<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________________ to ____________________
Commission file number 0-22351
VIRTUAL TELECOM, INC.
(NAME OF SMALL BUSINESS ISSUER IN ITS CHARTER)
Delaware 98-0162893
___________________________________ __________________________________
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
12, Av. des Morgines
1213 Petit-Lancy 1 N/A
Geneva,Switzerland
___________________________________ __________________________________
(ADDRESS OF PRINCIPAL (ZIP CODE)
EXECUTIVE OFFICES)
ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE +4122-879-0879
SECURITIES TO BE REGISTERED UNDER SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH
TO BE SO REGISTERED EACH CLASS IS TO BE REGISTERED
None N/A
___________________________________ __________________________________
SECURITIES TO BE REGISTERED UNDER SECTION 12(g) OF THE ACT:
Common Stock, $.001 par value
______________________________________________________________________________
(TITLE OF CLASS)
<PAGE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes /X/ No / /
Check if there is no disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K contained in this form, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. / /
The market value of the voting stock held by non-affiliates of the registrant
as of March 20, 1998 was approximately $7,789,600.
The number of shares of the Common Stock outstanding as of March 20, 1998 was
5,534,148.
DOCUMENTS INCORPORATED BY REFERENCE: NONE.
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
BUSINESS DEVELOPMENT
Virtual Telecom, Inc., a Delaware corporation (the "Company"), was
recently organized to engage in the business of developing and marketing
various Internet content-based products and, secondarily, to act as an
Internet Service Provider ("ISP") providing access to the Internet. The
Company's initial content-based products offered over the Internet consist of
the delivery of financial data from securities and commodity exchanges
worldwide on a real time and near real-time basis. During 1996 and the first
quarter of 1997, the Company acquired and implemented the hardware,
consisting of routers and servers, and leased telephone lines through which
it offers its financial data service and access to the Swiss market. During
the second fiscal quarter, the Company conducted pilot operations. The
Company commenced full commercial operations during the quarter ended
September 30, 1997.
The Company was organized on July 3, 1996 under the laws of the State
of Delaware and has two corporate predecessors, Virtual Telecom SA, a Swiss
Corporation, and Moke Acquisition Corp. ("Moke"), a Delaware corporation.
Virtual Telecom SA was organized on May 19, 1994 to engage in the development
and marketing of Internet content-based products and Internet dial-up access
to the Swiss market. Pursuant to a Securities Purchase Agreement and Plan of
Reorganization dated July 3, 1996, the holders of all of the issued and
outstanding capital shares of Virtual Telecom SA transferred those shares to
the Company in exchange for the Company's issuance of 3,193,540 shares of its
$.001 common stock ("Common Stock"). The share for share exchange between
the shareholders of Virtual Telecom SA and the Company was formally
consummated effective as of July 22, 1996. Virtual Telecom SA presently
exists as the wholly owned operating subsidiary of the Company. Pursuant to
an Agreement and Plan of Merger dated July 31, 1996 between the Company and
Moke, Moke merged with and into the Company effective as of August 30, 1996.
Prior to the merger, Moke was a publicly held shell corporation with
approximately 4,090,448 shares of Common Stock outstanding. Pursuant to the
Agreement and Plan of Merger, each outstanding share of Moke common stock was
converted into .0867471 shares of the Company's Common Stock, for an
aggregate issuance of 355,039 shares of the Company's Common Stock to the
shareholders of Moke.
From October 1 through December 2, 1996, the Company conducted a
private placement of units ("Units") of its securities at $3.50 per Unit.
Each Unit consisted of one share ("Series A Preferred Share") of the
Company's Series A Preferred Stock and one common stock purchase warrant
("Unit Warrant"). Each Series A Preferred Share was initially convertible
into Common Stock at a conversion price of $3.50 per share, provided that on
the one year anniversary of the original issuance of the Series A Preferred
Stock, the conversion price was to be adjusted to 70% of the average last
sale price of the Common Stock during the 30 trading days immediately
preceding the first anniversary date. In December 1997, this conversion
price was adjusted to $1.75 per share. Each Unit Warrant initially entitled
its holder to purchase one share of Common Stock at an exercise price of
$7.00 per share until July 31, 1998, at which time the unexercised Unit
Warrants shall expire by their own terms. In December 1997, the Company
adjusted the exercise price of each Unit Warrant to $3.50 per share and
extended the expiration date to December 31, 2000. The Company sold 283,781
Units to European institutional investors for the gross proceeds of
$993,233.50.
From January 8, 1997 through March 10, 1997, the Company conducted a
private placement of shares of Common Stock. In the private placement, the
Company sold 534,063 shares of Common Stock for the gross proceeds of
$873,000.
In June 1997, the Company conducted a private placement of units
("Units") of its securities at $5.00 per Unit. Each Unit consisted of two
(2) shares of Common Stock and one (1) warrant which entitled its holder to
purchase one share of Common Stock at an exercise price of $3.50 per share.
In the private placement, the Company sold 204,000 Units for the gross
proceeds of $1,020,000. In February 1998, the Board of Directors of the
- 1 -
<PAGE>
Company resolved to reduce the price of the Units from $5.00 per Unit to
$4.00 per Unit and to issue an additional 102,000 shares of Common Stock to
the Unit purchasers.
On December 30, 1997, the Company sold 1,923,716 shares ("Series B
Shares") of its Series B Preferred Stock to Alta-Berkeley V, C.V. and
two-affiliated venture capital funds (collectively referred to as
"Alta-Berkeley") for the purchase price of $3,000,000. Pursuant to the terms
of the Agreement, Alta-Berkeley delivered $1,000,000 at the closing on
December 30, 1997 and the balance of $2,000,000 was delivered in March 1998.
The Series B Shares are convertible at any time into shares of Common Stock
on a one-for-one basis, subject to adjustment pursuant to certain
anti-dilution rights, and have full voting rights along with the Company's
Series A Preferred Stock and its Common Stock. In the event of any
liquidation, dissolution or winding up of the Company, before any
distribution or payment to holders of Common Stock may be made, the holder of
each Series B Share shall be entitled to be paid an amount equal to $3.50 per
share, plus any accrued and unpaid dividends, if the event of liquidation,
dissolution or winding up occurs on or before December 31, 1999 and
thereafter $5.20 per share, plus any accrued and unpaid dividends.
Concurrent with the Agreement, the Company and Alta-Berkeley entered
into an Investors' Rights Agreement. Pursuant to the terms of their
agreement, the Company increased the authorized number of its directors from
four to six and holders of the Series B Shares are entitled to elect two
members of the Company's Board of Directors. At the closing, the Company
appointed Mr. Bryan Wood of Alta-Berkeley to the Board of Directors. In
addition, the Company granted Alta-Berkeley the right of first refusal to
purchase a pro rata share of any equity securities, which the Company may
issue. The right of first refusal expires on December 18, 2004. The
Investors' Rights Agreement also grants Alta-Berkeley certain approval and
disclosure rights over certain management and strategic matters.
Unless the context otherwise requires, all references to the Company
include its wholly-owned subsidiaries, Virtual Telecom SA, a Swiss
corporation, and Firstquote Limited, an English corporation. The Company's
executive offices are located at 12, Av. des Morgines, 1213 Petit-Lancy 1,
Geneva, Switzerland; telephone number +4122-879-0879.
BUSINESS OF THE COMPANY
CERTAIN TERMS USED HEREIN ARE DEFINED BELOW IN THE SECTION "GLOSSARY."
THE COMPANY HAS ENTERED INTO CERTAIN FINANCIAL COMMITMENTS PAYABLE IN SWISS
FRANCS, THE UNIT OF CURRENCY OF SWITZERLAND. ALL SWISS FRANC BASED AMOUNTS
ARE DESIGNATED BY THE SYMBOL "CHF." AS OF MARCH 20, 1998, THE SWISS
FRANC-DOLLAR EXCHANGE RATE WAS 1.4965 SWISS FRANCS TO 1 U.S. DOLLAR.
GENERAL
The Company is a value-added Internet Service and Information provider.
The Company has developed and intends to commercialize its ISP and content
provider operations through a network of strategic alliances with
internationally recognized businesses. The Company's ISP operations are
conducted pursuant to an agreement with Digital Equipment Corporation ("DEC")
under which DEC has designed, implemented and operates a network of routers
and servers located at 13 to 20 PoP's throughout Switzerland and, in time,
additional PoP's throughout Europe. Swisscom (formerly known as Swiss
Telecom PTT) and British Telecom provide frame relay and IP connectivity
services. The Company's financial data service is offered pursuant to
separate non-exclusive licenses entered into by the Company with the Standard
& Poor's ComStock Division of McGraw-Hill International (UK) Ltd. ("S&P
ComStock"), which supplies the Company with a raw feed of market data from
securities and commodities exchanges world-wide, and Townsend Analytics, Ltd.
("Townsend"), which has licensed to the Company its proprietary software
program which can organize the raw data feed from S&P ComStock for
presentation in tabular and chart formats. DEC operates and manages the
central server over which the Company's subscribers will access the financial
data. See "Strategic Alliances" below for a summary of the terms and
conditions of the Company's contracts with DEC, S&P ComStock, Townsend,
Swisscom and British Telecom.
- 2 -
<PAGE>
The Company's strategy is to focus on the development of content-based
Internet services through alliances with internationally recognized service
providers, such as DEC, S&P ComStock and Townsend, and to aggressively market
those services throughout Europe. Through these strategic alliances, the
Company hopes to readily establish a reputation for quality and reliability
and, more importantly, out-source the required expertise in the areas of
software development and system operation, thereby allowing the Company to
focus on the marketing of its products and services. The Company's business
strategy also includes the development of the ISP network, which can be
marketed as a stand-alone service and as a tie-in with its content-based
products.
BACKGROUND
The Internet is a collection of computer networks linking millions of
public and private computers around the world. Historically, the Internet was
used by government agencies and academic institutions to exchange
information, publish research and transfer electronic mail. A number of
factors, including the proliferation of communication-enabled personal
computers, the availability of intuitive graphical user interface software
and the wide accessibility of an increasingly robust network infrastructure,
have combined to allow non-technical users to easily access the Internet and,
in turn, have produced rapid growth in the number of Internet users. The
number of users worldwide is variously estimated to be between 70 and 110
million. Durlacher Multimedia Ltd. estimates that the number of Internet
users will reach 200 million by 2000.
This growth, combined with the emergence of the World Wide Web, the
graphical, multimedia environment of the Internet, has resulted in the
development of the Internet as a new mass communications medium. The ease and
speed of publishing, distributing and communicating text and graphics over
the Internet has lead to a proliferation of Internet-based content, including
online magazines, news feeds, interactive games and a wealth of educational
and entertainment information, as well as to the development of online
communities. In addition, the reduced cost of executing transactions over the
Internet provides individuals and organizations with a new means to conduct
business.
THE OBJECTIVES OF THE COMPANY
The Company's objectives are to establish itself as an Internet-based
content provider of investor information services and, secondarily, as a
provider of enterprise Internet access for the Swiss market. To achieve its
objectives as a provider of investor information, the Company (i) offers
competitive pricing, (ii) provides detailed content with respect to
information provided to investors (including maintaining a wide range of
available stock symbols), and (iii) intends to exploit unfilled opportunities
with respect to untapped European markets. To achieve its objectives as an
ISP for the Swiss market, the Company provides (i) competitive pricing
(maintaining a price advantage over the Company's major competitors), (ii)
high-availability (including the provision of call-forwarding so that a
subscriber never gets a busy tone) and (iii) dial-up portability to
subscribers (as one would enjoy with respect to use of a portable computer).
THE COMPANY'S SERVICES AND PRODUCTS
FINANCIAL DATA SERVICE. The Company has implemented a system of
providing real-time and near real-time financial market quotation data in
tabular or chart form. The Company offers two services for different market
mixes, service content and types of presentation. A professional online
investor service is offered to professionals under the mark "1stQuote" and
includes real time market data. A Web-based investor service covering the
Swiss market is provided to individual investors under the mark
"InvestMaster" and provides market data on a real-time snap-quote basis. The
Company commenced offering financial data services on a limited basis
end-September, 1997 and commenced full-scale marketing of its financial data
service in March 1998.
- 3 -
<PAGE>
"1ST QUOTE" PROFESSIONAL ONLINE INVESTOR SERVICE. At a relatively low
cost compared to traditional systems, the Company provides the subscriber
with a professional online investor (Intranet) service under the mark "1st
Quote." The 1st Quote service has the following characteristics:
- After first installing an interface program, the subscriber can
dial-up and access real-time or near real-time data feed via
the Internet
- Provides access to up to 280,000 stock symbols
- Provides real-time price data in a boardview (tabular) or chart
format for a major stock exchanges, option/futures markets,
currency markets, commodities markets
- Runs on Microsoft Windows system and information is presented in
true Windows-style format
- Additional value-added features such as alarms, closed captioned
news, trend tools, and automated spreadsheet updates
- Floating user-license provides significant mobility to users
Also available in lower-cost "Lite" version
"INVESTMASTER" COMMERCIAL ONLINE INVESTOR SERVICE. For a nominal
monthly subscription, the Company offers individual investors with a
commercial on-line investor (web) service known as "InvestMaster" with the
following characteristics:
- Provides personal investors with information in a multi-lingual
format
- Provides access to 70,000 stock symbols for all instruments traded
on Swiss markets
- Provides delayed price data in a boardview (tabular) or chart
format for equities, option/futures markets, currency markets,
commodities markets
- Information presented in Web-browser
- Provides additional value-added features such as market & corporate
news, and a personal portfolio feature
"FIRSTSWISS" DIAL-UP INTERNET ACCESS (INTERNET SERVICE PROVIDER). The
Company provides commercial Internet service under the mark "FirstSwiss."
The Internet consists of high-speed telecommunications circuits connecting
routers that transmit data packets. The circuits are maintained by large
telecommunication (telco) firms (such as, AT&T, MCI, Sprint, Swisscom,
British Telecom, etc.). The routers are generally owned by the ISP's. As a
Swiss-based ISP, the Company leases lines from Swisscom and British Telecom
to connect its routers located at miscellaneous PoP's located throughout
Switzerland. The customers dial-up into the PoPs through their local phone
lines or have a permanent leased-line type of connection. Their call is then
routed to the Company's central server in Geneva, which then connects the
call to the Internet.
As an ISP, the Company is selling a commodity to consumers, and the
commodity is bandwidth. The Company purchases bandwidth (or line
communication capacity) from Swisscom and British Telecom; then resells
bandwidth to its local subscribers. The Company charges the subscriber or
customer a mark-up to cover the provision of services and the Company's
investment in support equipment. Separately, the subscriber is charged by the
local telco for the phone connection to the Company's PoPs. The greater the
bandwidth that the Company can provide leads to a higher quality to more
subscribers simultaneously.
- 4 -
<PAGE>
The Company commenced offering its ISP service in September 1997. The
Company provides individual and corporate subscribers with local dial-up
Internet access with the following characteristics:
- A high speed reliable Internet connection for a 33.6 kbps modem
or an ISDN (64 kbps) terminal.
- Local dial-up capability throughout Switzerland via 13 PoPs
initially and additional PoPs as subscribers increase.
- An E-mail account (multiple E-mail accounts for an additional one
time fee)
- Access to 14,000 worldwide Usenet News groups
- Access to a local FTP software library containing many types of
software, upgrades and documents
- Log-in access to a multi-lingual Web homepage with links to daily
news, financial news, transportation timetables classified
advertising, etc.
STRATEGIC ALLIANCES
The Company's operations and Internet services are provided through a
network of strategic alliances with the following internationally recognized
businesses:
DIGITAL EQUIPMENT CORPORATION. The Company's ISP operations are
operated pursuant to Partnership Outsourcing Agreement ("DEC Agreement")
dated September 9, 1996 between Virtual Telecom SA and DEC Digital Equipment
Corporation ("DEC"). Pursuant to the DEC Agreement, DEC has designed,
implemented and operates on behalf of the Company a network of routers and
servers located at 13 to 20 PoP's throughout Switzerland and, in time,
additional PoP's throughout Europe. Pursuant to the DEC Agreement, the
Company has purchased from DEC the hardware and software required to operate
an Internet dial-up access network, including a central server site located
in Geneva that is built around a cluster of DEC Alpha computers running a
UNIX operating system. The DEC Agreement is for an initial four year term
subject to one year renewals thereafter unless either party provides the
other with notice of its intent to cancel at least six months prior to the
pending termination date. The Company enjoys the status of Digital Business
Partner, and Business Partner-AltaVista Internet Software Solutions.
AltaVista is a division of Digital Equipment Corporation.
STANDARD & POOR'S COMSTOCK. The Company's financial data service
is provided through separate arrangements with S&P ComStock and Townsend
Analytics. The Company receives stock and commodity information on a real
time basis pursuant to an Information Distribution License Agreement ("S&P
ComStock Agreement") dated August 23, 1996 between McGraw-Hill International
(UK) Ltd. and Virtual Telecom SA. The Standard & Poor's ComStock Division of
McGraw-Hill is licensed to distribute trading information from most U.S. and
international stock, mercantile, option and currency exchanges. Pursuant to
the S&P ComStock Agreement, McGraw-Hill provides the Company with trading
information from S&P ComStock on a real time basis via a satellite
transmission and has granted the Company a non-exclusive license to
redistribute such information as part of the Company's Internet financial
data service.
TOWNSEND ANALYTICS. The Company receives raw financial data,
which it stores and distributes to graphical user interfaces (GUI) by way of
software licensed on a non-exclusive basis from an affiliate, Townsend
Analytics, Ltd., of Chicago, Illinois.
- 5 -
<PAGE>
SWISSCOM/BRITISH TELECOM. The Company's ISP network is carried
over a frame relay telecommunication network operated by the Unisource
Division of Swisscom. The Swiss subsidiary of British Telecom ("British
Telecom"), provides connectivity to the Internet via their global Concert IP
network. Pursuant to a UNIDATA Frame Relay & Unimaster Services Contract
dated October 22, 1996 between Swisscom and Virtual Telecom SA, Swisscom has
installed the Company-owned routers and provided connectivity by way of their
frame relay network. The Company has arranged for connections to the Internet
from British Telecom pursuant to an Agreement for Global Telecommunications
Services ("BT Agreement") dated October 1, 1996 between British Telecom and
Virtual Telecom SA.
IQ NET CORPORATION. The Company has licensed from IQ Net
Corporation ("IQ Net") certain computer software programs designed to enhance
the presentation of its financial data services through its InvestMaster
Service. Pursuant to a Software License Agreement ("Agreement") dated
February 27, 1998 between the Company and IQ Net, IQ Net has granted the
Company an exclusive license to use IQ Net's software to deliver a financial
data service over the Internet and to market and promote such service
throughout Europe.
MARKETING
The Company markets its ISP and content-based financial services
throughout Switzerland. The Company's strategy is to focus its marketing
efforts on the sale of its 1stQuote and InvestMaster financial data products
to the Swiss investment community. The 1stQuote financial service is
marketed primarily to private banks, investment bankers and money managers,
and the InvestMaster financial service is marketed primarily to private
investors. The Company's strategy is to sell its ISP operations to the
1stQuote and InvestMaster subscribers as a tie-in service. In addition, the
Company markets its ISP service as a stand-alone product to corporate Swiss
Internet users. The Company employs a combination of direct marketing, print
advertisements and direct mailings in order to market its ISP and
content-based financial services. The Company promotes itself and its
financial data services to the Swiss Internet and financial trade
publications for purposes of generating feature articles that promote the
Company and its business. The Company also endeavors, whenever possible, to
market its services to the clients of those companies through which it
outsources its ISP and financial data operations. To date, DEC has actively
promoted the Company's ISP and financial data services directly to the DEC
clients and has promoted the Company as a strategic partner of DEC.
COMPETITION
The market for Internet products and services is expanding rapidly but
is also highly competitive and the Company expects that this competition will
intensify in the future. The Company's current and prospective competitors
include many companies that have substantially greater financial, technical,
marketing, and other resources than the Company. Increased competition could
result in price reductions and increased spending on marketing and product
development. Any of these events could have a material adverse affect on the
Company's financial condition and operating results. There can be no
assurance that the Company will be able to compete successfully against
current and future competitors or that competitive pressures faced by the
Company will not materially adversely affect its business, financial
condition, and results of operations.
As of the date of this report there are several ISP's providing dial-up
access to Swiss Internet users. There are also several companies that
provide for the delivery of financial data over the Internet or electronic
means, including Reuters, Bloomberg, Dow Jones Telerate, Bridge on Telekurs.
- 6 -
<PAGE>
GOVERNMENT REGULATION
The Company's ISP operation and content-based products are not
currently subject to direct regulation by Swiss, US or other law, other than
regulations applicable to businesses generally. Changes in the regulatory
environment relating to the Internet content or connectivity industries,
including regulatory changes that directly or indirectly affect
telecommunications costs or increase the likelihood or scope of competition
from regional telephone companies or others, could have a material adverse
affect on the Company's business. The Company cannot predict the impact, if
any, that future regulation or regulatory changes may have on its business.
EMPLOYEES
The Company is staffed with 16 full-time employees and 3 full-time
consultants at present, six of whom are involved in the Company's network and
Web operations.
GLOSSARY
Set forth below are definitions of certain terms used in this report.
BACKBONE A centralized high-speed network that
connects smaller, independent networks. In
other terms, the backbone of a network is its
means of linking its major nodes so all of
its PoPs feed into backbone nodes with high
speed uninterrupted flow.
BANDWIDTH The number of bits of information which can
move over a communications medium in a given
amount of time.
DIAL UP LINE A local access line and number provided by
domestic telecom operators allowing the
subscriber to dial the service provider's PoP
and connect to their backbone.
ELECTRONIC MAIL OR E-MAIL As application that allows a user to send or
receive messages to or from any other user
with an Internet address, commonly termed an
e-mail address.
FRAME RELAY A packet-switched Data network
GRAPHICAL USER INTERFACE A means of communicating with a computer by
manipulating icons and windows rather than
using text commands.
INTERNET An open global network of interconnected
commercial, education and governmental
computer networks which utilize a common
communications protocol, TCP/IP.
- 7 -
<PAGE>
ISDN Integrated Services Digital Network. A
digital network that combines voice and
digital network services through a single
medium, making it possible to offer customers
digital data services as well as voice
connections. In Europe, a 64 kilobit (64,000
bits per second) leased line is currently the
most current bandwidth transmission data
circuit useful in Internet business
applications.
