laws of its jurisdiction in connection with any
invitation to subscribe for the Series B Preferred Stock or any use of this
Agreement, including (a) the legal requirements within its jurisdiction for
the purchase of the Series B Preferred Stock, (b) any foreign exchange
restrictions applicable to such purchase, (c) any governmental or other
consents that may need to be obtained, and (d) the
-14-
income tax and other tax consequences, if any, which may be relevant to the
purchase, holding, redemption, sale or transfer of the Series B Preferred
Stock. Investor's subscription and payment for, and its continued beneficial
ownership of, the Series B Preferred Stock will not violate any applicable
securities or other laws of Investor's jurisdiction.
3.6 PARTLY PAID SHARES. Investor understands and acknowledges that
until such time as the full purchase price set forth in Section 1.2 has been
delivered by Investor to the Company, the shares of the Series B Preferred
Stock shall be partly paid shares and shall be subject to the provisions of
Section 156 of the Delaware General Corporation Law.
4. CONDITIONS OF INVESTORS' OBLIGATIONS AT CLOSING. The obligations
of each Investor under subparagraph 1.1(b) of this Agreement are subject to
the fulfillment on or before the Closing of each of the following conditions:
4.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of the Company contained in Section 2 shall be true on and as of the Closing
with the same effect as though such representations and warranties had been
made on and as of the date of the Closing.
4.2 PERFORMANCE. The Company shall have performed and complied with
all agreements, obligations and conditions contained in this Agreement that
are required to be performed or complied with by it on or before the Closing.
4.3 COMPLIANCE CERTIFICATE. The President of the Company shall deliver
to Investors at the Closing a certificate certifying that the conditions
specified in Sections 4.1, 4.2, 4.4, 4.6, 4.7, 4.9 and 4.10 have been
fulfilled.
4.4 QUALIFICATIONS. All authorizations, approvals or permits, if any,
of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale
of the Stock pursuant to this Agreement shall be duly obtained and effective
as of the Closing.
4.5 PROCEEDINGS AND DOCUMENTS. All corporate and other proceedings in
connection with the transactions contemplated at the Closing and all
documents incident thereto shall be reasonably satisfactory in form and
substance to Investors' counsel, which shall have received all such
counterpart original and certified or other copies of such documents as it
may reasonably request.
4.6 CERTIFICATE OF DESIGNATIONS. The Restated Certificate shall
provide that the holders of a majority of the outstanding shares of Series B
Preferred Stock shall be entitled to elect two (2) directors to the Company's
Board of Directors.
-15-
provision of the Restated Certificate referenced in the preceding sentence
shall not be amended without the consent of the holders of a majority of the
outstanding shares of Series B Preferred Stock.
4.7 BOARD OF DIRECTORS. The directors of the Company shall be ▇▇▇▇
▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ and ▇▇▇▇▇ ▇. ▇▇▇▇.
4.8 OPINION OF COMPANY COUNSEL. Investors shall have received from
▇▇▇▇▇ & Perry, counsel for the Company, an opinion, dated the date of the
Closing, in substantially the form attached hereto as EXHIBIT E.
4.9 INVESTORS' RIGHTS AGREEMENT. The Company and each Investor shall
have entered into the Investors' Rights Agreement in the form attached hereto
as EXHIBIT B.
4.10 CO-SALE AGREEMENT. The Company, each Investor, ▇▇▇▇ ▇▇▇▇▇▇▇ and
▇▇▇▇▇▇ ▇▇▇▇▇ shall each have entered into a Co-Sale Agreement in the form
attached hereto as EXHIBIT F.
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT CLOSING. The
obligations of the Company to each Investor under this Agreement are subject
to the fulfillment on or before the Closing of each of the following
conditions by that Investor:
5.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
of each Investor contained in Section 3 shall be true on and as of the
Closing with the same effect as though such representations and warranties
had been made on and as of the Closing.
5.2 QUALIFICATIONS. All authorizations, approvals or permits, if any,
of any governmental authority or regulatory body of the United States or of
any state that are required in connection with the lawful issuance and sale
of the Series B Preferred Stock pursuant to this Agreement, shall be duly
obtained and effective as of the Closing.
6. MISCELLANEOUS.
6.1 ENTIRE AGREEMENT. This Agreement and the documents referred to
herein constitute the entire agreement among the parties 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.
6.2 SURVIVAL OF WARRANTIES. The warranties, representations and
covenants of the Company and each Investor contained in or made pursuant to
this Agreement shall survive the execution and delivery of this Agreement and
the Closing.
-16-
6.3 SUCCESSORS AND ASSIGNS. Except as otherwise provided herein, 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 (including
permitted thransferees of any shares of Series B Preferred Stock sold
hereunder or any Common Stock issued upon conversion thereof). 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. The Company hereby
acknowledges and agrees that each Investor may assign any right or rights
that such Investor may have by reason of this Agreement to one or more
affiliates of such Investor or to one or more persons or entities organized
by the Investors for the purpose of investing in the Series B Preferred
Stock, provided that any such assignment is effected within 120 days of
the Closing in connection with a non-public sale to an accredited investor
(as such terms are defined in the Securities Act) and the Investors retain a
majority of the Series B Preferred Stock.
