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U.S. SECURITIES & EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-KSB
ANNUAL REPORT PURSUANT SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
Commission File Number 0-22351
Virtual Telecom, Inc.
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(Name of small business issuer as specified in its charter)
Delaware 98-0162893
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
12, Ave des Morgines, 1213 Petit-Lancy 1, Geneva, Switzerland N/A
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(Address of principal executive offices) (Zip Code)
41-22-879-0879
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(Issuer's telephone number)
Securities to be Registered Under Section 12(b) of the Act:
None N/A
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(Title of each class (Name of each exchange on which
to be so registered) each class is to be registered)
Securities To Be Registered Under Section 12(g) Of The Act:
Common Stock, $.001 par value
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(Title of class)
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 22, 1999 was approximately $14,749,961
As of March 22, 1999 the registrant had 6,016,309 shares of its common stock,
par value $0.001, issued and outstanding.
Documents Incorporated By Reference: None
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Part I
Item 1. Description of Business.
Business Development
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Virtual Telecom, Inc., a Delaware corporation (the "Company"), was organized
to engage in the business of developing and marketing various real-time market
data and financial information services as well as online brokerage capabilities
via a range of client interfaces based on Internet technologies. Its services
are marketed under the brand name "FirstQuote" and are available via its own
wide-area Internet protocol network by dial-up or dedicated access, as well as
from any other Internet access point. The Company also provides related
supporting network services to users of its financial information services.
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.
During the last quarter of 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.
During the first quarter of 1997, the Company conducted a private placement
of shares of Common Stock whereby 534,063 shares of Common Stock were sold for
gross proceeds of $873,000.
During the second quarter of 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 gross proceeds of $1,020,000. In February 1998, the Board
of Directors of the Company resolved to reduce the price of the Units from $5.00
per Unit to $4.00 per Unit and thereby to issue an additional 102,000 shares of
Common Stock to the Unit purchasers.
In December 1997, the Company sold 1,923,716 shares ("Series B Shares") of
its Series B Preferred Stock to Alta-Berkeley V, C.V. and three affiliated Alta-
Berkeley venture capital funds (collectively referred to as "Alta-Berkeley") for
$3,000,000 of which $1,000,000 was received in December 1997 and $2,000,000 in
March 1998.
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In January 1999 the Company sold 3,783,784 shares of its Series C Preferred
Stock to five parties, including Alta-Berkeley, two other venture capital funds,
a bank and a private investor, for a total consideration of $7,000,000.
Concurrent with the issuance of the Series B Preferred Stock, the Company
and Alta-Berkeley entered into an Investors' Rights Agreement, which has been
amended to include the holders of the Series C Preferred Stock. Pursuant to the
terms of this agreement, the Company increased the authorized number of its
directors to nine. Holders of the shares of both the Series B Preferred Stock as
a class, and the Series C Preferred Stock as a class, are each entitled to elect
two members of the Company's Board (four in total). In addition, the Company has
granted the holders of the Series B Preferred Stock and the Series C Preferred
Stock (the "Holders") the right of first refusal to purchase a pro rata share of
any new equity securities which the Company may issue. The right of first
refusal expires on January 24, 2006. The Investors' Rights Agreement also grants
the Holders demand registration rights in certain circumstances as well as
certain approval and disclosure rights over certain management and strategic
matters.
The shares of both the Series B Preferred Stock and the Series C Preferred
Stock have a liquidation preference of the greater of (i) $3.50 per share if the
event of liquidation, dissolution or winding up occurs on or before December 31,
2000 and thereafter of $5.20 per share and (ii) $1.85 plus a pro-rata share of
any excess liquidation proceeds accruing to the common shareholders. The shares
are all 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.
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 Avenue des Morgines, 1213 Petit-Lancy 1, Geneva, Switzerland;
telephone number +41 (22) 879 0879.
Business of the Company
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Certain terms used herein are defined below in the section "Glossary."