KBPS Kilobits per second. A rate of digital
information transmission. One kilobit equals
1,000 bits.
LEASED LINE A leased line is the telephone circuit
transmission channel reserved for the
customer's use from point "a" to point "b"
through phone company physical lines and
switches. The line may be of different
bandwidths of data carrying capacity.
MBPS Megabits per second. A rate of digital
information transmission. One megabit equals
1,000 kilobits.
MODEM A piece of equipment that connects a computer
to an analog transmission line (typically a
telephone line).
ONLINE SERVICES Commercial information services that offer a
computer user access through a modem to a
specified slate of information, entertainment
and communications menus. These services are
generally closed systems but may offer
Internet access at additional cost.
POPS Points of Presence. A clustered group of
modems, routers and other computer equipment,
located in a particular city or metropolitan
area, that allows a nearby subscriber to
access the Internet through a local telephone
call.
ROUTER A device that receives and transmits data
packets between segments in a network or
different networks.
SERVER Software that allows a computer to offer a
service to another computer. Other computers
connect the server program by means of
matching client software. In addition, such
term means the computer on which server
software runs.
WINDOWS A computer operating system developed by
Microsoft that provides a graphical user
interface and multitasking capabilities.
WORLD WIDEWEB A network of computer servers that uses a
special communications protocol to link
different servers throughout the Internet and
permits communications of graphics, video and
sound.
- 8 -
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
The Company's executive offices are located in Geneva, Switzerland and
consist of approximately 1,800 square feet of leased premises. The Company's
lease for these premises expires on August 30, 1999 and provides for monthly
rent of CHF 7,500.
ITEM 3. LEGAL PROCEEDINGS.
There are no pending legal proceedings to which the Company or the properties
of the Company are subject. In addition, no proceedings are known to be
contemplated by a governmental authority against the Company or any officer
or director of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
Not applicable.
- 9 -
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET FOR COMMON SHARES. The Company's Common Stock has been
listed on the OTC Bulletin Board under the symbol "VITE" since November 18,
1996. During the fiscal year ended December 31, 1997, the high and low last
sale prices were $3.25 and $0.50, respectively. These high and low sale
prices reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions. The Company considers
its Common Stock to be thinly traded and that any reported bid or sale prices
may not be a true market-based valuation of the Common Stock.
As of March 20, 1998, there were approximately 348 record holders of the
Company's Common Stock.
The Company has not paid any cash dividends since its inception and does
not contemplate paying dividends in the foreseeable future. It is
anticipated that earnings, if any, will be retained for the operation of the
Company's business.
RECENT SALES OF UNREGISTERED SECURITIES. During the fiscal year
ended December 31, 1997, the Company sold unregistered securities in the
following transactions:
A. From January 1997 through March 1997, the Company conducted a
private placement of shares of Common Stock. In the private placement, the
Company sold 534,063 shares of Common Stock for the gross proceeds of
$873,000. The shares were sold pursuant to Rule 504 under the Securities Act
of 1933 ("1933 Act"). There was no underwriter involved in this issuance.
B. In February 1997, the Company issued 10,000 shares of Common
Stock to a director as consideration for consulting services rendered on
behalf of the Company. The shares were issued pursuant to Section 4(2) of
the 1933 Act. There was no underwriter involved in this issuance.
C. In February 1997, the Company issued 20,000 shares of Common
Stock to one individual as consideration for consulting services rendered on
behalf of the Company. The issuance was made pursuant to Rule 701 under the
1933 Act. There was no underwriter involved in this issuance.
D. In April 1997, the Company granted one of its directors options
to purchase an aggregate of 100,000 shares of Common Stock pursuant to the
Company's 1997 Stock Option Plan. The options have an exercise price of
$3.00 per share and vest at a rate 25,000 shares on each one year anniversary
of the option grant date. The options were issued pursuant to Section 4(2)
of 1933 Act. There was no underwriter involved in this issuance.
E. In May 1997, the Company granted eight of its employees options
to purchase an aggregate of 190,000 shares of Common Stock pursuant to the
Company's 1997 Stock Option Plan. The options had an initial exercise price
of $3.50 per share, are immediately exercisable and expire on December 31,
2000. The exercise price was revised downward to $2.00 in March 1998. The
options were issued pursuant to Section 4(2) of the 1933 Act. There was no
underwriter involved in this issuance.
F. In May 1997, the Company issued 50,000 shares of Common Stock
to one individual as consideration for consulting services rendered on behalf
of the Company. The issuance was made pursuant to Rule 701 under the 1933
Act. There was no underwriter involved in this issuance.
G. In June 1997, the Company conducted a private placement of
units ("Units") of its securities at $5.00 per Unit. Each Unit consisted of
two shares of Common Stock and one warrant which entitled its holder to
purchase one share of Common Stock at an exercise price of $3.50 per share.
The Company sold 204,000 Units for the gross proceeds of $1,020,000. In
February 1998, the Board of Directors of the Company resolved to reduce the
price per Unit to $4.00 and to issue an additional 102,000 shares of Common
-10-
<PAGE>
Stock to the Unit purchasers. The Units were sold pursuant to Regulation S
under the 1933 Act. There was no underwriter involved in this issuance.
H. In December 1997, the Company granted two of its employees
options to purchase an aggregate of 20,000 shares of Common Stock pursuant to
the Company's 1997 Stock Option Plan. The options had an initial exercise
price of $3.50 per share and are immediately exercisable and expire on
December 31, 2000. The exercise price was revised downward to $2.00 in March
1998. The options were issued pursuant to Section 4(2) of the 1933 Act.
There was no underwriter involved in this issuance.
I. On December 30, 1997, the Company sold 1,923,716 shares of its
Series B Preferred Stock to Alta-Berkeley V, C.V. and two-affiliated venture
capital funds (collectively referred to as "Alta-Berkeley") for the purchase
price of $3,000,000. The shares were issued pursuant to Section 4(2) of the
1933 Act. There was no underwriter involved in this issuance.
J. In 1997, the Company issued 271,686 shares of Common Stock upon
conversion of the outstanding Series A Preferred Stock. The shares were
issued pursuant to Regulation S under the 1933 Act. There was no underwriter
involved in this issuance.
K. In 1997, the Company issued 133,333 shares of Common Stock upon
conversion of outstanding indebtedness. The shares were issued pursuant to
Regulation S under the 1933 Act. There was no underwriter involved in this
issuance.
L. In 1997, the Company issued 8,000 shares of Common Stock to a
consultant for administrative services rendered. The shares were issued
pursuant to Section 4(2) of the 1933 Act. There was no underwriter involved
in this issuance.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The Company was recently organized to engage in the business of
developing and marketing various Internet content-based products and,
secondarily, to act as an Internet Service Provider ("ISP") providing access
to the Internet. The Company's initial content-based products offered over
the Internet consist of the delivery of financial data from securities and
commodity exchanges worldwide on a real time and near real-time basis.
During 1996 and the first quarter of 1997, the Company acquired and
implemented the hardware, consisting of routers and servers, and leased
telephone lines through which it offers its financial data service and access
to the Swiss market. During the second fiscal quarter, the Company conducted
pilot operations. The Company commenced full commercial operations during
the quarter ended September 30, 1997.
The Company's results of operations for fiscal year ended December 31,
1997 included revenues of $112,446 and a net loss of $(2,359,209). As of
December 31, 1997, the Company had working capital of $1,859,966. The
Company has financed its operations to date through the sale of its equity
securities and has received gross proceeds of $2,893,000 from the sale of its
equity securities during the 1997 fiscal year and an additional $2,000,000,
which was in the form of subscription receivable as of December 31, 1997 and
was collected by the Company in March 1998. Management believes that its
current working capital, along with expected revenues from operations, will
satisfy its capital requirements throughout the 1998 fiscal year.
The Company's plan of operations for the 1998 fiscal year include a
full-scale roll-out of its on-line financial database products targeted at
investment professionals and personal investors in the Swiss banking,
investment and corporate markets. Subsequent to the rollout to the Swiss
market, the Company intends to expand its operations to other key European
markets.
As of March 20, 1998, the Company has in its early stage of
commencement of operations concluded financial database product contracts
with 13 banking or trading enterprises providing for recurring revenue to the
Company in the aggregate amount of $12,500 per month. In addition, the
Company has concluded ISP network service contracts with 14 corporate clients
providing for recurring revenue to the Company in the aggregate amount of
$5,000 per month. Additional non-recurring revenues in the first two months
of fiscal
-11-
<PAGE>
1998 amounting to $22,000 were derived from the set-up and installation
charges. The Company is in an advanced stage of negotiations with
approximately 50 potential corporate clients, each of which has solicited
offers for the Company's provision of financial data base products or ISP
network service or both.
This report contains various forward-looking statements that are based
on the Company's beliefs as well as assumptions made by and information
currently available to the Company. When used in this registration
statement, the words "believe," "expect," "anticipate," "estimate" and
similar expressions are intended to identify forward-looking statements.
Such statements are subject to certain risks, uncertainties and assumptions,
including, without limitation, the Company's recent commencement of
commercial operations and the risks and uncertainties concerning the
acceptance of its services and products by the Swiss market; the risks and
uncertainties concerning the availability of additional capital as and when
required; technological changes; increased competition; and general economic
conditions. Should one or more of these risks or uncertainties materialize,
or should underlying assumptions prove incorrect, actual results may vary
materially from those anticipated, estimated, or projected. The Company
cautions potential investors not to place undue reliance on any such
forward-looking statements, all of which speak only as of the date made.
-12-
<PAGE>
ITEM 7. FINANCIAL STATEMENTS.
INDEX TO FINANCIAL STATEMENTS
Independent Auditors' Reports. . . . . . . . . . . . . . . . . . . . . 14,15
Consolidated Balance Sheets at December 31, 1997 and 1996 . . . . . . 16,17
Consolidated Statements of Operations for the years
ended December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . 18
Consolidated Statements of Cash Flows for the years ended
December 31, 1997 and 1996 . . . . . . . . . . . . . . . . . . . . . 19
Consolidated Statements of Stockholders' Equity (Deficit)
for the years ended December 31, 1997 and 1996 . . . . . . . . . . 20
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . 21-38
-13-
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors
VIRTUAL TELECOM, INC.
We have audited the accompanying consolidated balance sheet of Virtual
Telecom Inc. and its subsidiaries as of December 31, 1997, and the related
statements of operations, stockholders' equity and cash flows for the year
then ended. The consolidated financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit. The consolidated
financial statements of Virtual Telecom Inc. and its subsidiaries as of
December 31, 1996 were audited by other auditors whose report dated March 14,
1997, expressed an unqualified opinion on those statements.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as
well as evaluating the overall consolidated financial statement presentation.
We believe that our audit provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Virtual
Telecom Inc. and its subsidiaries as of December 31, 1997, and the results of
their operations and their cash flows for the year then ended in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
March 30, 1998.
-14-
<PAGE>
RAIMONDO, PETTIT & GLASSMAN
CERTIFIED PUBLIC ACCOUNTANTS
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Virtual Telecom, Inc.
Geneva, Switzerland
We have audited the accompanying consolidated balance sheet of Virtual
Telecom, Inc. at December 31, 1996 and the related consolidated statements of
operations, changes in stockholders' equity (deficit), and cash flows for the
year ended December 31, 1996. The financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Virtual
Telecom, Inc. as of December 31, 1996 and the results of its operations and
its cash flows for the year ended December 31, 1996, in conformity with
generally accepted accounting principles.
RAIMONDO, PETTIT & GLASSMAN
Torrance, California
March 14, 1997
-15-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996
(Currency - U.S. dollars)
A S S E T S
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
------------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents 569,264 219,139
Trade accounts receivable, net 65,931 -
Advance to a related party - 38,645
Subscriptions receivable from stockholders 2,000,000 -
Prepaid expenses and other receivables 138,107 23,836
---------- --------
Total current assets 2,773,302 281,620
---------- --------
NON CURRENT ASSETS:
Property and equipment, net 1,186,773 634,472
Other assets 25,874 32,838
---------- --------
Total non current assets 1,212,647 667,310
---------- --------
3,985,949 948,930
---------- --------
---------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-16-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996
(Currency - U.S. dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
------------- -------------
<S> <C> <C>
CURRENT LIABILITIES:
Trade accounts payable 165,557 298,635
Current portion of capital lease obligations 189,526 10,849
Advances and convertible loans from
stockholders and other related parties 315,672 590,507
Accrued liabilities and deferred income 242,581 37,171
---------- --------
Total current liabilities 913,336 937,162
---------- --------
LONG-TERM CAPITAL LEASE OBLIGATIONS,
net of current maturities 199,114 10,707
---------- --------
COMMITMENTS (Notes 6, 8 and 12)
STOCKHOLDERS' EQUITY:
Common Stock, $0.001 par value,
20,000,000 shares authorized; 5,375,272
and 3,940,190 shares issued and
outstanding in 1997 and 1996 5,375 3,940
Preferred Stock, $0.001 par value,
10,000,000 shares authorized-
Class A: 147,938 and 283,781 shares
issued and outstanding, liquidation
preference of $517,783 and $993,233, as
of December 31, 1997 and 1996 148 284
Class B: 1,923,716 shares issued and
outstanding in 1997, liquidation
preference of $6,733,006 ($10,003,323
after December 31, 1999) (1996:-) 1,924 -
Additional paid-in capital 6,156,642 994,465
Cumulative translation adjustment 131,707 65,460
Accumulated deficit (3,422,297) (1,063,088)
---------- --------
Total stockholders' equity 2,873,499 1,061
---------- --------
3,985,949 948,930
---------- --------
---------- --------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-17-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(Currency - U.S. dollars)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
SALES 112,446 -
---------- ----------
OPERATING EXPENSES:
General and administrative (1,754,670) (818,738)
Selling and market development (664,591) (130,335)
---------- ----------
Total operating expenses (2,419,261) (949,073)
---------- ----------
Net operating loss (2,306,815) (949,073)
INTEREST EXPENSE (52,394) (15,237)
---------- ----------
Net loss (2,359,209) (964,310)
---------- ----------
Basic and diluted weighted average number 4,465,486 3,374,108
of common shares
---------- ----------
Basic and diluted net loss per common share (0.53) (0.29)
---------- ----------
---------- ----------
</TABLE>
-18-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(Currency - U.S. dollars)
<TABLE>
<CAPTION>
1997 1996
------------- -------------
<S> <C> <C>
Cash flows used in operating activities:
Net loss (2,359,209) (964,310)
Adjustments to reconcile net loss to net
cash used in operating activities:
Net exchange loss 100,234 -
Depreciation 184,794 28,566
Interest accrued on loans payable 39,309 26,362
Capitalization of interest (6,656) (12,883)
Stock issued for consultation fees - 47,903
Write-off Moke goodwill - 104,090
Increase (decrease) resulting from
changes in:
Trade accounts receivable (65,931) -
Prepaid expenses and other receivables (114,271) (25,789)
Trade accounts payable 95,748 67,623
Accrued liabilities 205,410 33,015
---------- ---------
Net cash used in operating activities (1,920,572) (695,423)
---------- ---------
Cash from (used in) investing activities:
Purchase of equipment (332,982) (358,449)
Purchase of Moke Acquisition Corp. - (100,000)
Other non-current asset expenditures - (26,023)
Advances to stockholder and related party - (40,775)
---------- ---------
Net cash used in investing activities (332,982) (525,247)
---------- ---------
Cash flows from (used in) financing
activities:
Commission on share issuance (63,500) -
Issuance of stock 2,893,000 875,520
Stock-related expenses 102,902 -
Proceeds from bridge loans - 500,000
Collection of stock subscriptions receivable - 40,000
Advances from stockholders and related parties - 72,282
Paid to stockholder and related party (51,397) -
Reimbursements of advances from
stockholders and related parties (50,000) (64,673)
Reimbursements of advances to related parties 66,180 -
Payment of capital lease obligations (275,230) (19,190)
Bank overdraft - (1,217)
---------- ---------
Net cash provided by financing activities 2,621,955 1,402,722
---------- ---------
Effect of exchange rate changes on cash and
cash equivalents (18,276) 37,087
---------- ---------
Net increase in cash and cash equivalents 350,125 219,139
Cash and cash equivalents, beginning of year 219,139 -
---------- ---------
Cash and cash equivalents, end of year 569,264 219,139
---------- ---------
---------- ---------
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-19-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
(Currency-U.S. Dollars)
<TABLE>
<CAPTION>
CLASS A
COMMON STOCK PREFERRED STOCK
----------------- ----------------
SHARES AMOUNT SHARES AMOUNT
--------- ------ -------- ------
<S> <C> <C> <C> <C>
Balance at December 31, 1995 3,193,540 3,194 - -
Issuance of common stock in consideration
for Moke Acquisition Corp. 355,039 355
Issuance of preferred stock 283,781 284
Issuance of common stock in consideration
for consultancy fees 191,611 191
Issuance of common stock in consideration
for preferred stock issuance fees 200,000 200
Net loss
Translation adjustment
--------- ------ -------- ------
Balance at December 31, 1996 3,940,190 3,940 283,781 284
Issuance of common stock in consideration
for consultancy fees 100,000 100
Issuance of common stock through private
placement offering 514,063 514
Issuance of common stock through private
placement offering 408,000 408
Issuance of common stock to repay
the bridging loan 133,333 133
Issuance of common stock in consideration
for administrative fees 8,000 8
Issuance of common stock through private
placement offering
Conversion of preferred to common stock 271,686 272 (135,843) (136)
Compensation cost related to stock option
Net loss
Translation gain
--------- ------ -------- ------
Balance at December 31, 1997 5,375,272 5,375 147,938 148
--------- ------ -------- ------
--------- ------ -------- ------
<CAPTION>
CLASS B
PREFERRED STOCK ADDITIONAL CUMULATIVE TOTAL
----------------- PAID-IN TRANSLATION ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT CAPITAL ADJUSTMENT DEFICIT EQUITY
--------- ------ ---------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 - - 67,980 10,533 (98,778) (17,071)
-
Issuance of common stock in consideration
for Moke Acquisition Corp. 3,735 4,090
Issuance of preferred stock 825,236 825,520
Issuance of common stock in consideration
for consultancy fees 47,714 47,905
Issuance of common stock in consideration
for preferred stock issuance fees 49,800 50,000
Net loss (964,310) (964,310)
Translation adjustment 54,927 54,927
--------- ------ ---------- ----------- ----------- -------------
Balance at December 31, 1996 - - 994,465 65,460 (1,063,088) 1,061
Issuance of common stock in consideration
for consultancy fees 24,900 25,000
Issuance of common stock through private
placement offering 839,486 840,000
Issuance of common stock through private
placement offering 1,019,592 1,020,000
Issuance of common stock to repay
the bridging loan 199,867 200,000
Issuance of common stock in consideration
for administrative fees 7,992 8,000
Issuance of common stock through private
placement offering 1,923,716 1,924 2,998,076 3,000,000
Conversion of preferred to common stock (136) -
Compensation cost related to stock option 44,400 44,400
Net loss (2,331,209) (2,331,209)
Translation gain 66,247 66,247
--------- ------ ---------- ----------- ----------- -------------
Balance at December 31, 1997 1,923,716 1,924 6,128,642 131,707 (3,394,297) 2,873,499
--------- ------ ---------- ----------- ----------- -------------
--------- ------ ---------- ----------- ----------- -------------
</TABLE>
-20-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1997 AND 1996
1. DESCRIPTION OF THE COMPANY
a) THE COMPANY AND ITS SUBSIDIARIES ("THE GROUP")
Virtual Telecom, Inc. ("Virtual Telecom" or the "Company") was
incorporated in Delaware on July 3, 1996 for the purpose of holding
all the shares of Virtual Telecom S.A., a Swiss corporation formed
in 1994. The owners of Virtual Telecom S.A. contributed all of the
Virtual Telecom S.A. shares in consideration for 3,194,540 common
shares of Virtual Telecom, Inc. The accompanying financial
statements have been prepared as if the acquisition had occurred at
Virtual Telecom S.A.'s inception (May 19, 1994), using the
historical costs of each entity. Unless the context otherwise
requires, all references to the Group include its wholly-owned
subsidiaries, Virtual Telecom SA, a Swiss corporation as well as
Firstquote Limited, an English corporation founded in December 1997.
The Group was recently organized to engage in the business of
developing and marketing various Internet content-based products
and, secondarily, to act as an Internet Service Provider ("ISP")
providing access to the Internet. The Group's initial
content-based products offered over the Internet consists of the
delivery of financial data from securities and commodities
exchanges worldwide on a real-time and near real-time basis.
During 1996 and the first quarter of 1997, the Group acquired and
implemented the hardware, consisting of routers and servers, and
leased telephone lines through which it offers its financial data
service and access to the Swiss market. During the second fiscal
quarter, the Group conducted pilot operations. The Group commenced
full commercial operations end of September 1997 and hence 1997 is
the first fiscal year in which the Company is no longer in the
development stage.
-21-
<PAGE>
b) BUSINESS COMBINATION WITH MOKE
Pursuant to an Agreement and Plan of Merger dated July 31, 1996
between the Company and Moke Acquisition Corp. ("Moke"), Moke
merged with and into the Company effective as of August 30, 1996.
Prior to the merger, Moke was a publicly held shell corporation
with no operations and approximately 4,090,448 shares of Common
Stock outstanding. Pursuant to the Agreement and Plan of Merger,
each outstanding share of Moke Common Stock was converted into
.0867471 shares of the Company's Common Stock, for an aggregate
issuance of 355,039 shares of the Company's Common Stock to the
shareholders of Moke. In connection with the merger, the Company
incurred approximately $100,000 in acquisition costs. The business
combination was accounted for using the purchase method. The
purchase price was allocated as follows:
<TABLE>
<S> <C>
Organization costs $ 4,090
Other assets 100
Goodwill 100,000
Accrued liabilities (100)
--------
Total purchase price $104,090
--------
--------
</TABLE>
Since Moke's operations were not expected to generate any cash flow in
the future, all of Moke's assets and goodwill were written off.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a) PRINCIPLE OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated.
-22-
<PAGE>
b) USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from these estimates.
c) REVENUE RECOGNITION
The Company's subsidiaries design, install, service and monitor ISP
Services and Online Financial Services. The services represent
either "one time" installation or monthly recurring revenues.