6.4 GOVERNING LAW. This Agreement shall be governed by and construed
under the laws of the State of Delaware. If any action or proceeding shall be
brought by any party in order to enforce any right or remedy under this
Agreement, each party hereby consents to submit to the jurisdiction of any
state or federal court of competent jurisdiction sitting within the State of
California.
6.5 COUNTERPARTS. This Agreement may be executed in two or more
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
6.6 TITLES AND SUBTITLES. 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.
6.7 NOTICES. Unless otherwise provided, any notice required or
permitted under this Agreement shall be given in writing and shall be deemed
effectively given upon personal delivery to the party to be notified or one
(1) day after being entrusted to a reputable overnight delivery service
properly addressed to the party to be notified at the address indicated for
such party on the signature page hereof, or at such other address as such
party may designate by ten (10) days advance written notice to the other
parties.
6.8 FINDERS' FEES. Except as disclosed in the Schedule of Exceptions
attached hereto as EXHIBIT B, each party represents that it neither is nor
will be obligated for any finders' fee or commission in connection with this
transaction. Each Investor agrees to indemnify and to hold harmless the
Company from any liability for any commission or compensation in the nature
of a
-17-
finder's fee (and the costs and expenses of defending against such
liability or asserted liability) for which the Investor or any of its
officers, employees or representatives is responsible. The Company agrees to
indemnify and hold harmless each Investor from any liability for any
commission or compensation in the nature of a finder's fee (and the costs and
expenses of defending against such liability or asserted liability) for which
the Company or any of its officers, employees or representatives is
responsible.
6.9 EXPENSES. Irrespective of whether the Closing is effected, the
Company shall pay all costs and expenses that it incurs with respect to the
negotiation, execution, delivery and performance of this Agreement. If the
Closing is effected, the Company shall, at the Closing, reimburse the
reasonable fees of (i) ATAG Ernst & Young (Geneva), accountants for
Investors, and (ii) Pillsbury Madison & Sutro LLP, counsel for Investors, and
shall, upon receipt of a ▇▇▇▇ therefor, reimburse the out-of-pocket expenses
of such accountants and counsel.
6.10 ATTORNEYS' FEES. If any action at law or in equity is necessary
to enforce or interpret the terms of this Agreement, the Investors' Rights
Agreement or the Restated Certificate, the prevailing party shall be entitled
to reasonable attorneys' fees, costs and disbursements in addition to any
other relief to which such party may be entitled.
6.11 AMENDMENTS AND WAIVERS. Any term of this Agreement may be amended
and the observance of any term of this Agreement may be waived (either
generally or in a particular instance and either retroactively or
prospectively), only with the written consent of the Company and the holders
of more than a majority of the Common Stock not previously sold to the public
that is issued or issuable upon conversion of the Series B Preferred Stock.
Any amendment or waiver effected in accordance with this paragraph shall be
binding upon each holder of any securities purchased under this Agreement at
the time outstanding (including securities into which such securities have
been converted), each future holder of all such securities and the Company.
6.12 SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, such provision shall be
excluded from this Agreement and the balance of the Agreement shall be
interpreted as if such provision were so excluded and shall be enforceable in
accordance with its terms.
-18-
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
VIRTUAL TELECOM, INC.
By /s/ ▇. ▇▇▇▇▇▇▇
---------------------------------
▇. ▇▇▇▇▇▇▇
Title CEO
---------------------------------
Address: 12 Ave des Morgines
---------------------------------
1213 ▇▇▇▇▇-▇▇▇▇▇ 1, Geneva
---------------------------------
Switzerland
---------------------------------
INVESTORS:
ALTA-BERKELEY, V, C.V.
By /s/ ▇▇▇▇▇ ▇▇▇▇
---------------------------------
▇▇▇▇▇ ▇▇▇▇
Title
---------------------------------
Address:
---------------------------------
---------------------------------
---------------------------------
ALTA-BERKELEY, V, S BY S, C.V.
By /s/ ▇▇▇▇▇ ▇▇▇▇
---------------------------------
▇▇▇▇▇ ▇▇▇▇
Title
---------------------------------
Address:
---------------------------------
---------------------------------
---------------------------------
-▇▇-
▇▇▇▇-▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, ▇▇
By /s/ CapMan Capital Management Oy
as general partner
---------------------------------
Title President
---------------------------------
Address: c/o CapMan Capital Management Oy
Aleksanterinkatu 15-B
---------------------------------
00100 Helsinki
---------------------------------
Finland
---------------------------------
-20-
SCHEDULE A
LIST OF INVESTORS
Number of
Investor Shares Purchased
-------- ----------------
Alta-Berkeley V, C.V. 1,704,880
Alta-Berkeley V. S by S, C.V. 62,023
Alta-Berkeley Nordic Partners, KY 156,813
Total 1,923,716
-21-
EXHIBIT D
LIST OF STOCKHOLDERS
-22-