Installation revenues and related costs are recognized upon
completion of installation. For the ISP Services and Online
Financial Services, the Company normally invoices 3 months in
advance. The Company therefore recognizes unearned income for
amounts invoiced in advance and the related deferred revenue is
then recognized in the profit and loss account on a straight-line,
monthly basis.
d) FOREIGN CURRENCY TRANSLATION
The Company accounts for foreign currency transactions in
accordance with Statement of Financial Accounting Standard (SFAS)
No. 52, "Foreign Currency Translation" which provides for the
translation of assets and liabilities at the end of period current
rate and of operations and cash flows at the rates existing at the
date of the transaction, or appropriate average. Foreign currency
transactions are translated into the functional currency at the
rate existing at the date of the transactions and outstanding
balances are reevaluated at year-end rate with the resulting
exchange gain or loss included in the statement of operations. The
Company's functional currency is the Swiss Franc (CHF). At
December 31, 1997 assets and liabilities were translated into US
dollars (the reporting currency) at CHF 1.455 (1996: CHF 1.340) per
US dollar and operations and cash flows at an average rate of CHF
1.455 and CHF 1.240 per US dollar for 1997 and 1996 respectively.
The resulting gain or loss on translation into the reporting
currency is included as a separate component of equity under
"cumulative translation adjustment".
-23-
<PAGE>
e) CASH AND CASH EQUIVALENTS
The Company considers all highly liquid debt instruments with an
initial maturity of three months or less to be cash equivalents.
The Company is required to maintain a $30,000 compensating balance
in one of its bank accounts to secure the credit line available on
credit cards used by Company personnel. The amount is classified
as cash and cash equivalents.
f) PROPERTY AND EQUIPMENT
Property and equipment are stated at cost and depreciated using the
straight-line method over their estimated useful lives, which range
from 3 to 5 years. Leasehold improvements are depreciated over the
shorter of the life of the lease or the life of the asset. Upon
sale, any gain or loss is included in the statement of operations.
Maintenance and minor replacements are charged to operations as
incurred.
g) INCOME TAXES
The Company utilizes the liability method to account for income
taxes. Under this method, deferred taxes are determined based on
the differences between the financial statement and tax bases of
assets and liabilities, using enacted tax rates in effect for the
year in which the differences are expected to reverse. Valuation
allowances are established when necessary to reduce deferred tax
assets to the amounts expected to be realized.
The Company's subsidiary, Virtual Telecom SA, is incorporated in
Switzerland. The tax charge in Switzerland is an accumulation of
the taxes due to the city, the canton (state) and the federal
authorities.
-24-
<PAGE>
h) STOCK-BASED COMPENSATION
Statement of financial accounting standards No. 123, "Accounting
for stock-based compensation" ("SFAS No. 123") was effective for
fiscal years beginning after December 15, 1996. This statement
provides for a fair value based method of accounting for grants of
equity instruments to employees or suppliers in return for goods or
services. With respect to stock-based compensation to employees,
SFAS No. 123 permits entities to continue to apply the provisions
prescribed by APB Opinion No. 25; however, pro forma disclosures of
net income and earnings per share must be presented as if the fair
value based method had been applied in measuring compensation cost.
The Company elected to continue with the accounting method
prescribed by APB Opinion No. 25 and presented the pro forma
disclosures in Note 11.
i) FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of financial instruments included in current
assets and liabilities approximates fair value because of the short
maturity of these items.
j) NET LOSS PER COMMON SHARE
Net loss per common share is based on the reported net loss divided
by the weighted average number of common shares outstanding.
Convertible preferred stock and outstanding warrants have not been
included, as their effect would be anti-dilutive.
3. TRADE RECEIVABLES
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
$ $
------------- -------------
<S> <C> <C>
Trade accounts receivable 75,622 -
Less - allowance for doubtful accounts (9,691) -
------------- -------------
Trade accounts receivable, net 65,931 -
------------- -------------
</TABLE>
Included in trade accounts receivable as of December 31, 1997 is an
amount of $33,756 relating to deferred revenues. This amount is also
included within accrued liabilities at that date.
-25-
<PAGE>
4. SUBSCRIPTIONS RECEIVABLE FROM SHAREHOLDERS
The $2,000,000 of subscription receivable from shareholders arose on the
issue of $3,000,000 of series "B" Preferred Stock in December 1997.
This amount was paid in March 1998. Refer to note 11 below for details
concerning numbers of shares issued and related term and conditions of
issuance.
5. PROPERTY AND EQUIPMENT, NET
Property and equipment consists of the following:
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
$ $
------------- -------------
<S> <C> <C>
Software 3,960 4,301
Computer equipment 401,924 30,600
Computer equipment under capital lease 45,766 49,201
Furniture and fixtures 86,295 43,129
Vehicles under capital lease 34,381 19,313
Network equipment under capital lease 830,409 528,928
------------- -------------
1,402,735 675,472
Less - accumulated depreciation (215,962) (41,000)
------------- -------------
1,186,773 634,472
------------- -------------
</TABLE>
Depreciation amounted to $184,794 and $28,566, including $84,833 and
$11,527 in depreciation of assets under capital leases for the periods
ended December 31, 1997 and 1996, respectively. During 1997 and 1996,
the Company capitalized $6,656 and $12,883 in interest expense incurred
during the installation of the network equipment. The network equipment
was used in operations from October 1, 1997.
It is the Company's policy to depreciate its computer and network
equipment over their estimated useful lives based on current conditions.
Given the rapid technological change affecting such equipment, it is at
least reasonably possible that the Company's estimates may change in the
near term.
-26-
<PAGE>
6. CAPITAL LEASE OBLIGATIONS
The Company's subsidiary is obligated under capital leases (computer and
cars) and operating leases (offices) expiring at various dates through
October 31, 2000. Minimum lease payments for leases that have initial
or remaining non-cancelable terms in excess of one year are:
<TABLE>
<CAPTION>
OPERATING CAPITAL
LEASES LEASES
------------- -------------
<S> <C> <C>
Future minimum lease payments:
1998 119,994 190,678
1999 79,996 190,678
2000 - 7,050
2001 - 2,565
------------- -------------
Minimum lease payments 199,990 390,971
-------------
Less - amount representing interest (2,331)
-------------
388,640
Less - current maturities (189,526)
-------------
Long-term capital lease obligations 199,114
-------------
</TABLE>
7. ADVANCES AND CONVERTIBLE LOANS FROM STOCKHOLDERS AND RELATED PARTIES
Advances and loans from stockholders and related parties consist of the
following:
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
$ $
------------- -------------
<S> <C> <C>
Bridge loans 315,672 526,362
Advances from related parties - 64,145
------------- -------------
315,672 590,507
------------- -------------
</TABLE>
In May 1996 and December 1996, the Company received bridge loans of
$300,000 and $200,000 respectively, with interest on the principal
amount accrued at 12%, due one year from the date the loans were made.
The loans are convertible into shares of Common Stock of the Company at
the option of the Company.
-27-
<PAGE>
In May 1997, the Company issued 133,333 shares of its Common Stock in
consideration for the conversion of $200,000 of the $300,000 loan. An
additional cash payment of $50,000 was made in September 1997.
Of the remaining unpaid amount of $50,000, together with the second loan
of $200,000, $25,000 plus interest of $71,088 was repaid on March 25,
1998 and the remaining balance of $225,000 will be converted into
145,161 shares of Common Stock at $1.55 per share.
8. RELATED PARTY TRANSACTIONS
EMPLOYMENT AGREEMENTS
Commencing May 1, 1996, the Company entered into five-year term
employment agreements with the Company's two majority stockholders.
Both agreements provide for compensation of approximately $5,600 per
month plus monthly car allowances of approximately $420 per month. The
agreements can be extended up to three additional three-year terms and
are subject to yearly consumer price index increases. Total
compensation paid under these agreements during 1997 amounted to
approximately $144,480.
ADMINISTRATIVE ASSISTANCE
In May 1996, the Company entered into an agreement with a related party
whereby the related party provides administrative services to the U.S.
holding corporation for $4,000 per month. Amounts charged under this
contract during 1997 and 1996 were approximately $48,000 and $26,000.
In addition to this monthly fee, the related party received a total of
8,000 shares of Common Stock during 1997.
OFFICE LEASE
The Company entered into a month to month sublease agreement with a
company affiliated with a stockholder, whereby the Company recovers
approximately $755 per month for use of its premises, utilities and
computer systems usage. Amounts charged to the affiliate amounted to
approximately $9,060 and $3,525 during 1997 and 1996.
-28-
<PAGE>
CHIEF EXECUTIVE OFFICER
The Chief Executive Officer of the Company was granted a loan in October
1996 with a principal amount of approximately $35,000 and an interest
rate of 6.5%. This amount was fully repaid as of December 31, 1997.
9. MAJOR AGREEMENTS
NETWORK EQUIPMENT SERVICE AGREEMENT
In September 1996, the Company entered into an equipment purchase and
network maintenance service agreement with a major computer equipment
manufacturer, whereby the Company committed to outsource the maintenance
and operation of the network for a total of approximately $635,000 from
1997 through 2000. Decreasing cancellation fees ranging from
approximately $480,000 to $100,000 will apply if the Company terminates
the agreement before the end of the four-year term of the agreement.
There are other major suppliers of similar equipment and services. A
change in supplier, however, could cause disruption in service and a
possible loss of revenues which would adversely affect future operating
results.
LICENSE TO USE AND DISSEMINATE STOCK MARKET INFORMATION
In August 1996, the Company entered into a 30-month license agreement to
use and disseminate stock market information. After the initial term,
the agreement is renewable in twelve-month increments, with a 90-day
cancellation notice period. A major portion of the Company's future
revenues will be dependent upon maintaining this license.
FINANCIAL SOFTWARE SOLUTION PROVIDER
In January 1997 the Company's Swiss subsidiary entered into a 3-year
software distributor agreement with a financial software solution
provider based in the USA. After the initial term the agreement is
renewable on a 12 monthly basis. A 90-day cancellation period applies
throughout the contract. Although there are other such providers of
financial software solutions on the market, the specialist nature of the
software solutions provided under the agreement means that the Company
places significant reliance on this supplier in terms of securing future
revenues.
-29-
<PAGE>
10. INCOME TAXES
Deferred income tax assets and liabilities are provided for temporary
differences between financial statement income and amounts currently
taxable.
Both the Company and its Swiss subsidiary have been incurring losses
during the years ended December 31, 1997 and 1996. For US tax reporting
purposes the Company has a net operating loss carry forward of
approximately $656,260 to offset federal income taxes which expire at
different dates through the year 2012. These net operating losses could
be restricted due to a change in ownership. Its Swiss subsidiary has a
net operating loss carry forward of $2,676,718 to offset future income
taxes in Switzerland which expires between the years 2002 and 2004.
Temporary differences that give rise to deferred income tax assets and
liabilities are:
<TABLE>
<CAPTION>
DEC. 31, 1997 DEC. 31, 1996
$ $
------------- -------------
<S> <C> <C>
Net operating loss carry forward 967,030 389,000
Valuation allowance (967,030) (389,000)
------------- -------------
Net deferred tax asset - -
------------- -------------
------------- -------------
</TABLE>
A valuation allowance is used to reduce deferred tax asset to a level
which, more likely than not, will be realized. Due to the fact that
certain doubts exist regarding the use of the tax losses carried forward
to offset future taxable income, the Company decided to record a
valuation allowance for the full amount of deferred tax assets.
11. STOCKHOLDERS' EQUITY
COMMON STOCK
The Company is authorized to issue 20,000,000 shares of Common Stock,
$.001 par value ("Common Stock"), of which, as of December 31, 1997,
5,375,272 shares were issued and outstanding and held by approximately
350 stockholders of record. As of December 31, 1997, there are no
outstanding options, warrants or other securities, which upon exercise
or conversion entitle their holder to acquire shares of Common
-30-
<PAGE>
Stock, other than the Unit Warrants, Series A and B Preferred Stock and
options issued under the Stock Option Plan, described below.
Holders of shares of Common Stock are entitled to one vote per share on
all matters to be voted upon by the stockholders. The approval of
proposals submitted to stockholders at a meeting other than for the
election of directors requires the favorable vote of a majority of the
shares voting, except in the case of certain fundamental matters (such
as certain amendments to the Certificate of Incorporation, and certain
mergers and reorganizations), in which case Delaware law and the
Company's Bylaws require the favorable vote of at least a majority of
all outstanding shares. Stockholders are entitled to receive such
dividends as may be declared from time to time by the Board of Directors
out of funds legally available therefore, and in the event of
liquidation, dissolution or winding up of the Company to share ratably
in all assets remaining after payment of liabilities. The holders of
shares of Common Stock have no pre-emptive, conversion, subscription or
cumulative voting rights.
In February 1997, the Company issued 10,000 shares of Common Stock to a
Director and a further 20,000 shares to an individual as consideration
for consulting services rendered on behalf of the Company.
During the year ended December 31, 1997 the Company issued 50,000 shares
of Common Stock to settle a liability of $12,500 resulting from
consultancy services provided to the Company.
A second issue of 534,063 shares (including 20,000 shares in
consideration for consulting fees) was made in the same period in a
private placement offering for total consideration of $873,000.
A third private placement issue of 204,000 units, each consisting of 2
shares of Common Stock plus one Common Stock warrant, was made during
the same period at a price of $5.00 per unit. In February 1998, the
Board of Directors resolved to reduce the price per Unit to $4.00 and
to issue an additional 102,000 Shares of Common Stock to the Unit
purchasers. The 204,000 warrants provide the holders with the right to
acquire 204,000 shares of the Company's Common Stock at a price of $3.50
per share up to December 31, 2000 (refer also to Note about Warrant
issues below).
In December 1997, the Company issued 133,333 shares for a total of
$200,000 to repay the bridge loan to stockholders and other related
parties (refer to Note 7).
The Company also issued a further 8,000 shares of its Common Stock
(refer to Note 8).
-31-
<PAGE>
PREFERRED STOCK
The Company is authorized to issue 10,000,000 shares of preferred stock,
$.001 par value ("Preferred Stock"). The Company's Board of Directors
is authorized to issue from time to time, without shareholder
authorization, in one or more designated series or classes, any or all
of the authorized but unissued shares of Preferred Stock with such
dividend, redemption, conversion and exchange provisions as may be
provided in the particular series.
The Board of Directors of the Company has designated an initial series
of Preferred Stock known as "Series A Preferred Stock" consisting of
750,000 authorized shares, and the Company has issued 283,781 units
("Units") of its securities, each Unit consisting of one share ("Series
A Preferred Share") of the Company's Series A Preferred Stock and one
Common Stock purchase warrant ("Unit Warrant"). Each Series A Preferred
Shares has a par value of $.001 and a liquidation preference of $3.50
per share. The Series A Preferred Stock does not carry dividend rights
or any other rights senior to the Common Stock and the Series A
Preferred Stock has equal voting rights with the Common Stock. During
1996, 283,781 shares of Series A Preferred stock and Warrants were
issued for a total consideration of $875,520, net of $117,713 in
issuance costs. In connection therewith, the Company also issued
200,000 shares of its common stock to related parties as commissions for
the issuance of the Preferred Stock. The shares were valued at $.25 a
share, the opening trading price of the Company's stock in November
1996, resulting in a $50,000 deduction from the Preferred Stock
proceeds.
In November 1997 the conversion price of the Series A Preferred Stock
has been reset to $1.75, which allows converting one Series A Preferred
Stock into two shares of Common Stock.
Through December 31, 1997, 135,843 Preferred Shares has been converted
into 271,686 Common Shares.
The Series A Preferred Stock is redeemable by the Company, at a price
equal to the liquidation preference plus any unpaid dividends, at the
earlier of one year from the date of initial issuance or upon the
closing of a public offering of the Company's Common Stock where
immediately following such offering the Common Stock is listed on the
New York or American Stock Exchange or the NASDAQ Stock Market. No
shares of Series A Preferred Stock shall be redeemed without the consent
of the majority of outstanding shares of Series B Preferred Stock. In
December 1997, the Board of Directors of the Company designated a second
series of preferred shares as "Series B Preferred stock" consisting of
1,923,716 shares of authorized shares. On December 30, 1997, the
Company sold 1,923,716 shares of its Series B Preferred Stock to
Alta-Berkeley V, C.V. and two affiliated venture capital funds
(collectively referred to as "Alta-Berkeley") for the purchase price of
$3,000,000. Pursuant to the terms of the agreement, Alta-Berkeley
transferred $1,000,000 at the closing on December 30, 1997 and the
balance of $2,000,000 was delivered to the Company in
-32-
<PAGE>
March 1998. Each Series B Preferred Stock has a par value of $.001 and a
liquidation preference of $3.50 per share if the event of liquidation,
dissolution or winding up occurs on or before December 31, 1999 and
thereafter of $5.20 per share. The shares are convertible at any time
into shares of the Company's Common Stock on a one-for-one basis,
subject to adjustment pursuant to certain anti-dilution rights, and have
full voting rights along with the Company's Series A Preferred Stock and
its Common Stock.
Concurrent with the Agreement, the Company and Alta-Berkeley entered
into an Investors' Rights Agreement. Pursuant to the terms of their
agreement, the Company increased the authorized number of its directors
from four to six and holders of the shares of Series B Preferred stock
are entitled to elect two members of the Company's Board of Directors.
At the closing, the Company appointed Mr. Bryan Wood of Alta-Berkeley to
the Board of Directors. In addition, the Company granted Alta-Berkeley
the right of first refusal to purchase a pro rata share of any equity
securities, which the Company may issue. The right of first refusal
expires on December 18, 2004. The Investors' Rights Agreement also
grants Alta-Berkeley certain approval and disclosure rights over certain
management and strategic matters.
WARRANT ISSUES
In fiscal year 1996, the Company issued 283,781 units ("Units") of its
securities, each Unit consisting of one Series A Preferred Share and one
Common Stock purchase warrant ("Unit Warrant"). Each Unit Warrant
entitles its holder to purchase one share of Common Stock at an initial
exercise price of $7.00 per share until July 31, 1998, which have been
reset to an exercise price of $3.50 and an expiring date of December 31,
2000, at which time the unexercised Unit Warrants shall expire by their
own terms. The Unit Warrants are subject to anti-dilution provisions.
During the year ended December 1997, the Company has issued a further
204,000 units ("Units") of its securities. Each Unit consists of two
Common Share and one Common Stock purchase warrant ("Unit Warrant").
Each Unit Warrant entitles its holder to purchase one share of Common
Stock at an exercise price of $3.50 per share until December 31, 2000,
at which time the unexercised Unit Warrants shall expire by their own
terms. The Unit Warrants are subject to anti-dilution provisions.
-33-
<PAGE>
STOCK OPTION PLAN
During the year ended December 31, 1997, the Company adopted a Stock
Option Plan ("the plan"). The Company accounts for the plan under APB
Opinion No. 25 under which no compensation cost has been recognized on
options granted to employees as the fair value of stock equals or is
lower than the exercise price at the date of grant.
During 1997, under the plan, the Company granted 310,000 options in
total. All transactions with individuals other than those considered
employees (as set forth within the scope of APB Opinion No. 25) have
been accounted for under the provisions of SFAS No. 123.
Had compensation cost on all options granted been determined consistent
with SFAS No. 123 the Company's net loss and earnings per share would
have been reduced to the following proforma amounts.
LOSS PER SHARE
<TABLE>
<CAPTION>
DEC. 31, 1997
-------------
<S> <C> <C>
Net loss As reported (2,359,209)
Proforma (2,510,409)
Basic loss per share As reported (0.53)
Proforma (0.56)
Diluted loss per share As reported (0.53)
Proforma (0.56)
</TABLE>
The effects of applying SFAS No. 123 in this pro-forma disclosure are
not indicative of future amounts.
The weighted average fair value of options granted in 1997 is $0.63 per
option. The fair value of each option grant is estimated on the date of
grant using the Black Scholes pricing model with the following
weighted-average assumptions for grants in 1997:
- a risk free rate of 5.75%
- an expected life of 1,186 days
- an expected volatility of 69%.
The weighted average remaining contractual life of the options is 954
days.
-34-
<PAGE>
A total of 500,000 common shares may be issued under the plan and have
been reserved by the Directors for that purpose. The Board of Directors
determines the terms and exercise prices.
Officers, employees and directors of the Company or its subsidiaries, in
addition to consultants, independent contractors or other service
providers are eligible for "non-qualified options". Only officers,
employees and directors who are also employees of the Company or its
subsidiaries are eligible to receive grants of Incentive Stock Options.
No option may be granted under the Plan after April 28, 2007, but
options granted before that date might be exercisable after that date.
The following non-qualified options have been granted to the Board of
Directors, Employees and Consultants:
<TABLE>
<CAPTION>
NOTES DEC. 31, 1997
-------------
<C> <S> <C>
1) Non-Executive Directors (granted
April 28, 1997) 100,000
2) Directors (granted May 12, 1997) 100,000
3) Employees (granted May 12, 1997) 40,000
4) Consultants (granted May and
November 1997) 70,000
-------------
Total 310,000
-------------
</TABLE>
NOTES:
1) The 100,000 Options granted to the Non-Executive Director have an
exercise price of $3.00 and can be exercised under following
conditions:
<TABLE>
<CAPTION>
NO. OF OPTIONS EXERCISE DATE
-------------- -------------
<S> <C>
25,000 April 28, 1998
25,000 April 28, 1999
25,000 April 28, 2000
25,000 April 28, 2001
</TABLE>
2), 3), 4) The other Options issued are exercisable immediately and
allow the holder to purchase one share of the Company's Common
Stock at $3.50 between May or November, 1997 and December 31, 2000.
The exercise price of these options was revised downward to $2.00
in March 1998.
-35-
<PAGE>
4) Under SFAS No. 123 the fair value of the 70,000 options granted to
consultants as of the date of grant using the Black Scholes pricing
model is $44,400 and has been recorded as expense in the statement
of operations (see above for weighed average assumptions).
A summary of the status of the Company's stock option plan as of
December 31, 1997 is presented in the table and narrative below:
<TABLE>
<CAPTION>
1997
----------------
WTD AVG
SHARES EX PRICE
(,000) ($)
------ --------
<S> <C> <C>
Outstanding, beginning of year - -
Granted 310 3.33
Exercised - -
Expired - -
------ --------
Outstanding, end of year 310 3.33
------ --------
------ --------
Exercisable 190 3.50
</TABLE>
12. RETIREMENT PLANS
All of the Company's Switzerland-based employees, including its
executive officers, participate in the legally required pension or
retirement plans existing in Switzerland, which are similar to defined
contribution plans. All of them are subject to the two pension and
retirement plans required under Swiss law. The first such plan is the
Assurance Vieillesse et Survivants ("AVS"), a government-administered
plan, under which the Company's subsidiary deducts on a monthly basis
5.05% of employee compensation and pays it to the AVS fund, whilst
itself contributing 5.05% to the fund for each employee's account.
The second such plan is the Prevoyance Professionnelle plan ("LPP"), a
company-sponsored plan which is currently administered by an independent
insurance company. Under this plan, a total amount equal to between
approximately 5% and 15% of each employee's compensation, depending on
age and sex is deducted by the Company and paid to each employee's
account in the LPP fund. The Company and employees each contribute 50%
of this cost. In addition to the legally required plans, the Company
offers to its management supplemental LPP programs.
-36-
<PAGE>
The Company has no pension or retirement liability other than its
obligation to make contributions to the AVS fund and the LPP fund and to
see that the appropriate employee amounts are deducted and paid. Total
LPP and AVS plans expenses (including supplemental programs) for
executive officers and other employees was approximately $59,586 and
$21,919 for the Company's Swiss subsidiary for the years ended December
31, 1997 and 1996 respectively.
The Company does not maintain any plans for other post-employment or
post-retirement employee benefits.
13. SUPPLEMENTARY DISCLOSURE TO CASH FLOW STATEMENT
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Cash paid during the year for:
Interest (1,268) (2,056)
Income taxes - -
Non-cash investing and financing transactions:
Capitalization of interest 6,656 12,883
Capital leases to finance equipment (532,500) 15,806
Common stock issued in consideration for consultancy fees (20,000) -
Common stock issued in consideration for Moke - 4,090
Common stock issued for preferred stock - 50,000
Common stock issued for issuance fees - 47,903
Common stock issued to repay a bridging loan (200,000) -
Common stock issued in consideration for administrative fees (8,000) -
Preferred stock issuance costs - 117,713
Interest accrued on loans payable - 26,362
Accrued invoice for equipment acquired - 223,881
</TABLE>
-37-
<PAGE>
<TABLE>
<CAPTION>
1997 1996
-------- -------
<S> <C> <C>
Common stock issued to repay a bridging loan (200,000) -
Common stock issued in consideration for administrative fees (8,000) -
</TABLE>
-38-
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
On November 21, 1997, the Company terminated the appointment of
Raimondo, Pettit & Glassman as independent auditors for the Company and
Arthur Andersen SA was engaged as independent auditors. The decision to
change independent auditors has been approved by the Board of Directors of
the Company. During the fiscal year ended December 31, 1996 and 1995 and the
subsequent interim period through November 21, 1997 there were no
disagreements between the Company and Raimondo, Pettit & Glassman on any
matter of accounting principles or practices, financial statement disclosure,
or auditing scope or procedures which disagreements if not resolved to the
satisfaction of Raimondo, Pettit & Glassman would have caused them to make
reference to the subject matter of the disagreement in connection with their
reports.
Except for the explanatory paragraph included in the 1995 report,
relating to substantial doubt existing about the Company's ability to
continue as a going concern, the audit reports of Raimondo, Pettit & Glassman
on the Company's financial statements as of December 31, 1996 and 1995 did
not contain an adverse opinion or a disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting
principles.
PART III.
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.
DIRECTORS AND EXECUTIVE OFFICERS
Sets forth below are the directors and officers of the Company.
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<C> <C> <S>
Neil Gibbons 48 Chairman of the Board, Chief
Executive Officer and President
Daniel Huber 30 Vice President, Chief Financial
Officer, Secretary and Director
William Cordeiro 52 Director
Stuart Townsend 51 Director
Bryan Wood 52 Director
</TABLE>
Mr. Gibbons co-founded Virtual Telecom SA in 1994 and has served as
Chief Executive Officer, President and director of the Company since its
inception in July 1996. From 1991 to 1994, Mr. Gibbons was engaged as an
independent investment manager.
Mr. Huber co-founded Virtual Telecom SA in 1994 and has served as Vice
President, Chief Financial Officer, Secretary and director of the Company
since its inception in July 1996. Since 1992, Mr. Huber has also served as
Chief Executive Officer of Profilinvest SA, an investment management firm
founded by Mr. Huber.
Mr. Cordeiro has served as director of the Company since July 1996.
Since 1990, Mr. Cordeiro has served as Professor of Management at California
State University, Los Angeles. Mr. Cordeiro holds a Ph.D.
-39-
<PAGE>
in Executive Management from the Peter F. Drucker Graduate Management Center
of the Claremont Graduate School. Mr. Cordeiro also serves as a director of
Harrier, Inc.
Mr. Townsend has served as a director of the Company since April 1997.
Mr. Townsend is the founder of Townsend Analytics, Ltd., a developer of
financial data software, and for the past five years has served as its
President.
Mr. Wood has served as a director of the Company since December 1997.
Mr. Wood is a founder of Alta-Berkeley Associates, a privately held venture
capital group, which was formed in 1982 and, for the past five years, has
served as its Senior Partner. Mr. Woods holds an MBA from Harvard Business
School and BSc in Industrial Engineering from Virginia Polytechnic Institute.
Those required to make filings under Section 16(a) have done so on a
timely basis.
-40-
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION.
CASH COMPENSATION OF EXECUTIVE OFFICERS. The following table sets forth
the cash compensation paid by the Company to its executive officers for
services rendered during the fiscal years ended December 31, 1997, 1996 and
1995.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG-TERM COMPENSATION
--------------------------------------------------- ------------------------------
YEAR SALARY BONUS OTHER RESTRICTED COMMON SHARES ALL OTHER
ANNUAL STOCK UNDERLYING COMPENSATION
NAME AND POSITION COMPENSATION AWARDS OPTIONS GRANTED (1)
($) (# SHARES)
- ------------------ ---- ---------- ----- ------------ ---------- --------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Neil Gibbons, CEO 1997 CHF96,000 -0- -0- -0- 50,000 CHF 7,200
1996 CHF62,000 -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
Daniel Huber, CFO 1997 CHF96,000 -0- -0- -0- 50,000 CHF7,200
1996 CHF64,000 -0- -0- -0- -0- -0-
1995 -0- -0- -0- -0- -0- -0-
</TABLE>
(1) Represents an allowance of CHF600 per month.
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS
- ---------------------------------------------------------------------------------------------------------------------------------
NAME NUMBER OF SECURITIES % OF TOTAL OPTIONS/SARS EXERCISE OR BASE EXPIRATION DATE
UNDERLYING OPTIONS/SARS GRANTED TO EMPLOYEES IN PRICE ($/Sh)
GRANTED (#) FISCAL YEAR
- --------------------------- ----------------------- ----------------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Neil Gibbons, CEO 50,000 21% 2.00 12/31/00
Daniel Huber, CFO 50,000 21% 2.00 12/31/00
</TABLE>
COMPENSATION OF DIRECTORS. Mr. Cordeiro receives a $500 per month
director's fee. All directors receive reimbursement for out-of-pocket
expenses in attending Board of Directors meetings. From time to time the
Company may engage certain members of the Board of Directors to perform
services on behalf of the Company. The Company will compensate the members
for their services at rates no more favorable than could be obtained from
unaffiliated parties.
-41-
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth certain information regarding the
beneficial ownership of the shares of Common Stock as of March 20, 1998 by
(i) each person who is known by the Company to be the beneficial owner of
more than five percent (5%) of the issued and outstanding shares of Common
Stock, (ii) each of the Company's directors and executive officers and (iii)
all directors and executive officers as a group.
<TABLE>
<CAPTION>
NAME AND ADDRESS NUMBER OF SHARES PERCENTAGE OWNED
---------------- ---------------- ----------------
<S> <C> <C>
Neil Gibbons (1) 1,521,770(2) 27.2%
Daniel Huber (1) 1,521,770(2) 27.2%
William Cordeiro (3) 10,000(4) (5)
Stuart Townsend (6) 25,000(7) (5)
Bryan Wood (8) 1,923,716(9) 25.7%
Alta-Berkeley V, C.V. (8) 1,923,716(9) 25.7%
All officers and directors as 3,193,420 69.6%
a group
</TABLE>
- --------------------------------------
(1) Address is 12, Av. des Morgines, 1213 Petit-Lancy 1, Geneva, Switzerland.
(2) Includes 50,000 shares of Common Stock underlying presently exercisable
options.
(3) Address is 23852 Pacific Coast Highway, Suite 283, Malibu, California
90265.
(4) Represents shares held by Bartik, Cordeiro Associates, Inc., of which Mr.
Cordeiro is a shareholder.
(5) Less than one percent.
(6) Address is Townsend Analytics, 100 South Wacker Drive, Suite 1500, Chicago,
Illinois.
(7) Represents shares of Common Stock underlying immediately exercisable
options.
(8) Address is Alta-Berkeley Associates, 9 Saville Row, London, England W1X
IAF.
(9) Represents shares of Common Stock issuable upon conversion of Series B
Preferred Stock held by Alta-Berkeley V, C.V. and two affiliated funds.
Mr. Bryan Wood is the Senior Partner of Alta-Berkeley Associates which
serves as manager of the three funds.
-42-
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The Company's Chief Financial Officer, Daniel Huber, is also Chief
Executive Officer of Profilinvest SA, an investment management firm in
Geneva, Switzerland. At the present time and for the foreseeable future, Mr.
Huber intends to devote substantially all of his business time to the
Company. However, Mr. Huber's association with Profilinvest SA presents a
potential conflict between his provision of his services to the Company and
to Profilinvest.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
ITEM 1. INDEX TO EXHIBITS PAGE
----
<C> <S>
3.1(1) Certificate of Incorporation of the Company
3.2(1) Bylaws of the Company
4.1(1) Specimen of Common Stock Certificate
4.2 Amended Certificate of Designations of the Company
10.1(1) Loan Agreement dated May 15, 1996 between Virtual Telecom SA and
New Capital Investment Fund
10.2(1) Partnership Outsourcing Agreement dated September 9, 1996 between
Virtual Telecom SA and Digital Equipment Corporation
10.3(1) Employment Agreement dated May 31, 1996 between Virtual Telecom
SA and Neil Gibbons
10.4(1) Employment Agreement dated May 31, 1996 between Virtual Telecom
SA and Daniel Huber
10.5(1) Computer Software License Agreement dated January 16, 1997
between Virtual Telecom SA and Townsend Analytics, Ltd.
10.6(1) Information and Distribution License Agreement dated August 23,
1996 between Virtual Telecom SA and McGraw-Hill International
(UK) Ltd.
10.7(1) Agreement for Global Telecommunications Services dated October 1,
1996 between Virtual Telecom SA and BT Limited London (British
Telecom)
10.8(1) Unidata Frame Relay & Unimaster Services dated October 22, 1996
between Virtual Telecom SA and Swiss Telecom ITT
10.9(1) News Distributor Agreement dated January 7, 1997 between Virtual
Telecom SA and AFX News Limited
10.10(1) 1997 Stock Option Plan of the Company
</TABLE>
-43-
<PAGE>
<TABLE>
<CAPTION>
ITEM 1. INDEX TO EXHIBITS PAGE
----
<C> <S>
10.11 Series B Preferred Stock Purchase Agreement dated December 18,
1997
10.12 Investor Rights Agreement dated December 18, 1997
10.13 Software License Agreement between the Company and IQ Net
16.1(2) Letter from Raimondo, Pettit & Glassman regarding Change of
Independent Public Accountant
21.1 The Company has two subsidiaries, Virtual Telecom SA, a Swiss
corporation and Firstquote Limited, an English corporation
27.1 Financial Data Schedule
</TABLE>
- ---------------
(1) Previously filed as part of registration statement on Form 10-SB (SEC File
No. 0-22351) filed with the Securities and Exchange Commission on April 7,
1997.
(2) Previously filed as part of Current Report on Form 8-K/A (SEC File No. 0-
22351) filed with the Securities and Exchange Commission on December 23,
1997.
(b) REPORTS ON FORM 8-K
During the fiscal year ended December 31, 1997, the Company filed a
Current report on Form 8-K dated November 21, 1997 to report a change in the
Company's certifying accountant. The Company also filed a current report on
Form 8-K dated December 30, 1997 to report the sale of securities pursuant to
Regulation S to Alta-Berkeley V, C.V. and two affiliated funds.
-44-
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
VIRTUAL TELECOM, INC.
Date: March 30, 1998 By: /s/ Neil Gibbons
------------------------------------------
Neil Gibbons, Chief Executive Officer
In accordance with the Exchange Act, this Report has been signed by the
following persons on behalf of the Registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ---- ----
<C> <S> <S>
/s/ Neil Gibbons Chief Executive Officer March 30, 1998
----------------------
Neil Gibbons
/s/ Daniel Huber Chief Financial Officer March 30, 1998
----------------------
Daniel Huber
/s/ William Cordeiro Director March 30, 1998
----------------------
William Cordeiro
/s/ Stuart Townsend Director March 30, 1998
----------------------
Stuart Townsend
/s/ Bryan Wood Director March 30, 1998
----------------------
Bryan Wood
</TABLE>
-45-
<PAGE>
AMENDED CERTIFICATE OF DESIGNATIONS
OF
VIRTUAL TELECOM, INC.
A DELAWARE CORPORATION
The undersigned, Neil Gibbons and Daniel Huber, hereby certify that:
1. They are the duly elected and acting Chief Executive Officer and
Secretary, respectively, of Virtual Telecom, Inc., a Delaware corporation
(the "Corporation").
2. The Corporation, in its Certificate of Incorporation, has
authorized 10,000,000 shares of preferred stock. By resolution, the Board of
Directors of the Corporation has previously designated 750,000 shares of
preferred stock authorized by the Certificate of Incorporation as Series A
Preferred Stock. The Corporation subsequently issued 283,781 shares of
Series A Preferred Stock of which 135,843 shares were converted into Common
Stock and 147,938 shares of Series A Preferred Stock are outstanding as of
the date of this Amended Certificate of Designations.
3. By resolution, the Board of Directors of the Corporation has also
designated 1,923,716 shares of preferred stock authorized by the Amended
Certificate of Incorporation as Series B Preferred Stock. No shares of
Series B Preferred Stock have been issued.
4. Pursuant to authority given by the Corporation's Certificate of
Incorporation, the Board of Directors of the Corporation has duly adopted the
following recital and resolution:
WHEREAS, Article IV of the Certificate of Incorporation
of the Corporation authorizes this Corporation to issue
10,000,000 shares of preferred stock, US$.001 par value per
share, issuable from time to time in one or more series (the
"Preferred Stock").
RESOLVED, the Board of Directors hereby determines that
it is in the best interests of this Corporation to amend and
restate the Certificate of Designations with respect to the
147,938 issued and outstanding shares of Series A Preferred
Stock and to designate 1,923,716 shares of Series B
Preferred Stock upon the following terms and conditions:
Section 1. DESIGNATION. The initial series of Preferred Stock shall be
designated and known as "Series A Preferred Stock." The number of authorized
shares constituting such series shall be 147,938. The Series A Preferred
Stock shall have a par value of US$.001 per share. The second series of
Preferred Stock shall be designated and known as "Series B Preferred Stock."
The number of authorized shares constituting such series shall be 1,923,716.
The Series B Preferred Stock shall have a par value of US$.001 per share.
<PAGE>
Section 2. DEFINITIONS. For the purposes of this Amended Certificate
of Designations, the following terms shall have the meanings indicated:
"COMMON STOCK" shall mean the Corporation's $.001 par value common
stock.
"CONVERSION PRICE" has the meaning assigned to such term in Section
7(a).
"INITIAL CONVERSION PRICE" shall mean with respect to Series A
Preferred Stock, US$1.75 per share of Series A Preferred Stock; and, with
respect to Series B Preferred Stock, shall mean US$1.5595 per share of Series
B Preferred Stock,
"JUNIOR STOCK" shall mean any capital stock of the Corporation,
including without limitation the Common Stock, ranking junior to either the
Series A Preferred Stock or the Series B Preferred Stock, as the case may be,
with respect to dividends, distribution in liquidation or any other
preferences, rights and powers.
"LIQUIDATION PREFERENCE" shall mean with respect to the Series A
Preferred Stock $3.50 per share of Series A Preferred Stock plus any accrued
and unpaid dividends; and shall mean with respect to the Series B Preferred
Stock $3.50 per share of Series B Preferred Stock plus any accrued and unpaid
dividends if the event of liquidation, dissolution or winding up occurs on or
before December 31, 1999 and thereafter shall mean $5.20 per share of Series
B Preferred Stock plus any accrued and unpaid dividends.
"PARITY STOCK" shall mean any capital stock of the Corporation
ranking on a parity with either the Series A Preferred Stock or the Series B
Preferred Stock, as the case may be, with respect to dividends, distributions
in liquidation and all other preferences, rights or powers.
"PERSON" shall mean any individual, firm, corporation, partnership,
trust, incorporated or unincorporated association, joint venture, joint stock
company, government (or an agency or political subdivision thereof) or other
entity of any kind, and shall include any successor (by merger or otherwise)
of such entity.
"PREFERRED STOCK" shall mean both the Series A Preferred Stock and
the Series B Preferred Stock, unless the context denotes otherwise.
"SENIOR STOCK" shall mean any capital stock of the Corporation
ranking senior to either the Series A Preferred Stock or the Series B
Preferred Stock, as the case may be, with respect to dividends, distribution
in liquidation or any other preference, right or power.
Section 3. RANKING. The Series B Preferred Stock shall, with respect
to rights on liquidation, dissolution or winding up, rank senior to all other
equity securities of the Corporation, including the Series A Preferred Stock
and the Common Stock and any other series or class of the Corporation's
preferred or common stock, now or hereafter authorized.
Section 4. DIVIDENDS. If any dividends or other distributions
(including, without limitation, any distribution of cash, indebtedness,
assets or other property, but excluding any
-2-
<PAGE>
dividend payable in shares of its common stock) on Common Stock ("Dividends")
are so permitted and declared, such Dividends shall be paid pro rata to the
holders of the Common Stock and Preferred Stock. The holders of Preferred
Stock shall receive a Dividend in an amount that would be payable to such
holder assuming that such shares had been converted on the record date for
determining the stockholders of the Corporation entitled to receive payment
of such Dividends into the maximum number of shares of Common Stock into
which such shares of Preferred Stock are then convertible as provided in
Section 7.
Section 5. VOTING RIGHTS.
In addition to any voting rights provided by law, the holders of
shares of Preferred Stock shall have the following voting rights:
(a) Except as otherwise required by applicable law and without
limiting the provisions of Section 5(b) below, each share of Preferred Stock
shall entitle the holder thereof to vote, in person or by proxy, at each
special and annual meeting of shareholders, on all matters voted on by
holders of Common Stock, voting together as a single class with the holders
of Common Stock and with holders of all other shares entitled to vote
thereon. With respect to any such vote, each share of Preferred Stock shall
entitle the holder thereof to cast the number of votes that such holder would
be entitled to cast assuming that such shares of Preferred Stock had been
converted, on the record date for determining the stockholders entitled to
vote on any such matters, into the maximum number of shares of Common Stock
into which such shares Preferred Stock are then convertible as provided in
Section 7(c) below.
(b) The Board of Directors of the Corporation shall consist of six
(6) members. The holders of Series B Preferred Stock, voting together as a
class, shall be entitled to elect two (2) members of the Board of Directors
at each meeting or pursuant to each consent of the Corporation's shareholders
for the election of Directors. The holders of the Common Stock, as a class,
shall be entitled to elect four (4) members of the Board of Directors at each
meeting or pursuant to each consent of the shareholders for the election of
Directors.
(c) Unless the consent or approval of a greater number of shares
shall then be required by law, the affirmative vote of the holders of more
than 50% of the outstanding shares of the Series A Preferred Stock or the
Series B Preferred Stock, as the case may be, shall be necessary to (1)
authorize, increase the authorized number of shares of or issue (including on
conversion or exchange of any convertible or exchangeable securities or by
reclassification) any shares of any class or classes of Senior Stock or
Parity Stock or any additional shares of such series, (2) authorize, adopt or
approve any amendment to the Certificate of Incorporation, the Bylaws or this
Amended Certificate of Designations that would increase or decrease the par
value of the shares of such series, alter or change the powers, preferences
or rights of the shares of such series or alter or change the powers,
preferences or rights of any other capital stock of the Corporation if after
such alteration or change such capital stock would be Senior Stock or Parity
Stock to such series, (3) amend, alter or repeal the Certificate of
Incorporation or this Amended Certificate of Designations
-3-
<PAGE>
so as to affect the shares of such series adversely, including, without
limitation, by granting any voting right to any holder of notes, bonds,
debentures or other debt obligations of the Corporation, or by amending,
altering or repealing Section 5(b) above, or (4) authorize or issue any
security convertible into, exchangeable for or evidencing the right to
purchase or otherwise receive any shares of any class or classes of Senior
Stock or Parity Stock.
Section 6. LIQUIDATION, DISSOLUTION OR WINDING UP.
(a) In the event of any liquidation, dissolution or winding up of
the Corporation, either voluntary or involuntary, before any distribution or
payment to holders of Junior Stock may be made, the holder of each share of
Preferred Stock shall be entitled to be paid an amount equal to the
Liquidation Preference of such share, plus all accrued or declared but unpaid
dividends on such share, in the following order of priority: first, to the
holders of the Series B Preferred Stock; next, to the holders of the Series A
Preferred Stock; and, then, to the holders of the Junior Stock in accordance
with the rights under such shares of Junior Stock.
(b) If, upon any liquidation, dissolution or winding up of the
Corporation, the assets of the Corporation available for distribution to the
holders of either the Series A Preferred Stock or the Series B Preferred
Stock shall be insufficient to permit payment in full to the holders of such
series the sums which such holders are entitled to receive in such case, then
all of the assets available for distribution to holders of such series shall
be distributed among and paid to such holders ratably in proportion to the
amounts that would be payable to such holders if such assets were sufficient
to permit payment in full. A consolidation or merger of the Corporation into
or with another corporation or corporations in which the Corporation is not
the successor, or the sale of all or substantially all of the assets of the
Corporation to another corporation or any other entity, shall be deemed a
liquidation, dissolution or winding up of the Corporation within the meaning
of this Section 6.
Section 7. CONVERSION OF PREFERRED STOCK INTO COMMON STOCK.
(a) RIGHT TO CONVERT. Each share of Preferred Stock shall be
convertible at any time, at the option of the holders thereof, into fully
paid and nonassessable shares of Common Stock at the Initial Conversion
Price, subject to adjustment as set forth in this Section 7 (the "Conversion
Price"). Notwithstanding any other provision contained herein, in the event
the Corporation gives written notice of its intention to redeem the Preferred
Stock pursuant to Section 8(b) below, any such shares called for redemption
shall be or become eligible for conversion up through the date of redemption
identified in the written notice issued pursuant to Section 8(b) below.
(b) NUMBER OF SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION.
The number of shares of Common Stock to be issued upon conversion of shares
of Preferred Stock shall be equal to the product of (X) and (Y), where (X) is
a fraction, the numerator of which is the Liquidation Preference and the
denominator of which is the applicable Conversion Price and (Y) is the number
of shares of Preferred Stock to be converted.
-4-
<PAGE>
(c) ANTIDILUTION ADJUSTMENTS. The Conversion Price of the
Preferred Stock shall be adjusted from time to time in certain cases as
follows:
(i) DIVIDEND, SUBDIVISION, COMBINATION OR RECLASSIFICATION OF
COMMON STOCK. If the Corporation shall, at any time or from time to time,
(a) declare a dividend on the Common Stock payable in shares of its capital
stock (including Common Stock), (b) subdivide the outstanding Common Stock,
(c) combine the outstanding Common Stock into a smaller number of shares, or
(d) issue any shares of its capital stock in a reclassification of the Common
Stock (including any such reclassification in connection with a consolidation
or merger in which the Corporation is the continuing corporation), then in
each such case, the Initial Conversion Price or the Conversion Price in
effect at the time of the record date for such dividend or at the effective
date of such subdivision, combination or reclassification shall be adjusted
to that price which will permit the number of shares of Common Stock into
which the Preferred Stock may be converted to be increased or reduced in the
same proportion as the number of shares of Common Stock are increased or
reduced in connection with such dividend, subdivision, combination or
reclassification. Any such adjustment shall become effective immediately
after the record date of such dividend or the effective date of such
subdivision, combination or reclassification. Such adjustment shall be made
successively whenever any event listed above shall occur. In the event, if a
dividend is declared, such dividend is not paid, the Conversion Price shall
be adjusted to the Conversion Price in effect immediately prior to the record
date of such dividend.
(ii) ISSUANCE OF ADDITIONAL COMMON STOCK. If the Corporation
shall, at any time or from time to time, directly or indirectly, sell or
issue shares of Common Stock (regardless of whether originally issued or from
the Corporation's treasury), or rights, options, warrants or convertible or
exchangeable securities containing the right to subscribe for or purchase
shares of Common Stock (excluding shares issued in any of the transactions
described in Section 7(c)(i)) at a price per share of Common Stock
(determined, in the case of rights, options, warrants or convertible or
exchangeable securities, by dividing (X) the total consideration received or
receivable by the Corporation in consideration of the sale or issuance of
such rights, options, warrants or convertible or exchangeable securities,
plus the total consideration payable to the Corporation upon exercise or
conversion or exchange thereof, by (Y) the total number of shares of Common
Stock covered by such rights, options, warrants or convertible or
exchangeable securities) lower than the Initial Conversion Price in effect
immediately prior to such sale or issuance, then the Conversion Price shall
be reduced to the price determined by multiplying the Conversion Price in
effect immediately prior thereto by a fraction, the numerator of which shall
be the sum of the number of shares of Common Stock outstanding immediately
prior to such sale or issuance plus the number of shares of Common Stock
which the aggregate consideration received (determined as provided below) for
such sale or issuance would purchase at the Conversion Price and the
denominator of which shall be the total number of shares of Common Stock
outstanding immediately after such sale or issuance. Such adjustment shall
be made successively whenever such sale or issuance is made. For the
purposes of such adjustments, the shares of Common Stock which the holder of
any such rights, options, warrants, or convertible or exchangeable securities
shall be entitled to subscribe for or purchase shall be deemed to be issued
and outstanding as of the date of such sale or issuance and the consideration
"received" by the Corporation therefor shall be deemed to be the
consideration actually
-5-
<PAGE>
received or receivable by the Corporation (plus any underwriting discounts or
commissions in connection therewith) for such rights, options, warrants or
convertible or exchangeable securities, plus the consideration stated in such
rights, options, warrants or convertible or exchangeable securities to be
payable to the Corporation for the shares of Common Stock covered thereby.
If the Corporation shall sell or issue shares of Common Stock for a
consideration consisting, in whole or in part, of property other than cash or
its equivalent, then in determining the "price per share of Common Stock" and
the "consideration" received or receivable by or payable to the Corporation
for purposes of the first sentence and the immediately preceding sentence of
this Section 7(c)(ii), the fair value of such property shall be determined in
good faith by the Board of Directors. The determination of whether any
adjustment is required under this Section 7(c)(ii) by reason of the sale and
issuance of rights, options, warrants or convertible or exchangeable
securities and the amount of such adjustment, if any, shall be made only at
the time of such issuance or sale and not at the subsequent time of issuance
or sale of Common Stock upon the exercise of such rights to subscribe or
purchase; provided, however, that if such rights, options, warrants or
convertible or exchangeable securities shall expire without exercise prior to
any conversion of the Preferred Stock pursuant to Section 7, then any
adjustment made under this Section 7(c)(ii) with respect thereto shall be
reversed.
(iii) DE MINIMIS ADJUSTMENTS. No adjustment of the
Conversion Price shall be made if the amount of such adjustment would result
in a change in the Conversion Price per share of less than $.01 but in such
case any adjustment that would otherwise be required then to be made shall be
carried forward and shall be made at the time of and together with the next
subsequent adjustment, which together with any adjustment so carried forward,
would result in a change in the Conversion Price in excess of $.01 per share.
All calculations under this Section 7(c) shall be made to the nearest cent,
or the nearest 1/100th of a share, as the case may be. If the Corporation
shall, at any time or from time to time, issue Common Stock by way of
dividends on any stock of the Corporation or subdivide or combine the
outstanding shares of the Common Stock, such amount of $.01 (as theretofore
increased or decreased, if such amount shall have been adjusted in accordance
with the provisions of this clause) shall forthwith be proportionately
increased in the case of a combination or decreased in the case of a
subdivision or stock dividend so as appropriately to reflect the same.
Notwithstanding the provisions of the first sentence of this Section
7(c)(iii), any adjustment postponed pursuant to this Section 7(c)(iii) shall
be made no later than the earlier of (a) two years from the date of the
transaction that would, but for the provisions of the first sentence of this
Section 7(c)(iii), have required such adjustment and (b) the date of any
redemption or conversion of the shares of Preferred Stock.
(iv) FRACTIONAL SHARES. Notwithstanding any other provision
of this Amended Certificate of Designations, the Corporation shall not be
required to issue fractions of shares upon conversion of any shares of
Preferred Stock or to distribute certificates which evidence fractional
shares. In lieu of fractional shares of Common Stock, the Corporation shall
pay therefore, at the time of any conversion of shares of Preferred Stock as
herein provided, an amount in cash equal to such fraction multiplied by the
Conversion Price then in effect.
-6-
<PAGE>
(d) REORGANIZATION AND RECLASSIFICATION ADJUSTMENT. If there
occurs any capital reorganization or any reclassification of the Common Stock
of the Corporation, then each share of Preferred Stock shall thereafter be
convertible into the same kind and amounts of securities (including shares of
stock) or other assets, or both, which were issuable or distributable to the
holders of outstanding Common Stock of the Corporation upon such
reorganization or reclassification in respect of that number of shares of
Common Stock into which such shares of Preferred Stock might have been
converted immediately prior to such reorganization or reclassification; and,
in any such case, appropriate adjustments (as determined in good faith by the
Board of Directors of the Corporation) shall be made to assure that the
provisions set forth herein (including provisions with respect to changes in,
and other adjustments of, the Conversion Price) shall thereafter be
applicable, as nearly as reasonably may be practicable, in relation to any
securities or other assets thereafter deliverable upon the conversion of the
Preferred Stock.
(e) MECHANICS OF CONVERSION. The option to convert shall be
exercised by surrendering for such purpose to the Corporation, certificates
representing the shares to be converted, duly endorsed in blank or
accompanied by proper instruments of transfer, and at the time of such
surrender, the Person in whose name any certificate for shares of Common
Stock shall be issuable upon such conversion shall be deemed to be the holder
of record of such shares of Common Stock on such date, notwithstanding that
the share register of the Corporation shall then be closed or that the
certificates representing such Common Stock shall not then be actually
delivered to such person. In the event the Corporation has given written
notice of its intention to redeem any or all of the shares to be converted,
the certificates representing such shares, duly endorsed in blank or
accompanied by proper instruments of transfer, shall be delivered into the
possession of the Corporation no later than the close of business on the date
of redemption identified in the written notice issued pursuant to Section
8(b) below.
(f) CERTIFICATE AS TO ADJUSTMENTS. Whenever the Conversion Price
or the securities or other property deliverable upon the conversion of the
Preferred Stock shall be adjusted pursuant to the provisions hereof, the
Corporation shall promptly give written notice thereof to each holder of
shares of Preferred Stock at such holder's address as it appears on the
transfer books of the Corporation and shall forthwith file, at its principal
executive office and with any transfer agent or agents for the shares of
Preferred Stock and the Common Stock, a certificate, signed by the Chairman
of the Board, Chief Executive Officer or one of the Vice Presidents of the
Corporation, and by its Chief Financial Officer, its Treasurer or one of its
Assistant Treasurers, stating the adjusted Conversion Price and the
securities or other property deliverable per share of Preferred Stock
calculated to the nearest cent or to the nearest one one-hundredth of a share
and setting forth in reasonable detail the method of calculation and the
facts requiring such adjustment and upon which such calculation is based.
Each adjustment shall remain in effect until a subsequent adjustment
hereunder is required.
(g) RESERVATION OF COMMON STOCK. The Corporation shall at all
times reserve and keep available for issuance upon the conversion of the
shares of Preferred Stock, the maximum number of its authorized but unissued
shares of Common Stock as is reasonably anticipated to be sufficient to
permit the conversion of all outstanding shares of Preferred
-7-
<PAGE>
Stock, and shall take all action required to increase the authorized number
of shares of Common Stock if at any time there shall be insufficient
authorized but unissued shares of Common Stock to permit such reservation or
to permit the conversion of all outstanding shares of Preferred Stock.
(h) NO CONVERSION CHARGE OR TAX. The issuance and delivery of
certificates for shares of Common Stock upon the conversion of shares of
Preferred Stock shall be made without charge to the holder of shares of
Preferred Stock for any issue or transfer tax, or other incidental expense in
respect of the issuance or delivery of such certificates or the securities
represented thereby, all of which taxes and expenses shall be paid by the
Corporation.
Section 8. REDEMPTION OF PREFERRED STOCK.
(a) REDEMPTION OF SERIES A PREFERRED STOCK. The Corporation shall
have the right to redeem for cash out of funds legally available therefor
each share of Series A Preferred Stock. Redemptions pursuant to this Section
8(a) shall be made for a price per share equal to the Liquidation Preference
plus an amount equal to the amount of all unpaid Dividends payable in
accordance with Section 4 hereof on each share of Series A Preferred Stock to
be redeemed; provided, however, that no shares of Series A Preferred Stock
shall be redeemed without the consent of the majority of outstanding shares
of Series B Preferred Stock.
(b) REDEMPTION OF SERIES B PREFERRED STOCK. The Corporation shall
have the right to redeem for cash out of funds legally available therefor
each share of Series B Preferred Stock. Redemptions pursuant to this Section
8(b) shall be made for a price per share equal to $3.50, if the date of
redemption is prior to December 31, 1999 and thereafter at a price per share
equal to $5.20 for each share of Series B Preferred Stock to be redeemed.
(c) The Corporation shall give written notice of its intention to
redeem the Preferred Stock as provided herein, to each holder thereof, at
such holder's address as it appears on the transfer books of the Corporation,
which notice shall specify (i) the total number of shares of Preferred Stock
being redeemed (which shall be all of such shares then outstanding); (ii) the
number of shares of Preferred Stock held by the holder which the Corporation
intends to redeem (which shall be all of such shares then held by the
holder); (iii) the date of redemption (which shall be at least 30 days from
the date of mailing of such notice by the Corporation); and (iv) the
redemption price. On or after the date of redemption, each holder of
Preferred Stock shall surrender his certificate for the number of shares to
be redeemed as stated in the notice provided by the Corporation. Dividends
will cease to accumulate on shares of Preferred Stock called for redemption.
(d) For the purpose of determining whether funds are legally
available for redemption of shares of Preferred Stock as provided herein, the
Corporation shall value its assets at the highest amount permissible under
applicable law. If on the redemption date funds of the Corporation legally
available therefor shall be insufficient to redeem all the shares of B
Preferred Stock required to be redeemed as provided herein, funds to the
extent
-8-
<PAGE>
legally available shall be used for such purpose and the Corporation shall
effect such redemption pro rata according to the total redemption amount owed
to each holder of Preferred Stock as of the redemption date. The redemption
requirements provided hereby shall be continuous, so that if such requirement
shall not be fully discharged, funds legally available shall be applied
therefor until such requirements are fully discharged in accordance with the
preceding sentence.
Section 9. NOTICE OF CERTAIN EVENTS. In case the Corporation shall
propose at any time or from time to time (A) to declare or pay any dividend
payable in stock of any class to the holders of Common Stock or to make any
other distribution to the holders of Common Stock, (B) to offer to the
holders of Common Stock rights or warrants to subscribe for or to purchase
any additional shares of Common Stock or shares of stock of any class or any
other securities, rights or options, (C) to effect any reclassification of
its Common Stock, (D) to effect any consolidation, merger or sale, transfer
or other disposition of all or substantially all of the property, assets or
business of the Corporation which would, if consummated result in the
mandatory conversion of shares of Preferred Stock, or (E) to effect the
liquidation, dissolution or winding up of the Corporation, then, in each such
case, the Corporation shall mail to each holder of shares of Preferred Stock
via first class mail at such holder's address as it appears on the transfer
books of the Corporation, a written notice of such proposed action, which
shall specify (1) the date on which a record is to be taken for the purpose
of such dividend, distribution or rights or warrants or, if a record is not
to be taken, the date as of which the holders of shares of Common Stock of
record to be entitled to such dividend, distribution or rights are to be
determined, or (2) the date on which such reclassification, consolidation,
merger, sale, conveyance, dissolution, liquidation or winding up is expected
to become effective, and such notice shall be so given as promptly as
possible but in any event at least ten (10) business days prior to the
applicable record, determination or effective date, specified in such notice.
Section 10. CERTAIN REMEDIES. Any registered holder of shares of
Preferred Stock shall be entitled to an injunction or injunctions to prevent
breaches of the provisions of this Amended Certificate of Designations and to
enforce specifically the terms and provisions of this Amended Certificate of
Designations in any court of the United States or any state thereof having
jurisdiction, this being in addition to any other remedy to which such holder
may be entitled at law or in equity.
Section 11. METHOD OF ELECTION. For purposes of this Amended
Certificate of Designations, any election required or allowed to be made by
the majority of the holders of Preferred Stock shall be effective upon
receipt by the Company of the written consent of a majority of such holders.
Section 12. STATUS OF REACQUIRED SHARES. Shares of Preferred Stock
which have been issued and converted or redeemed shall (upon compliance with
any applicable provisions of the laws of the State of Delaware) have the
status of authorized and unissued shares of Preferred Stock issuable in
series undesignated as to series and may be redesignated and reissued.
-9-
<PAGE>
The undersigned, Neil Gibbons and Daniel Huber, Chief Executive Officer
and Secretary of Virtual Telecom, Inc., respectively, hereby declare and
certify under penalty of perjury that the foregoing Certificate is the act
and deed of the Corporation and that the facts herein stated are true.
Executed at Geneva, Switzerland on December 19, 1997.
-------------------------------------------
NEIL GIBBONS
Chief Executive Officer
-------------------------------------------
DANIEL HUBER
Secretary
-10-
<PAGE>
EXECUTION COPY
VIRTUAL TELECOM, INC.
SERIES B PREFERRED STOCK
PURCHASE AGREEMENT
December 18, 1997
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
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
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
PAGE
----
<C> <S> <C>
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
</TABLE>
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
-ii-
<PAGE>
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:
-1-
<PAGE>
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
Petit-Lancy 1, Geneva, Switzerland, 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
-2-
<PAGE>
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
-3-
<PAGE>
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
-4-
<PAGE>
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.
-5-
<PAGE>
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
-6-
<PAGE>
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
-7-
<PAGE>
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,
-8-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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 Neil
Gibbons and Daniel Huber 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-
<PAGE>
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-
<PAGE>
(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-
<PAGE>
"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 Ernest & 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-
<PAGE>
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-
<PAGE>
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 Neil
Gibbons, Daniel Huber, William Cordeiro, Stuart Townsend and Bryan R. Wood.
4.8 OPINION OF COMPANY COUNSEL. Investors shall have received from
Bruck & 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, Neil Gibbons and
Daniel Huber 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-
<PAGE>
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-
<PAGE>
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 bill 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-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first above written.
COMPANY:
VIRTUAL TELECOM, INC.
By /s/ N. Gibbons
---------------------------------
N. Gibbons
Title CEO
---------------------------------
Address: 12 Ave des Morgines
---------------------------------
1213 Petit-Lancy 1, Geneva
---------------------------------
Switzerland
---------------------------------
INVESTORS:
ALTA-BERKELEY, V, C.V.
By /s/ Bryan Wood
---------------------------------
Bryan Wood
Title
---------------------------------
Address:
---------------------------------
---------------------------------
---------------------------------
ALTA-BERKELEY, V, S BY S, C.V.
By /s/ Bryan Wood
---------------------------------
Bryan Wood
Title
---------------------------------
Address:
---------------------------------
---------------------------------
---------------------------------
-19-
<PAGE>
ALTA-BERKELEY, NORDIC PARTNERS, KY
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-
<PAGE>
SCHEDULE A
LIST OF INVESTORS
<TABLE>
<CAPTION>
Number of
Investor Shares Purchased
-------- ----------------
<S> <C>
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
</TABLE>
-21-
<PAGE>
EXHIBIT D
LIST OF STOCKHOLDERS
-22-
<PAGE>
EXECUTION COPY
VIRTUAL TELECOM, INC.
INVESTORS' RIGHTS AGREEMENT
THIS INVESTORS' RIGHTS AGREEMENT (this "Agreement") is made and entered
into as of the 18th day of December, 1997 by and among Virtual Telecom, Inc.,
a Delaware corporation (the "Company"), and the persons identified on EXHIBIT
A attached hereto (the "Stockholders").
SECTION 1
Restrictions on Transferability of Securities;
REGISTRATION RIGHTS
1.1 CERTAIN DEFINITIONS. As used in this Agreement, the following
terms shall have the meanings set forth below:
(a) "Closing" shall mean the date of the initial sale of shares of the
Company's Series B Preferred Stock.
(b) "Commission" shall mean the Securities and Exchange Commission or
any other federal agency at the time administering the Securities Act.
(c) "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to time.
(d) "Holder" shall mean any Investor who holds Registrable Securities
and any holder of Registrable Securities to whom the registration rights
conferred by this Agreement have been transferred in compliance with Section
1.11 hereof.
(e) "Initiating Holders" shall mean any Holder or Holders who in the
aggregate hold not less than fifty percent (50%) of the outstanding
Registrable Securities.
(f) "Investors" shall mean persons who purchased Shares pursuant to the
Series B Agreement.
(g) "Other Stockholders" shall mean persons other than Holders who, by
virtue of agreements with the Company, are entitled to include their
securities in certain registrations hereunder.
(h) "Registrable Securities" shall mean (i) shares of Common Stock
issued or issuable pursuant to the conversion of the Shares and (ii) any
Common Stock issued as a dividend or other distribution with respect to or in
exchange for or in replacement
-1-
<PAGE>
of the shares referenced in (i) above, provided, however, that Registrable
Securities shall not include any shares of Common Stock which have previously
been registered or which have been sold to the public.
(i) The terms "register," "registered" and "registration" shall refer
to a registration effected by preparing and filing a registration statement
in compliance with the Securities Act and applicable rules and regulations
thereunder, and the declaration or ordering of the effectiveness of such
registration statement.
(j) "Registration Expenses" shall mean all expenses incurred in
effecting any registration pursuant to this Agreement, including, without
limitation, all registration, qualification, and filing fees, printing
expenses, escrow fees, fees and disbursements of counsel for the Company,
blue sky fees and expenses, and expenses of any regular or special audits
incident to or required by any such registration, but shall not include
Selling Expenses and fees and disbursements of counsel for the Holders (but
excluding the compensation or regular employees of the Company, which shall
be paid in any event by the Company).
(k) "Rule 144" shall mean Rule 144 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or
any similar successor rule that may be promulgated by the Commission.
(l) "Rule 145" shall mean Rule 145 as promulgated by the Commission
under the Securities Act, as such Rule may be amended from time to time, or
any similar successor rule that may be promulgated by the Commission.
(m) "Securities Act" shall mean the Securities Act of 1933, as amended,
or any similar successor federal statute and the rules and regulations
thereunder, all as the same shall be in effect from time to time.
(n) "Selling Expenses" shall mean all underwriting discounts and
selling commissions applicable to the sale of Registrable Securities and fees
and disbursements of counsel for any Holder (other than the fees and
disbursements of counsel included in Registration Expenses).
(o) "Series B Agreement" shall mean the Series B Preferred Stock
Purchase Agreement between the Company and the Stockholders.
(p) "Shares" shall mean the Company's Series B Preferred Stock.
-2-
<PAGE>
1.2 REQUESTED REGISTRATION.
(a) REQUEST FOR REGISTRATION. If the Company shall receive from
Initiating Holders at any time or times not earlier than the earlier of (i)
eighteen (18) months after the date of this Agreement or (ii) three (3)
months prior to the Company's good faith estimate of the date of filing of
any registration statement covering an underwritten offering of any of the
Company's securities to the general public, a written request that the
Company effect any registration with respect to all or a part of the
Registrable Securities the aggregate proceeds of which (after deduction for
underwriter's discounts and expenses related to the issuance) exceed
$5,000,000 the Company will:
(i) promptly give written notice of the proposed registration to all
other Holders; and
(ii) as soon as practicable, use its best efforts to effect such
registration (including, without limitation, filing post-effective
amendments, appropriate qualifications under applicable blue sky or other
state securities laws, and appropriate compliance with the Securities Act)
and as would permit or facilitate the sale and distribution of all or such
portion of such Registrable Securities as are specified in such request,
together with all or such portion of the Registrable Securities of any Holder
or Holders joining in such request as are specified in a written request
received by the Company within twenty (20) days after such written notice
from the Company is mailed or delivered.
The Company shall not be obligated to effect, or to take any action to
effect, any such registration pursuant to this Section 1.2:
(A) In any particular jurisdiction in which the Company would be
required to execute a general consent to service of process in effecting
such registration, qualification, or compliance, unless the Company is
already subject to service in such jurisdiction and except as may be
required by the Securities Act;
(B) After the Company has initiated two such registrations
pursuant to this Section 1.2(a) (counting for these purposes only
registrations which have been declared or ordered effective and pursuant
to which securities have been sold and registrations which have been
withdrawn by the Holders as to which the Holders have not elected to
bear the Registration Expenses pursuant to Section 1.4 hereof and would,
absent such election, have been required to bear such expenses);
(C) During the period starting with the date sixty (60) days prior
to the Company's good faith estimate of the date of filing of, and
ending on a date one hundred eighty
-3-
<PAGE>
(180) days after the effective date of, a Company-initiated
registration; provided that the Company is actively employing in good
faith all reasonable efforts to cause such registration statement to
become effective;
(D) If the Initiating Holders propose to dispose of shares of
Registrable Securities which may be immediately registered on Form S-3
pursuant to a request made under Section 1.5 hereof;
(E) If the Initiating Holders do not request that such offering be
firmly underwritten by underwriters selected by the Initiating Holders
(subject to the consent of the Company, which consent will not be
unreasonably withheld); or
(F) If the Company and the Initiating Holders are unable to obtain
the commitment of the underwriter described in clause (E) above to
firmly underwrite the offer.
(b) Subject to the foregoing clauses (A) through (F), the Company shall
file a registration statement covering the Registrable Securities so
requested to be registered as soon as practicable after receipt of the
request or requests of the Initiating Holders; provided, however, that if (i)
in the good faith judgment of the Board of Directors of the Company, such
registration would be seriously detrimental to the Company and the Board of
Directors of the Company concludes, as a result, that it is essential to
defer the filing of such registration statement at such time, and (ii) the
Company shall furnish to such Holders a certificate signed by the President
of the Company stating that in the good faith judgment of the Board of
Directors of the Company, it would be seriously detrimental to the Company
for such registration statement to be filed in the near future and that it
is, therefore, essential to defer the filing of such registration statement,
then the Company shall have the right to defer such filing for the period
during which such disclosure would be seriously detrimental, provided that
(except as provided in clause (C) above) the Company may not defer the filing
for a period of more than one hundred eighty (180) days after receipt of the
request of the Initiating Holders, and, provided further, that the Company
shall not defer its obligation in this manner more than once in any
twelve-month period.
The registration statement filed pursuant to the request of the
Initiating Holders may, subject to the provisions of Sections 1.2(b) and 1.12
hereof, include other securities of the Company, with respect to which
registration rights have been granted, and may include securities of the
Company being sold for the account of the Company.
(c) UNDERWRITING. The right of any Holder to registration pursuant to
Section 1.2 shall be conditioned upon such Holder's participation in such
underwriting and the inclusion of such
-4-
<PAGE>
Holder's Registrable Securities in the underwriting (unless otherwise
mutually agreed by a majority in interest of the Initiating Holders and such
Holder with respect to such participation and inclusion) to the extent
provided herein. A Holder may elect to include in such underwriting all or
a part of the Registrable Securities he holds.
(d) PROCEDURES. If the Company shall request inclusion in any
registration pursuant to Section 1.2 of securities being sold for its own
account, or if other persons shall request inclusion in any registration
pursuant to Section 1.2, the initiating Holders shall, on behalf of all
Holders, offer to include such securities in the underwriting and may
condition such offer on their acceptance of the further applicable provisions
of this Section 1. The Company shall (together with all Holders and other
persons proposing to distribute their securities through such underwriting)
enter into an underwriting agreement in customary form with the
representative of the underwriter or underwriters selected for such
underwriting by a majority in interest of the Initiating Holders, which
underwriters are reasonably acceptable to the Company. Notwithstanding any
other provision of this Section 1.2, if the representative of the
underwriters advises the Initiating Holders in writing that marketing factors
require a limitation on the number of shares to be underwritten, the number
of shares to be included in the underwriting or registration shall be
allocated as set forth in Section 1.12 hereof. If a person who has requested
inclusion in such registration as provided above does not agree to the terms
of any such underwriting, such person shall be excluded therefrom by written
notice from the Company, the underwriter or the Initiating Holders. The
securities so excluded shall also be withdrawn from registration. Any
Registrable Securities or other securities excluded shall also be withdrawn
from such registration. If shares are so withdrawn from the registration and
if the number of shares to be included in such registration was previously
reduced as a result of marketing factors pursuant to this Section 1.2(d),
then the Company shall offer to all Holders who have retained rights to
include securities in the registration the right to include additional
securities in the registration in an aggregate amount equal to the number of
shares so withdrawn, with such shares to be allocated among such Holders
requesting additional inclusion in accordance with Section 1.12.
1.3 COMPANY REGISTRATION.
(a) If the Company shall determine to register any of its securities
either for its own account or the account of a security holder or holders
exercising their respective demand registration rights (other than pursuant
to Section 1.2 or 1.5 hereof), other than a registration relating solely to
employee benefit plans, or a registration relating solely to a Rule 145
transaction, or a registration on any registration form that does not permit
secondary sales, the Company will:
-5-
<PAGE>
(i) promptly give to each Holder written notice thereof; and
(ii) use its best efforts to include in such registration (and any
related qualification under blue sky laws or other compliance), except as set
forth in Section 1.3(b) below, and in any underwriting involved therein, all
the Registrable Securities specified in a written request or requests, made
by any Holder and received by the Company within twenty (20) days after the
written notice from the Company described in clause (i) above is mailed or
delivered by the Company. Such written request may specify all or a part of
a Holder's Registrable Securities.
(b) UNDERWRITING. If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 1.3(a)(i). In such event, the right of any Holder to
registration pursuant to this Section 1.3 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent provided
herein. All Holders proposing to distribute their securities through such
underwriting shall (together with the Company and the other holders of
securities of the Company with registration rights to participate therein
distributing their securities through such underwriting) enter into an
underwriting agreement in customary form with the representative of the
underwriter or underwriters selected by the Company.
Notwithstanding any other provision of this Section 1.3, if the
representative of the underwriters advises the Company in writing that
marketing factors require a limitation on the number of shares to be
underwritten, the Company may limit, to the extent so advised by the
underwriters, the amount of securities to be included in the registration by
the Company's stockholders (including the Holders); provided, however, that
the aggregate value of securities (including Registrable Securities) to be
included in such registration by the Company's stockholders (including the
Holders) may not be so reduced to less than twenty-five percent (25%) of the
total value of all securities included in such registration, and provided
further that the Company shall not be required to reduce the number of shares
of securities that it is entitled to include in the registration and
underwriting. The Company shall so advise all holders of securities
requesting registration, and the number of shares of securities that are
entitled to be included in the registration and underwriting shall be
allocated first to the Company for securities being sold for its own account
and thereafter as set forth in Section 1.12. If any person does not agree to
the terms of any such underwriting, he shall be excluded therefrom by written
notice from the Company or the underwriter. Any Registrable Securities or
other securities excluded or withdrawn from such underwriting shall be
withdrawn from such registration.
-6-
<PAGE>
If shares are so withdrawn from the registration or if the number of
shares of Registrable Securities to be included in such registration was
previously reduced as a result of marketing factors, the Company shall then
offer to all persons who have retained the right to include securities in the
registration the right to include securities in the registration the right to
include additional securities in the registration in an aggregate amount
equal to the number of shares so withdrawn, with such shares to be allocated
among the persons requesting additional inclusion in accordance with Section
1.12 hereof.
1.4 EXPENSES OF REGISTRATION. All Registration Expenses incurred in
connection with any registration, qualification or compliance pursuant to
Sections 1.3 and 1.5 hereof, and the first two registrations pursuant to
Section 1.2 hereof and reasonable fees of one counsel for the selling
stockholders in the case of registrations pursuant to Section 1.2 which have
been declared or ordered effective and pursuant to which securities have been
sold shall be borne by the Company; provided, however, that if the Holders
bear the Registration Expenses for any registration proceeding begun pursuant
to Section 1.2 and subsequently withdrawn by the Holders registering shares
therein, such registration proceeding shall not be counted as a requested
registration pursuant to Section 1.2 hereof, except in the event that such
withdrawal is based upon material adverse information relating to the Company
that is different from the information known or available (upon request from
the Company or otherwise) to the Holders requesting registration at the time
of their request for registration under Section 1.2, in which event such
registration shall not be treated as a counted registration for purposes of
Section 1.2 hereof, even though the Holders do not bear the Registration
Expenses for such registration. All Selling Expenses relating to securities
so registered shall be borne by the holders of such securities pro rata on
the basis of the number of shares of securities so registered on their behalf.
1.5 REGISTRATION ON FORM S-3.
(a) The Company shall use its best efforts to qualify for registration
on Form S-3 or any comparable or successor form or forms. After the Company
has qualified for the use of Form S-3, in addition to the rights contained in
the foregoing provisions of this Section 1, the Holders of Registrable
Securities shall have the right to request registrations of Form S-3 (such
requests shall be in writing and shall state the number of shares of
Registrable Securities to be disposed of and the intended methods of
disposition of such shares by such Holder or Holders), provided, however,
that the Company shall not be obligated to effect any such registration if
(i) the Holders, together with the holders of any other securities of the
Company entitled to inclusion in such registration, propose to sell
Registrable Securities and such other securities (if any) on Form S-3 at an
aggregate price to the public of less than $1,000,000, or (ii) in the event
that the Company shall furnish the certification described in paragraph
1.2(b)(ii) (but subject to the limitations
-7-
<PAGE>
set forth therein) or (iii) in a given twelve-month period, after the Company
has effected one (1) such registration in any such period or (iv) it is to be
effected less than six (6) months, or more than five (5) years, after the
date of this Agreement.
(b) If a request complying with the requirements of section 1.5(a)
hereof is delivered to the Company, the provisions of Sections 1.2(a)(i) and
(ii) (including subsections 1.2(a)(ii)(A) through 1.2(a)(ii)(F)) and Section
1.2(b) hereof shall apply to such registration. If the registration is for
an underwritten offering, the provisions of Sections 1.2(c) and 1.2(d) hereof
shall apply to such registration.
1.6 REGISTRATION PROCEDURES. In the case of each registration effected
by the Company pursuant to Section 1, the Company will keep each Holder
advised in writing as to the initiation of each registration and as to the
completion thereof. At its expense, the Company will use its best efforts to:
(a) Keep such registration effective for a period of ninety (90) days
or until the Holder or Holders have completed the distribution described in
the registration statement relating thereto, whichever first occurs;
provided, however, that (i) such 90-day period shall be extended for a period
of time equal to the period the Holder refrains from selling any securities
included in such registration at the request of an underwriter of Common
Stock (or other securities) of the Company; and (ii) in the case of any
registration of Registrable Securities on Form S-3 which are intended to be
offered on a continuous or delayed basis, such 90-day period shall be
extended, if necessary, to keep the registration statement effective until
all such Registrable Securities are sold, provided that Rule 415, or any
successor rule under the Securities Act, permits an offering on a continuous
or delayed basis, and provided further that applicable rules under the
Securities Act governing the obligation to file a post-effective amendment
permit, in lieu of filing a post-effective amendment that (I) includes any
prospectus required by Section 10(a)(3) of the Securities Act or (II)
reflects facts or events representing a material or fundamental change in the
information set forth in the registration statement, the incorporation by
reference of information required to be included in (I) and (II) above to be
contained in periodic reports filed pursuant to Section 13 or 15(d) of the
Exchange Act in the registration statement;
(b) Prepare and file with the Commission such amendments and
supplements to such registration statement and the prospectus used in
connection with such registration statement as may be necessary to comply
with the provisions of the Securities Act with respect to the disposition of
all securities covered by such registration statement;
-8-
<PAGE>
(c) Furnish such number of prospectuses and other documents incident
thereto, including any amendment of or supplement to the prospectus, as a
Holder from time to time may reasonably request;
(d) Notify each seller of Registrable Securities covered by such
registration statement at any time when a prospectus relating thereto is
required to be delivered under the Securities Act of the happening of any
event as a result of which the prospectus included in such registration
statement, as then in effect, includes an untrue statement of a material fact
or omits to state a material fact required to be stated therein or necessary
to make the statements therein not misleading or incomplete in the light of
the circumstances then existing, and at the request of any such seller,
prepare and furnish to such seller a reasonable number of copies of a
supplement to or an amendment of such prospectus as may be necessary so that,
as thereafter delivered to the purchasers of such shares, such prospectus
shall not include an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or incomplete in the light of the
circumstances then existing;
(e) Cause all such Registrable Securities registered pursuant hereunder
to be listed on each securities exchange on which similar securities issued
by the Company are then listed;
(f) Provide a transfer agent and registrar for all Registrable
Securities registered pursuant to such registration statement and a CUSIP
number for all such Registrable Securities, in each case not later than the
effective date of such registration;
(g) Otherwise use its best efforts to comply with all applicable rules
and regulations of the Commission, and make available to its security
holders, as soon as reasonably practicable, an earnings statement covering
the period of at least twelve months, but not more than eighteen months,
beginning with the first month after the effective date of the Registration
Statement, which earnings statement shall satisfy the provisions of Section
11(a) of the Securities Act; and
(h) In connection with any underwritten offering pursuant to a
registration statement filed pursuant to Section 1.2 hereof, the Company will
enter into an underwriting agreement reasonably necessary to effect the offer
and sale of Common Stock, provided such underwriting agreement contains
customary underwriting provisions and provided further that if the
underwriter so requests the underwriting agreement will contain customary
contribution provisions.
-9-
<PAGE>
1.7 INDEMNIFICATION.
(a) The Company will indemnify each Holder, each of its officers,
directors and partners, legal counsel, and accountants and each person
controlling such Holder within the meaning of Section 15 of the Securities
Act, with respect to which registration, qualification, or compliance has
been effected pursuant to this Section 1, and each underwriter, if any, and
each person who controls within the meaning of Section 15 of the Securities
Act any underwriter, against all expenses, claims, losses, damages, and
liabilities (or actions, proceedings, or settlements in respect thereof)
arising out of or based on any untrue statement (or alleged untrue statement)
of a material fact contained in any prospectus, offering circular, or other
document (including any related registration statement, notification, or the
like) incident to any such registration, qualification, or compliance, or
based on any omission (or alleged omission) to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, or any violation by the Company of the Securities Act or any rule
or regulation thereunder applicable to the Company and relating to action or
inaction required of the Company in connection with any such registration,
qualification, or compliance, and will reimburse each such Holder, each of
its officers, directors, partners, legal counsel, and accountants and each
person controlling such Holder, each such underwriter, and each person who
controls any such underwriter, for any legal and any other expenses
reasonably incurred in connection with investigating and defending or
settling any such claim, loss, damage, liability, or action, provided that
the Company will not be liable in any such case to the extent that any such
claim, loss, damage, liability, or expense arises out of or is based on any
untrue statement or omission based upon written information furnished to the
Company by such Holder or underwriter and stated to be specifically for use
therein. It is agreed that the indemnity agreement contained in this Section
1.7(a) shall not apply to amounts paid in settlement of any such loss,
claim, damage, liability, or action if such settlement is effected without
the consent of the Company (which consent has not been unreasonably withheld).
(b) Each Holder will, if Registrable Securities held by him are
included in the securities as to which such registration, qualification, or
compliance is being effected, indemnify the Company, each of its directors,
officers, partners, legal counsel, and accountants and each underwriter, if
any, of the Company's securities covered by such a registration statement,
each person who controls the Company or such underwriter within the meaning
of Section 15 of the Securities Act, each other such Holder and Other
Stockholder, and each of their officers, directors, and partners, and each
person controlling such Holder or Other Stockholder, against all claims,
losses, damages and liabilities (or actions in respect thereof) arising out
of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any such registration statement,
-10-
<PAGE>
prospectus, offering circular, or other document, or any omission (or alleged
omission) to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, and will reimburse
the Company and such Holders, Other Stockholders, directors, officers,
partners, legal counsel, and accountants, persons, underwriters, or control
persons for any legal and any other expenses reasonably incurred in
connection with investigating or defending any such claim, loss, damage,
liability, or action, in each case to the extent, but only to the extent,
that such untrue statement (or alleged untrue statement) or omission (or
alleged omission) is made in such registration statement, prospectus,
offering circular, or other document in reliance upon and in conformity with
written information furnished to the Company by such Holder and stated to be
specifically for use therein provided, however, that the obligations of such
Holder hereunder shall not apply to amounts paid in settlement of any such
claims, losses, damages, or liabilities (or actions in respect thereof) if
such settlement is effected without the consent of such Holder (which consent
shall not be unreasonably withheld).
(c) Each party entitled to indemnification under this Section 1.7 (the
"Indemnified Party") shall give notice to the party required to provide
indemnification (the "Indemnifying Party") promptly after such Indemnified
Party has actual knowledge of any claim as to which indemnity may be sought,
and shall permit the Indemnifying Party to assume the defense of such claim
or any litigation resulting therefrom, provided that counsel for the
Indemnifying Party, who shall conduct the defense of such claim or any
litigation resulting therefrom, shall be approved by the Indemnified Party
(whose approval shall not unreasonably be withheld), and the Indemnified
Party may participate in such defense at such party's expense, and provided
further that the failure of any Indemnified Party to give notice as provided
herein shall not relieve the Indemnifying Party of its obligations under this
Section 1, to the extent such failure is not prejudicial. No Indemnifying
Party, in the defense of any such claim or litigation, shall, except with the
consent of each Indemnified Party, consent to entry of any judgment or enter
into any settlement that does not include as an unconditional term thereof
the giving by the claimant or plaintiff to such Indemnified Party of a
release from all liability in respect to such claim or litigation. Each
Indemnified Party shall furnish such information regarding itself or the
claim in question as an Indemnifying Party may reasonably request in writing
and as shall be reasonably required in connection with defense of such claim
and litigation resulting therefrom.
(d) If the indemnification provided for in this Section 1.7 is held by
a court of competent jurisdiction to be unavailable to an Indemnified Party
with respect to any loss, liability, claim, damage, or expense referred to
therein, then the Indemnifying Party, in lieu of indemnifying such
Indemnified Party hereunder, shall contribute to the amount paid or payable
by such
-11-
<PAGE>
Indemnified Party as a result of such loss, liability, claim, damage, or
expense in such proportion as is appropriate to reflect the relative fault of
the Indemnifying Party on the one hand and of the Indemnified Party on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage, or expense as well as any other relevant
equitable considerations. The relative fault of the Indemnifying Party and of
the Indemnified Party shall be determined by reference to, among other
things, whether the untrue or alleged untrue statement of a material fact or
the omission to state a material fact relates to information supplied by the
Indemnifying Party or by the Indemnified Party and the parties' relative
intent, knowledge, access to information, and opportunity to correct or
prevent such statement or omission.
(e) Notwithstanding the foregoing, to the extent that the provisions on
indemnification and contribution contained in the underwriting agreement
entered into in connection with the underwritten public offering are in
conflict with the foregoing provisions, the provisions in the underwriting
agreement shall control.
1.8 INFORMATION BY HOLDER. Each Holder of Registrable Securities shall
furnish to the Company such information regarding such Holder and the
distribution proposed by such Holder as the Company may reasonably request in
writing and as shall be reasonably required in connection with any
registration, qualification, or compliance referred to in this Section 1.
1.9 LIMITATIONS ON REGISTRATION OF ISSUES OF SECURITIES. From and
after the date of this Agreement, the Company shall not, without the prior
written consent of a majority in interest of the Holders, enter into any
agreement with any holder or prospective holder of any securities of the
Company giving such holder or prospective holder any registration rights the
terms of which are more favorable than the registration rights granted to the
Holders hereunder.
1.10 RULE 144 REPORTING. With a view to making available the benefits
of certain rules and regulations of the Commission that may permit the sale
of the Restricted Securities to the public without registration, the Company
agrees to use its best efforts to:
(a) Make and keep public information regarding the Company available as
those terms are understood and defined in Rule 144 under the Securities Act;
(b) File with the Commission in a timely manner all reports and other
documents required of the Company under the Securities Act and the Exchange
Act at any time after it has become subject to such reporting requirements;
-12-
<PAGE>
(c) So long as a Holder owns any Restricted Securities, furnish to the
Holder forthwith upon written request a written statement by the Company as
to its compliance with the reporting requirements of Rule 144, and of the
Securities Act and the Exchange Act (at any time after it has become subject
to such reporting requirements), a copy of the most recent annual or
quarterly report of the Company, and such other reports and documents so
filed as a Holder may reasonably request in availing itself of any rule or
regulation of the Commission allowing a Holder to sell any such securities
without registration.
1.11 TRANSFER OR ASSIGNMENT OF REGISTRATION RIGHTS. The rights to cause
the Company to register securities granted to a Holder by the Company under
this Section 1 may be transferred or assigned by a Holder only to a
transferee or assignee of not less than 250,000 shares of Registrable
Securities (as presently constituted and subject to subsequent adjustments
for stock splits, stock dividends, reverse stock splits, and the like),
provided that the Company is given written notice at the time of or within a
reasonable time after such transfer or assignment, stating the name and
address of the transferee or assignee and identifying the securities with
respect to which such registration rights are being transferred or assigned,
and, provided further, that the transferee or assignee of such rights assumes
the obligations of such Holder under this Section 1.
1.12 ALLOCATION OF REGISTRATION OPPORTUNITIES. In any circumstance in
which all of the Registrable Securities and other shares of Common Stock of
the Company (including shares of Common Stock issued or issuable upon
conversion of shares of any currently unissued series of Preferred Stock of
the Company) with registration rights (the "Other Shares") requested to be
included in a registration on behalf of the Holders or other selling
stockholders cannot be so included as a result of limitations of the
aggregate number of shares of Registrable Securities and Other Shares that
may be so included, the number of shares of Registrable Securities and Other
Shares that may be so included shall be allocated among the Holders and other
selling stockholders requesting inclusion of shares pro rata on the basis of
the number of shares of Registrable Securities and Other Shares that would be
held by such Holders and other selling stockholders, assuming conversion;
provided, however, so that such allocation shall not operate to reduce the
aggregate number of Registrable Securities and Other Shares to be included in
such registration, if any Holder or other selling stockholder does not
request inclusion of the maximum number of shares of Registrable Securities
and Other Shares allocated to him pursuant to the above-described procedure,
the remaining portion of his allocation shall be reallocated among those
requesting Holders and other selling stockholders whose allocations did not
satisfy their requests pro rata on the basis of the number of shares of
Registrable Securities and Other Shares which would be held by such Holders
and other selling stockholders, assuming conversion, and this procedure shall
be repeated until all of the shares of
-13-
<PAGE>
Registrable Securities and Other Shares which may be included in the
registration on behalf of the Holders and other selling stockholders have
been so allocated. The Company shall not limit the number of Registrable
Securities to be included in a registration pursuant to this Agreement in
order to include shares held by stockholders with no registration rights or
to include founder's stock or any other shares of stock issued to employees,
officers, directors, or consultants, or with respect to registrations under
Sections 1.5 or 1.8 hereof, in order to include in such registration
securities registered for the Company's own account.
1.13 DELAY OF REGISTRATION. No Holder shall have any right to take any
action to restrain, enjoin, or otherwise delay any registration as the result
of any controversy that might arise with respect to the interpretation or
implementation of this Section 1.
1.14 TERMINATION OF REGISTRATION RIGHTS. The right of any Holder to
request registration or inclusion in any registration pursuant to Section
1.2, 1.3 or 1.5 shall terminate five (5) years after the date of this
Agreement.
SECTION 2
COVENANTS OF THE COMPANY
The Company hereby covenants and agrees, so long as any Holder owns any
Registrable Securities, as follows:
2.1 BASIC FINANCIAL INFORMATION. The Company will furnish to each
Holder copies of its annual reports on Form 10-K, quarterly reports on Form
10-Q and current reports on Form 8-K, in each case within two (2) business
days of filing.
2.2 ADDITIONAL INFORMATION AND RIGHTS.
(a) The Company will permit any Holder, so long as such Holder (or its
representative) owns at least 250,000 Shares, or such number of shares of
Common Stock issued upon conversion of 250,000 or more Shares, or any
combination thereof (as presently constituted and subject to subsequent
adjustment for stock splits, stock dividends, reverse stock splits,
recapitalizations and the like) and to each Holder which represents that it
is a "venture capital operating company" for purposes of Department of Labor
Regulation Section 2510.3-101, who requests them (a Significant Holder'') (or
a representative of any Significant Holder) to visit and inspect any of the
properties of the Company, including its books of account and other records
(and make copies thereof and take extracts therefrom), and to discuss its
affairs, finances and accounts with the Company's officers and its
independent public accountants, all at such reasonable times and as often as
any such person may reasonably request.
-14-
<PAGE>
(b) The Company will deliver the reports described below in this
Section 2.2 to each Significant Holder:
(i) As soon as practical after the end of each month and in any event
within thirty (30) days thereafter a consolidated balance sheet of the
Company and its subsidiaries, if any, as at the end of such month and
consolidated statements of income and cash flows of the Company and its
subsidiaries, for each month and for the current fiscal year of the Company
to date, all subject to normal year-end audit adjustments, prepared in
accordance with generally accepted accounting principles consistently applied
and certified by the principal financial or accounting officer of the
Company, together with a comparison of such statements to the corresponding
periods of the prior fiscal year and to the Company's operating plan then in
effect and approved by its Board of Directors.
(ii) Annually (but in any event within forty-five (45) days after the
commencement of fiscal year 1998 and at least thirty (30) days prior to the
commencement of each fiscal year of the Company thereafter) the financial
plan of the Company, in such manner and form as approved by the Board of
Directors of the Company, which financial plan shall include a projection of
income and a projected cash flow statement for such fiscal year and a
projected balance sheet as of the end of such fiscal year. Any material
changes in such business plan shall be submitted as promptly as practicable
after such changes have been approved by the Board of Directors of the
Company.
(iii) With reasonable promptness, such other information and data with
respect to the Company and its subsidiaries as any such person may from time
to time reasonably request, provided that the Company possesses such
information or may obtain such information without unreasonable expense.
(iv) As soon as practicable after the end of each fiscal year and in any
event within ninety (90) days thereafter, (i) a report from the Company
reporting on compliance with the terms and conditions of this Agreement and
any other agreement pursuant to which the Company has borrowed money or sold
its securities and (ii) a copy of the annual management review letter of the
Company's independent public accountants.
(v) As soon as practicable after transmission or occurrence and in any
event within ten (10) days thereof, copies of any reports or communications
delivered to any class of the Company's security holders or broadly to the
financial community, including any filings by the Company with any securities
exchange, the Securities and Exchange Commission or the National Association
of Securities Dealers, Inc.
(c) The provisions of Section 2.1 and this Section 2.2 shall not be in
limitation of any rights which any Holder or Significant Holder may have with
respect to the books and records
-15-
<PAGE>
of the Company and its subsidiaries, or to inspect their properties or
discuss their affairs, finances and accounts, under the laws of the
jurisdictions in which they are incorporated.
(d) Anything in Section 2 to the contrary notwithstanding, no Holder or
Significant Holder by reason of this Agreement shall have access to any trade
secrets or classified information of the Company. Each Significant Holder
hereby agrees to hold in confidence and trust and not to misuse or disclose
any confidential information provided pursuant to this Section 2.2. The
Company shall not be required to comply with this Section 2.2 in respect of
any Holder whom the Company reasonably determines to be a competitor or an
officer, employee, director or greater than 10% shareholder of a competitor.
(e) Each Holder who represents to the Company that it is a "venture
capital operating company" for purposes of Department of Labor Regulation
Section 2510.3-101 shall in addition have the right to consult with and
advise the officers of the Company as to the management of the Company.
2.3 RIGHT OF FIRST REFUSAL. The Company hereby grants to each Holder
who owns any Shares or any shares of Common Stock issued upon conversion of
the Shares the right of first refusal to purchase a pro rata share of New
Securities (as defined in this Section 2.3) which the Company may, from time
to time, propose to sell and issue. A Holder's pro rata share, for purposes
of this right of first refusal, is the ratio of the number of shares of
Common Stock issued or issuable upon conversion of all Shares owned by such
Holder immediately prior to the issuance of New Securities, assuming full
conversion of the Shares held by such Holder, to the total number of shares
of Common Stock outstanding immediately prior to the issuance of New
Securities, assuming full conversion of the Shares and exercise of all
outstanding rights, options and warrants to acquire Common Stock of the
Company. Each Holder shall have a right of over-allotment such that if any
Holder fails to exercise its right hereunder to purchase its pro rata share
of New Securities, the other Holders may purchase the non-purchasing Holder's
portion on a pro rata basis within ten (10) days from the date such
non-purchasing Holder fails to exercise its right hereunder to purchase its
pro rata share of New Securities. This right of first refusal shall be
subject to the following provisions:
(a) "New Securities" shall mean any capital stock (including Common
Stock and/or Preferred Stock) of the Company whether now authorized or not,
and rights, options or warrants to purchase such capital stock, and
securities of any type whatsoever that are, or may become, convertible into
capital stock; provided that the term "New Securities" does not include (i)
securities purchased under the Series B Agreement; (ii) securities issued
upon conversion of the Shares; (iii) securities issued pursuant to the
acquisition of another business entity or business segment of any such entity
by the Company by merger
-16-
<PAGE>
purchase of substantially all the assets or other reorganization whereby the
Company will own more than fifty percent (50%) of the voting power of such
business entity or business segment of any such entity; (iv) any borrowings,
direct or indirect, from financial institutions or other persons by the
Company, whether or not presently authorized, including any type of loan or
payment evidenced by any type of debt instrument, provided such borrowings do
not have any equity features including warrants, convertible into capital
stock of the Company; (v) securities issued to employees, consultants,
officers or directors of the Company pursuant to any stock option, stock
purchase or stock bonus plan, agreement or arrangement approved by the Board
of Directors; (vi) securities issued to vendors or customers or to other
persons in similar commercial situations with the Company if such issuance is
approved by the Board of Directors; (vii) securities issued in connection
with obtaining lease financing, whether issued to a lessor, guarantor or
other person; (viii) securities issued in a public offering pursuant to a
registration under the Securities Act with an aggregate offering price to the
public of at least $5,000,000; (ix) securities issued in connection with any
stock split, stock dividend or recapitalization of the Company; and (x) any
right, option or warrant to acquire any security convertible into the
securities excluded from the definition of New Securities pursuant to
subsections (i) through (ix) above.
(b) In the event the Company proposes to undertake an issuance of New
Securities, it shall give each Holder written notice of its intention,
describing the type of New Securities, and their price and the general terms
upon which the Company proposes to issue the same. Each Holder shall have
twenty (20) days after any such notice is mailed or delivered to agree to
purchase such Holder's pro rata share of such New Securities for the price
and upon the terms specified in the notice by giving written notice to the
Company and stating therein the quantity of New Securities to be purchased.
(c) In the event the Holders fail to exercise fully the right of first
refusal within such twenty (20) day period and after the expiration of the
ten-day period for the exercise of the over-allotment provisions of this
Section 2.3, the Company shall have one hundred twenty (120) days thereafter
to sell or enter into an agreement (pursuant to which the sale of New
Securities covered thereby shall be closed, if at all, within one hundred
twenty (120) days from the date of such agreement) to sell the New Securities
respecting which the Holders' right of first refusal option set forth in this
Section 2.3 was not exercised, at a price and upon terms no more favorable to
the purchasers thereof than specified in the Company's notice to Holders
pursuant to Section 2.3(b). In the event the Company has not sold within such
120-day period or entered into an agreement to sell the New Securities in
accordance with the foregoing within one hundred twenty (120) days from the
date of such
-17-
<PAGE>
agreement, the Company shall not thereafter issue or sell any New Securities,
without first again offering such securities to the Holders in the manner
provided in Section 2.3(b) above.
(d) The right of first refusal granted under this Agreement shall
expire seven (7) years from the date of this Agreement.
(e) The right of first refusal set forth in this Section 2.3 may not be
assigned or transferred, except that (i) such right is assignable by each
Holder to any wholly owned subsidiary or parent of, or to any corporation or
entity that is, within the meaning of the Securities Act, controlling,
controlled by or under common control with, any such Holder, and (ii) such
right is assignable between and among any of the Holders.
2.4 INDEPENDENT ACCOUNTANTS. The Company will retain independent
public accountants of recognized national standing who shall certify the
Company's financial statements at the end of each fiscal year. In the event
the services of the independent public accountants so selected, or any firm
of independent public accountants hereafter employed by the Company, are
terminated, the Company will promptly thereafter notify the Holders and will
request the firm of independent public accountants whose services are
terminated to deliver to the Holders a letter from such firm setting forth
the reasons for the termination of their services. In the event of such
termination, the Company will promptly thereafter engage another firm of
independent public accountants of recognized national standing. In its notice
to the Holders the Company shall state whether the change of accountants was
recommended or approved by the Board of Directors of the Company or any
committee thereof.
2.5 ATTENDANCE AT BOARD MEETINGS. Each Significant Holder (or its
representative) shall have the right to attend all meetings of the Board of
Directors, which shall be held on a quarterly basis, in a non-voting observer
capacity, to receive notice of such meetings and to receive the information
provided by the Company to the Board of Directors; provided, however, that
the Company may require as a condition precedent to any Holder's rights under
this Section 2.5 that each person proposing to attend any meeting of the
Board of Directors and each person to have access to any of the information
provided by the Company to the Board of Directors shall agree to hold in
confidence and trust and to act in a fiduciary manner with respect to all
information so received during such meetings or otherwise; and, provided
further, that the Company reserves the right not to provide information and
to exclude such significant Holder (or its representative) from any meeting
or portion thereof if delivery of such information or attendance at such
meeting by such Significant Holder (or its representatives) would result in
disclosure of trade secrets to such holder or its representative or would
adversely affect the attorney-client privilege between the Company and its
counsel or if such Significant Holder or its representative is a direct
competitor of the Company.
-18-
<PAGE>
2.6 KEY PERSON LIFE INSURANCE. The Company has as of the date hereof
or shall within 90 days of the date hereof use its best efforts to obtain
from financially sound and reputable insurers term life insurance on the
lives of Neil Gibbons and Daniel Huber in the amount of $1,500,000 each,
except as otherwise decided in accordance with policies adopted by the
Company's Board of Directors. The Company will cause to be maintained the
term life insurance required by this Section 2.6 hereof, except as otherwise
decided in accordance with policies adopted by the Company's Board of
Directors. Such policies shall name the Company as loss payee and shall not
be cancelable by the Company without prior approval of the Board of Directors.
2.7 COMPLIANCE WITH REQUIREMENTS OF GOVERNMENT AUTHORITIES. The
Company and all its subsidiaries shall duly observe and conform to all valid
requirements of governmental authorities relating to the conduct of their
businesses or to their properties or assets.
2.8 MAINTENANCE OF CORPORATE EXISTENCE, ETC. The Company shall
maintain in full force and effect its corporate existence, rights and
franchises and all licenses and other rights in or to use patents,
processes, licenses, trademarks, trade names or copyrights owned or
possessed by it or any subsidiary and deemed by the Company to be necessary
to the conduct of their business.
2.9 SUBSTANTIAL CHANGES. The Company shall not, without the approval
of the holders of at least a majority of the Shares, enter into any agreement
or understanding with any other person regarding the merger, liquidation or
sale of all or substantially all of the assets of the Company or engage in
any business activity which is fundamentally different from that in which it
is currently engaged.
2.10 AMENDMENT OF CORPORATE DOCUMENTS. The company shall not, without
the approval of the holders of at least a majority of the Shares, amend its
Certification of Incorporation, Certificate of Designations or Bylaws.
2.11 STOCK ARRANGEMENTS. The Company shall not, without the approval
of the holders of at least a majority of the Shares, declare or pay any
dividends to any stockholders of the Company, create any new security, issue
or repurchase any of its capital stock, or grant an option or right to
subscribe for, purchase or acquire any of its capital stock; provided,
however, that approval of the holders of the Shares shall not be required for
the Company to issue, repurchase or grant options or rights to subscribe for,
purchase or acquire shares of its capital stock if such shares would
represent less than five percent (5%) of the Company's outstanding capital
stock on a fully diluted basis immediately prior to such issuance, repurchase
or grant. Each acquisition of any shares of capital stock of the Company or
any option or right to acquire any shares of capital stock of the Company
will be conditioned upon the execution and delivery by
-19-
<PAGE>
the Company and such purchaser of an agreement substantially in a form
approved by the holders of at least a majority of the Shares and the Board of
Directors of the Company.
2.12 ACQUISITIONS. The Company shall not, without the prior approval
of the holders of at least a majority of the Shares, acquire any assets
having an aggregate value greater than $200,000 or any capital stock of
another business entity, in each case other than as provided for in the
Company's approved budget.
2.13 INDEBTEDNESS. The Company shall not, without the prior approval
of the holders of at least a majority of the Shares, incur any indebtedness
in excess of amounts contained in the Company's approved budget, other than
trade credit incurred in the ordinary course of business.
2.14 EXTENSION OF CREDIT. The Company shall not, without the prior
approval of the holders of at least a majority of the Shares, extend credit
by any method or in any form or manner other than open account credit
extended to customers in the ordinary course of business.
2.15 COMPENSATION OF EMPLOYEES. The Company shall not, without the
prior approval of the holders of at least a majority of the Shares, (i) vary
the terms of employment or the compensation payable to any of its directors
or employees who are paid more than SFr 10,000 per month (other than Neil
Gibbons and Daniel Huber) except as provided for in the Company's approved
budget or (ii) vary the terms of employment or the compensation payable to
Neil Gibbons and Daniel Huber from that approved by the Board of Directors of
the Company at its most recent annual meeting.
2.16 TRANSACTIONS WITH AFFILIATES. The Company shall not, without the
approval of the holders of at least a majority of the Shares and the
disinterested members of the Company's Board of Directors, engage in any
loans, leases, contracts or other transactions or vary the terms of any
existing agreements with any director, officer, key employee or stockholder
of the Company, or any member of any such person's immediate family,
including the parents, spouse, children and other relatives of any such
person.
2.17 TERMINATION OF COVENANTS. The Covenants contained in this Section
2 shall be terminable by the Company with respect to the Stockholders in the
event, and only in such event, that the Stockholders fail to deliver to the
Company when due the full purchase price for the Shares, as set forth in
Section 1.2 of the Series R Agreement; provided, however, that if such
failure by the Stockholders to deliver the full purchase price for the Shares
is due to the breach by the Company, Neil Gibbons or Daniel Huber of any
material term of this Agreement, the Series B Agreement or that certain
Co-Sale Agreement of even date herewith among the Company, the Stockholders,
Neil Gibbons and Daniel
-20-
<PAGE>
Huber, then the covenants contained herein shall not be terminable by the
Company.
SECTION 3
MISCELLANEOUS
3.1 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.
3.2 SUCCESSORS AND ASSIGNS. Except as otherwise expressly provided
herein, the provisions hereof shall inure to the benefit of, and be binding
upon, the successors, assigns, heirs, executors and administrators of the
parties hereto. The Company hereby acknowledges and agrees that each
Stockholder may assign any right or rights that such Stockholder may have by
reason of this Agreement to one or more affiliates of such Stockholder or to
one or more persons or entities organized by the Stockholders for the purpose
of investing in the Company's 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 Stockholders retain a majority of the Company's
Series B Preferred Stock.
3.3 ENTIRE AGREEMENT; AMENDMENT; WAIVER. This Agreement (including the
Exhibits hereto) constitutes the full and entire understanding and agreement
between the parties with regard to the subjects hereof and thereof. Neither
this Agreement nor any term hereof may be amended, waived, discharged or
terminated, except by a written instrument signed by the Company and the
holders of at least a majority of the Registrable Securities and any such
amendment, waiver, discharge or termination shall be binding on all the
Holders, but in no event shall be the obligation of any Holder hereunder be
materially increased, except upon the written consent of such Holder.
3.4 NOTICES, ETC. All notices and other communications required or
permitted hereunder shall be in writing and shall be delivered personally by
hand or nationally recognized courier addressed (a) if to a Holder, as
indicated on the list of Stockholders attached hereto as Exhibit A, or at
such other address as such Holder or permitted assignee shall have furnished
to the Company in writing, or (b) if to the Company, at 12 Avenue Des
Morgines, 1213 Petit-Lancy 1, Geneva, Switzerland, or at such other address
as the Company shall have furnished to each Holder in writing. All such
notices and other written communications shall be effective (i) if personally
delivered, upon delivery and
-21-
<PAGE>
(ii) if delivered by courier, one (1) day after being entrusted to a
reputable overnight delivery service.
3.5 DELAYS OR OMISSIONS. No delay or omission to exercise any right,
power or remedy accruing to any party, upon any breach or default under this
Agreement shall impair any such right, power or remedy of such party nor
shall it be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default thereafter
occurring; nor shall any waiver of any single breach or default be deemed a
waiver of any other breach or default therefore or thereafter occurring. Any
waiver, permit, consent or approval of any kind or character on the part of
any party of any breach or default under this Agreement or any waiver on the
part of any party of any provisions or conditions of this Agreement must be
made in writing and shall be effective only to the extent specifically set
forth in such writing. All remedies, either under this Agreement or by law or
otherwise afforded to any party, shall be cumulative and not alternative.
3.6 RIGHTS; SEPARABILITY. Unless otherwise expressly provided herein,
a Holder's rights hereunder are several rights, not rights jointly held with
any of the other Holders. In case any provision of this Agreement shall be
invalid, illegal or unenforceable, the validity, legality and enforceability
of the remaining provisions shall not in any way be affected or impaired
thereby.
3.7 INFORMATION CONFIDENTIAL. Each Stockholder acknowledges that the
information received by it pursuant hereto may be confidential and for its
use only, and it will not use such confidential information in violation of
the Exchange Act or reproduce, disclose or disseminate such information to
any other person (other than its employees or agents having a need to know
the contents of such information, and its attorneys), except in connection
with the exercise of rights under this Agreement, unless the Company has made
such information available to the public generally or such Stockholder is
required to disclose such information by a governmental body.
3.8 TITLES AND SUBTITLES. The titles of the paragraphs and
subparagraphs of this Agreement are for convenience of reference only and are
not to be considered in construing this Agreement.
-22-
<PAGE>
3.9 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be an original, but all of which together
shall constitute one instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Investors
Rights Agreement effective as of the day and year first above written.
VIRTUAL TELECOM, INC.
By: /s/ N. Gibbons /s/ D. Huber
------------------------------
N. Gibbons D. Huber
Title: CEO CFO
---------------------------
STOCKHOLDERS:
ALTA-BERKELEY V, C.V.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ALTA-BERKELEY V, S BY S, C.V.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
-23-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Investors
Rights Agreement effective as of the day and year first above written.
VIRTUAL TELECOM, INC.
By:
---------------------------------
Title:
------------------------------
STOCKHOLDERS:
ALTA-BERKELEY V, C.V.
By: /s/
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ALTA-BERKELEY V, S BY S, C.V.
By: /s/
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ALTA-BERKELEY NORDIC PARTNERS,
KY
By: /s/
---------------------------------
Name:
-------------------------------
Title:
------------------------------
-23-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Investors
Rights Agreement effective as of the day and year first above written.
VIRTUAL TELECOM, INC.
By:
---------------------------------
Title:
------------------------------
STOCKHOLDERS:
ALTA-BERKELEY V, C.V.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ALTA-BERKELEY V, S BY S, C.V.
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
ALTA-BERKELEY NORDIC PARTNERS,
KY
CapMan Capital Management
Oy as general partner
By: /s/
---------------------------------
Name: Ari Tolppanen
-------------------------------
Title: President
------------------------------
-23-
<PAGE>
ALTA-BERKELEY NORDIC PARTNERS,
KY
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
By:
---------------------------------
Name:
-------------------------------
Title:
------------------------------
-24-
<PAGE>
EXHIBIT A
List of Stockholders
Alta-Berkeley, V, C.V.
[Address]
Alta-Berkeley V, S by S, C.V.
[Address]
Alta-Berkeley Nordic Partners, KY
[Address]
-25-
<PAGE>
EXHIBIT 10.13
SOFTWARE LICENSE AGREEMENT
THIS SOFTWARE LICENSE AGREEMENT ("Agreement") is entered into as of
February 27, 1998 between IQ NET CORPORATION, a California corporation
("Licensor"), and VIRTUAL TELECOM SA, a Swiss corporation ("Licensee").
R E C I T A L S
A. Licensor has developed operating software (referred to herein as
"IQ Suite Software") for purposes of offering an Internet financial data
service under the mark "IQ Suite" by means of gathering raw data concerning
current and historical price and volume information on US and foreign
securities, currencies and commodities and formatting that data in a usable
charts, graphs and other forms for delivery over the Internet.
B. Licensee desires to acquire from Licensor, and Licensor desires to
grant to Licensee, the right to IQ Suite Software for Licensee's use in
delivering a similar financial data service over the Internet both directly
to the public under Licensee's own marks and to financial institutions on an
OEM basis who will offer the service to their own clients under their own
marks.
A G R E E M E N T
It as agreed as follows:
1. LICENSES.
1.1 GRANT. Subject to the terms hereof, Licensor hereby grants to
Licensee and Licensee hereby accepts the licenses (collectively referred to
herein as the "License"), as set forth in Sections 1.1.1 and 1.1.2 below, to
use the IQ Suite Software for Licensee's use in delivering a financial data
service over the Internet both directly to the public and the securities
industry under Licensee's own marks and to financial institutions on an OEM
basis who will offer the service under their own marks to their own clients.
As used in this Agreement, the term IQ Suite Software shall mean the
operating software program currently utilized by Licensor for its financial
data service identified by Licensor as "IQ Suite," including all computer
programs, excluding any source codes; all files, including input and output
materials; all documentation related to such computer programs and files; all
media upon which any such computer programs, files and documentation are
located (including tapes, disks and other storage media); and all related
material. Licensee expressly understands and acknowledges that,
notwithstanding any other provision of this Agreement, Licensee will not be
entitled to receive or inspect any source code for the software. As used
-1-
<PAGE>
in this Agreement, the term "Licensed Product" shall mean Licensee's
financial data service incorporating the IQ Suite Software.
1.1.1 EXCLUSIVE LICENSE. Licensor hereby grants the
License to Licensee on an exclusive basis for the countries and area of
Europe (referred to herein as the "Exclusive Territory"). Except as
otherwise provided in Section 1.6, Licensor agrees not to market or promote a
financial data service based on its IQ Suite Software in the Exclusive
Territory. Licensor represents that it has not authorized, and agrees that
it shall not authorize, any other party to utilize the IQ Suite Software for
purposes of delivering financial data to parties in the Exclusive Territory;
provided, however, Licensor reserves the right to license the IQ Suite
Software to securities brokerage firms, banks and financial institutions,
accounting firms, and other financial firms in the U.S. for their use in
offering financial data to parties in the Exclusive Territory as an integral
part of the firm's provision of retail securities brokerage services in the
Exclusive Territory based on the Licensor's proprietary transactional systems
also licensed by Licensor to the firm.
1.1.2 NONEXCLUSIVE LICENSE. Licensor hereby grants
the License to Licensee on a nonexclusive basis for all countries and areas
outside of the Exclusive Territory except for the countries and area of North
America and Asia. As used in this Agreement, the term "Excluded Territory"
shall mean the countries and area of North America and Asia and the term
"Nonexclusive Territory" shall mean all areas of the World other than the
Exclusive Territory and the Excluded Territory. Licensee agrees not to
actively market or promote its financial data service utilizing the IQ Suite
Software in the Excluded Territory and, as provided in Section 3.3 below, to
pay Licensor compensation for each party residing in the Excluded Territory
who otherwise subscribes for the Licensee' financial data service; provided,
however, Licensee shall have the right on a nonexclusive basis to sublicense
the Licensed Product to securities brokerage firms, banks and financial
institutions, accounting firms, and other financial firms in the Exclusive
Territory for their use in offering financial data to parties in the Excluded
Territory as an integral part of the firm's provision of retail securities
brokerage services to parties in the Excluded Territory based on a
transactional system also licensed by Licensee to the firm.
1.2 IMPROVEMENTS. Any modification of, development of or
improvement on a currently offered feature of the IQ Suite Software by, or
obtained by, Licensor, whether or not copyrightable and whether presently
existing or hereafter arising, shall be promptly communicated to Licensee and
be subject to the terms of the License.
1.3 ALLEGED INFRINGEMENT BY LICENSEE. If any suit, action or other
proceeding shall be brought or threatened against Licensee involving any
claim of infringement of any copyright or other proprietary right held by a
third party based upon Licensee's use of the Licensed Product, but excluding
any claim based upon Licensee's use of its marks, intellectual property other
than IQ Suite Software, or business practices, Licensee shall promptly notify
Licensor and deliver to Licensor copies of all papers which shall have been
served in any such suit, action or other proceeding. Licensor shall have the
-2-
<PAGE>
right and obligation to dispose of any such claim at Licensor's expense.
Licensee shall cooperate fully with Licensor in pursuing such measures as
Licensor may elect, provided Licensor acts in such a manner as to protect
Licensee's interest in the License at all times. To the extent a conflict
exists between any proposed action of Licensor and any proprietary rights of
Licensee, or rights of Licensee under this Agreement, Licensor shall not take
such action without first consulting with Licensee as to such action and
shall fully cooperate with Licensee in the protection of such rights.
Licensor shall hold Licensee harmless from and against any and all Losses
(but not the fees or expenses of any counsel retained by Licensee to
represent its separate interests) incurred by Licensee in connection with any
of the foregoing claims of infringement.
1.5 SUBLICENSE RIGHTS. Except as otherwise provided herein,
Licensee may sublicense its rights under the License, and Licensee's rights
under the License may be asserted by any such sublicensee, in connection with
Licensee's grant of a sublicense to a banking or securities brokerage firm
for that parties use in hosting an Internet site for purposes of delivering
financial data service utilizing the IQ Suite Software to its own clientele.
Licensee shall also confer with Licensor from time to time regarding the
status of such sublicensing arrangements and provide Licensor with copies of
any sublicense agreements.
1.6 RIGHT OF FIRST REFUSAL. In the event Licensor develops any
new features to its IQ Suite Software or develops any other operating
software or systems relating to the provision of services to the financial
industry (collectively referred to herein as a "New Product"), than Licensee
shall have the right of first refusal to bid on any license for use of the
New Product in the Exclusive Territory. Licensor shall provide Licensee with
the written terms of any proposed license for the New Product and Licensee
shall have 30 days to accept the offer by delivering written notice of
acceptance of the proposed terms to Licensor. If Licensee fails to accept
the offer within the 30 day period, Licensor shall have the right to offer
the license rights to the New Product in the Exclusive Territory to another
party on the same terms and conditions as offered to Licensee. However, if
after Licensee fails to accept the offer and Licensor materially changes the
terms of the offer, Licensor must reoffer the license to Licensee under a new
30 day acceptance period.
2. OBLIGATIONS AND REPRESENTATIONS OF LICENSOR AND LICENSEE.
2.1 INTEGRATION. In consideration of the payment set forth in
Section 3.1 below, Licensor shall (i) conduct certain clean-up of the IQ
Suite Software as the Licensee may reasonably request in writing, (ii)
integrate the IQ Suite Software program into Licensee's existing financial
data service, including those cosmetic changes to the front-end of the
financial data service as Licensee shall reasonably request for purposes of
identifying the service under Licensee' marks, and (iii) deliver to Licensee
electronically a standardized version of the IQ Suite Software, pursuant to
Licensee's reasonable criteria, suitable for use by a financial institution
in offering the Licensed Product on an OEM basis to its own clients under the
firm's own mark. Licensor shall use its best efforts to complete the
clean-up and
-3-
<PAGE>
system integration referred to in subparts (i) and (ii) and deliver the
standardized program referred to in subpart (iii) no later than 30 days
following the execution of this Agreement.
2.2 MAINTENANCE AND ASSISTANCE. Licensor shall for no additional
consideration install, and assist the Licensee in installing for its OEM
customers, on a timely basis, all upgrades and modifications to the IQ Suite
Software conducted by Licensor from time to time throughout the term of this
Agreement. In addition, and in consideration of a consulting fee to be
agreed to by the parties but which in any case shall be on commercially
reasonable terms, Licensor shall provide Licensee with technical assistance
in connection with Licensee' use of the Licensed Product, including (i)
cosmetic modifications to the front-end of the Licensed Product as Licensee
may request from time to time, and (ii) assistance in integrating the
Licensed Product to the operating systems of the Licensee's OEM customers.
2.2 COPYRIGHT NOTICES. Licensee shall display as part of any
financial data service utilizing the IQ Suite Software offered by Licensee
hereunder, copyright notices as may be reasonably requested by Licensor in
writing for purposes of protecting Licensor's copyrights.
2.3 OWNERSHIP. Licensor represents that it owns solely all of the
rights, title and interests in and to the IQ Suite Software free and clear of
all mortgages, liens, claims and encumbrances. Licensor has no reason to
believe that it has violated or, by reason of this Agreement, would violate
any of the patents, trademarks, service marks, trade names, copyrights, trade
secrets or other proprietary rights of any other person or entity. Licensor
is not 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 Licensee's use of the License Product.
3. LICENSE CONSIDERATION. As consideration for the License, Licensee
shall pay to Licensor the following:
3.1 INITIAL LICENSE FEE. Licensee shall pay Licensor the sum of
Thirty Thousand Dollars ($30,000.00) in consideration of Licensor's grant of
the License and provision of integration and clean-up services referred to in
Section 2.1 above, payable as follows: $10,000 upon execution of this
Agreement and $20,000 upon completion of clean-up and integration.
3.2 IQ SUITE LIGHT SOFTWARE INTEGRATION FEE. At such time as
Licensee provides written notice of its election to integrate Licensor's IQ
Suite Light Software containing the features set forth on Attachment 1 into
Licensee's financial data service, Licensee shall pay Licensor the sum of Ten
Thousand Dollars ($10,000.00) in consideration of Licensor's modification and
integration of the IQ Suite Light Software into Licensee's financial data
service.
-4-
<PAGE>
3.3 CONTINUING ROYALTY. Licensee shall pay to Licensor a sales
royalty equal to (i) twenty percent (20%) on net sales derived by Licensee
through its commercial use of the Licensed Product to residents of the
Exclusive Territory and Nonexclusive Territory; and (ii) the greater of $5.00
per subscriber or sixty percent (60%) on net sales derived by Licensee
through its commercial use of the Licensed Product to residents of the
Excluded Territory. For purposes of this Agreement, the term "net sales"
shall mean be the gross receipts by Licensee from its provision of the
Licensed Product less all fees paid to stock exchanges and data vendors.
The sales royalty shall be payable within forty-five (45) days of the end of
each calendar quarter or portion thereof falling within the term of this
Agreement and shall be accompanied by a report describing in reasonable
detail the basis for Licensee's determination of the amount of sales royalty
payable hereunder. All payments made hereunder shall be in United States
dollars or at the option of Licensee in Swiss francs. The exchange rate shall
be established on the date the payment is made calculated using the rate set
by the Citibank of New York, New York, U.S.A.
3.3.1 CALCULATION OF ROYALTY ON OEM ACCOUNTS. For
purposes of determining the amount of sales royalty to be paid by Licensee
based on its sublicense of the Licensed Product to an OEM customer with
clients in the Excluded Territory, the following rules shall be followed: (i)
if less than ten percent (10%) of the OEM customers' clients are in the
Excluded Territory, Licensee shall pay royalties on all net sales derived
from the contract with the OEM customer pursuant to subpart (i) of Section
3.3; and (ii) in the event more than ten percent (10%) of the clients are in
the Excluded Territory, Licensee shall pay a sales royalty pursuant to
subpart (ii) of Section 3.3 on a percentage amount of net sales derived under
the contract equal to the percentage amount of the OEM customers' clients
that are located in the Excluded Territory and shall pay a sales royalty
based on subpart (i) of Section 3.3 on the balance of the net sales.
3.4 AUDIT RIGHTS. Licensee shall keep true and sufficient records
to determine sales royalty payments due hereunder. These records shall be
maintained and open to inspection at reasonable intervals by an independent
auditor at Licensor's expense, for a period of three (3) years following each
accounting report filed hereunder. Licensor shall select the independent
auditor and shall instruct each such auditor to exert his or her best efforts
to avoid disruption of Licensee's business in the conduct of the inspection.
4. CONFIDENTIAL INFORMATION.
4.1 NON-DISCLOSURE. Each party agrees not to use, disclose, sell,
license, publish, reproduce or otherwise make available the Confidential
Information of the other party except and only to the extent necessary to
perform under this Agreement. Each party agrees to secure and protect the
other party's Confidential Information in a manner consistent with the
maintenance of the other party's confidential and proprietary rights in the
information and to take appropriate action by instruction or agreement with
its employees, consultants or other agents who are permitted access to the
other party's Confidential Information to satisfy its obligations under this
Section 4.
-5-
<PAGE>
4.2 DEFINITION. "Confidential Information" means a party's
information, not generally known by non-party personnel, used by the party
and which is proprietary to the party or the disclosure of which would be
detrimental to the party.
4.3 CONFIDENTIALITY AGREEMENT WITH EMPLOYEES. Each party shall
require each of its employees or agents who perform services for it hereunder
to sign a confidentiality agreement in a form approved by the other party.
4.4 INDEMNIFICATION. Each party agrees to indemnify and shall
hold harmless (including payment of reasonable attorneys' fees) the other
party, its corporate affiliates, and any employee or agent thereof (each of
the foregoing being hereinafter referred to individually as "Indemnified
Party") against all liability to third parties (other than liability solely
the fault of the Indemnified Party) arising from or in connection with the
parties breach of its agreement under this Section 4. Each party's
obligation to indemnify any Indemnified Party will survive the expiration or
termination of this Letter Agreement by either party for any reason.
4.5 INJUNCTIVE RELIEF. It is hereby understood and agreed that
damages shall be an inadequate remedy in the event of any party's breach of
this Section 4 and that any such breach by a party will cause the other party
great and irreparable injury and damage. Accordingly, notwithstanding the
provisions of Section 6.11, each party agrees that the other shall be
entitled, without waiving any additional rights or remedies otherwise
available to the nonbreaching party at law or in equity or by statute, to
injunctive and other equitable relief in the event of a breach or intended or
threatened breach by the breaching party.
4.6 RETURN OF MATERIALS. Upon termination of this Agreement,
Licensee shall immediately return to Licensor all materials specified in
Section 1.1.
5. TERM OF AGREEMENT AND TERMINATION.
5.1 TERM. This Agreement shall remain in full force and effect for
an initial term of two (2) years expiring on February 27, 2000, subject to
renewal by Licensee for consecutive two (2) year terms upon Licensee's
payment of a renewal fee of $100,000 prior to the expiration of the then
current term.
5.2 TERMINATION. This Agreement may be terminated by Licensor only
if:
(a) Licensee fails to pay or to give reasonable assurances it
will pay any amount due under this Agreement within 15 days of its receipt of
written notice of nonpayment from Licensor;
(b) Licensee becomes insolvent or fails to pay its debts when
due;
-6-
<PAGE>
(c) Licensee seeks relief under any bankruptcy law or similar
law for protection of debtors, or allows a receiver or trustee to be
appointed for substantially all of its assets who is not removed within 30
days;
(d) Licensee breaches any material provision of this
Agreement (other than as specified in subparagraph (a), and does not (i)
correct the material breach within 45 days of the effective date of written
notice of the material breach from Licensor, or (ii) if such material breach
cannot reasonably be corrected within the aforesaid 45-day period, undertake
within 20 days of the effective date of such notice and continue until
completion, efforts to cure the breach in an expeditious manner; or
(e) Licensee attempts to make an assignment or other transfer
within the meaning of Section 6.10 without first obtaining Licensor's
reasonable approval.
6. MISCELLANEOUS.
6.1 NOTICE. Any notice hereunder shall be in writing (including
electronic facsimile) and shall be effective upon receipt, if personally
delivered, upon receipt at the receiving terminal, if delivered by telex or
other electronic facsimile, or on the tenth day following mailing by
registered or certified mail deposited in the United States mail and
addressed to the parties at the following addresses or at such other
addresses as shall be specified in writing in accordance with this Section.
If to Licensor: IQ Net Corporation
19433 E. Walnut Drive South
City of Industry, CA 91748
Attn: Eric Wu
If to Licensee: Virtual Telecom SA
12 av. des Morgines
Petit-Lancy 1, Switzerland
Attn: Neil Gibbons
6.2 NO AGENT. This Agreement does not constitute Licensee as the
agent or legal representative of Licensor for any purpose whatsoever.
Licensee shall not have the right or authority to assume or to create any
obligation or responsibility, express or implied, on behalf or in the name of
Licensor or to bind Licensor in any manner.
6.3 REMEDIES. All remedies provided for in this Agreement shall be
cumulative and shall not be exclusive of one another or any other remedies
available in law or equity.
6.4 SEVERABILITY. If any clause or provision of this Agreement
should, under any applicable laws, be held to be illegal, void or
unenforceable, such clause or provision
-7-
<PAGE>
shall be considered separately and renegotiated in good faith between the
parties, taking into consideration the spirit of this Agreement, so as to
agree on any other alternate clause or provision, it being understood that in
any case the remaining portion of this Agreement shall continue in full force
and effect.
6.5 WAIVERS. No delay or failure by either party to this Agreement
to exercise any right, power or remedy with regard to any breach or default
by the other party shall impair any right, power or remedy of the former
party, and shall not be construed to be a waiver of any breach or default of
the same or any other provision of this Agreement.
6.6 HEADINGS AND GENDER. The section headings used in this
Agreement are intended solely for convenience of reference and shall not in
any way or manner amplify, limit, modify or otherwise be used in the
interpretation of any of the provisions of this Agreement, and the masculine,
feminine or neuter gender and the singular or plural number shall be deemed
to include the others whenever the context so indicates or requires.
6.7 SUCCESSORS. The covenants, agreements, terms and conditions
contained in this Agreement shall be binding upon and inure to the benefit of
the successors, assigns, receivers and trustees of the parties hereto.
6.8 ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement between the parties hereto and fully supersedes any and all prior
agreements or understandings between the parties hereto pertaining to the
subject matter hereof. No change in, modification of or addition, amendment
or supplement to this Agreement shall be valid unless set forth in writing
and signed and dated by each of the parties hereto subsequent to the
execution of this Agreement.
6.9 COUNTERPARTS. This Agreement may be executed in two
counterparts both of which shall constitute only one agreement.
6.10 ASSIGNMENTS. Licensee may not assign or transfer this
Agreement, voluntarily or involuntarily, without Licensor's prior approval
not to be unreasonably withheld or delayed. A transfer of a controlling
interest in Licensee's stock or other evidence of ownership will be deemed to
be a transfer of the Agreement requiring Licensor's approval. If Licensor
does approve, this Agreement will be binding on the authorized assignee or
transferee, but will not release Licensee from its obligations.
6.11 ARBITRATION AND ATTORNEY'S FEES. Any controversy or claim
arising out of or relating to this Agreement, or the breach thereof, shall be
settled by arbitration administered by the American Arbitration Association
in accordance with its Commercial Arbitration Rules, and judgment on the
award rendered by the arbitrator(s) may be entered in any court having
jurisdiction thereof. The arbitration shall take place in Los Angeles
County, California. The prevailing party shall be entitled to its reasonable
attorney's fees.
-8-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the day and year first above written.
"LICENSOR"
IQ NET CORPORATION,
a California corporation
By:______________________________________________
Eric Wu,
Chief Executive Officer
"LICENSEE"
VIRTUAL TELECOM SA,
a Swiss corporation
By:______________________________________________
Neil Gibbons,
Chief Executive Officer
-9-
<PAGE>
ATTACHMENT 1
The features of IQ Suite "Light" version include:
Quotes (Snap quote)
Charts - Intraday with time series 5/15/30/60 min
- Daily
- Weekly
- Monthly
- Barcharts
- Candlestick charts
Bollinger Bands
Moving Averages 10 day & 30 day
Volume
RSI
Stockastics
Momentum
Search tool for Fundamentals
Selector/Organizer Tool for custom studies
-10-
<PAGE>
EXHIBIT 21.1
The Registrant has two subsidiaries, Virtual Telecom SA, a Swiss corporation,
and Firstquote Limited, an English corporation.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
VIRTUAL TELECOM, INC. CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER
31, 1997 AND 1996 AND IS QUALIFIED IN ITS ENTIRETY TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 569,264
<SECURITIES> 0
<RECEIVABLES> 75,622
<ALLOWANCES> 9,691
<INVENTORY> 0
<CURRENT-ASSETS> 2,773,302
<PP&E> 1,402,735
<DEPRECIATION> 215,962
<TOTAL-ASSETS> 3,985,949
<CURRENT-LIABILITIES> 913,336
<BONDS> 0
0
2,072
<COMMON> 5,375
<OTHER-SE> 2,866,052
<TOTAL-LIABILITY-AND-EQUITY> 3,985,949
<SALES> 112,446
<TOTAL-REVENUES> 112,446
<CGS> 0
<TOTAL-COSTS> 664,591
<OTHER-EXPENSES> 1,754,670
<LOSS-PROVISION> 9,691
<INTEREST-EXPENSE> 47,233 <F1>
<INCOME-PRETAX> (2,359,209)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,359,209)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,359,209)
<EPS-PRIMARY> (0.53)
<EPS-DILUTED> (0.53)
<FN>
<F1> INCLUDING CAPITALISED AND ACCRUED INTEREST
</FN>
</TABLE>