Certain financial information is presented in Swiss Francs, the unit of currency
of Switzerland. All Swiss Franc based amounts are designated by the symbol
"CHF." As of March 22, 1999, the Swiss Franc-dollar exchange rate was 1.4640
Swiss Francs to 1 US dollar.
General
Virtual Telecom is engaged in the business of developing and marketing
Internet-based financial services and solutions to the European investment
community. The Company provides real-time or delayed market data, news and
financial information as well as online dealing capabilities over the Internet
to institutional, corporate and private users.
The Company's financial information services are offered on a direct
subscription basis or as a co-branded product to third parties, including,
brokerage firms, banks, insurance companies, fund managers, institutional,
professional traders, news organizations and Internet service providers, who
desire to offer the services directly to their own customers. The Company also
offers to institutional clients turnkey solutions for Internet-based online
dealing capabilities. In order to provide an end-to-end solution, the Company
also derives revenue through the provision of Internet access and network
connectivity services to its corporate and institutional clients.
The Company's services are available via its own wide-area Internet
network backbone by dial-up or dedicated access, as well as from any other
Internet point of access world-wide. Its "ticker plant" and client interface
technologies are based on systems developed in the USA.
Background
During 1996 and the first quarter of 1997, the Company implemented the
telecommunications and information processing infrastructure required to deliver
its services. The Company commenced pilot and thereafter commercial operations
during the second and third quarters of 1997. Active marketing activities were
commenced
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towards the end of the second quarter of 1998. Thereafter the Company has
concentrated on growing its client base, primarily in Switzerland, Germany and
France, as well as developing online dealing services for these markets.
During the last quarter of 1998, the Company developed and commenced hosting
of a financial portal website for Les Echos, a member company of the Pearson
Group, a leading European financial media organization. This strategic alliance
also embodies a joint marketing arrangement for the Company's FirstQuote
services as well as promotion of its activities to the website visitors.
Following the introduction of this service, the Company has opened a sales
office in Paris. The Company has implemented a similar project for Agefi.com, a
leading Swiss financial media concern during the first quarter of 1999.
In January 1999, the Company entered into an arrangement with Maerki Baumann
& Co., a Swiss (Zurich) based private bank, for implementation and joint
marketing of an Internet-based electronic trading service enabling its clients
to trade securities and receive account information over the Internet. The on-
line trading service is offered as a co-branded version of FirstQuote. The
Company receives monthly fees for operating and maintaining the system as well
as a share of the transactional revenue generated by trades routed through the
system.
Strategy
The Company believes that until recently western European investors have had
relatively limited interest in investing in publicly traded equity securities
compared to those in the US. However, in recent years western Europeans have
directed more of the their investments towards the equity securities, evidenced
by the emergence of several junior equity markets, including the New Market
section of the Frankfurt Stock Exchange, the Alternative Investment Market
section of the London Stock Exchange, the Nouveau Marche section of the Paris
Stock Exchange and the European Automated Securities Dealers and Quotation
System (EASDAQ). The growth in European equity investments has created an
opportunity for providers of related financial information services and
electronic brokerage solutions. According to Frost & Sullivan, a market research
firm, the market for financial information services alone in Western Europe was
estimated to be $3.5 billion and growing at the rate of 10% per annum in 1997.
The Company further believes that most providers of Internet-based
electronic brokerage services in western Europe are affiliates or subsidiaries
of US providers, and as such provide services having a distinctly US focus. The
Company's internal marketing studies indicate that European banks and brokerage
firms have a high degree of interest in offering an Internet-based information
and brokerage services to the their client base. However, few of the European
banks or brokerages presently offer these services. As a result, the Company
believes that significant market opportunities exist for a provider of financial
information and electronic brokerage services that is able to address the
interests and requirements of the European investor.
The Company's objective is to be a leading provider of Internet-based
services and solutions to the European investment community. The Company plans
to achieve these objectives through the development of joint-venture
arrangements (strategic alliances) with banks and securities brokerages,
financial service providers, financial news organizations and Internet service
providers throughout Europe. As required, the Company will develop and operate
co-branded websites for the purpose of offering basic free-of-charge quote
services (delayed data), which serve a marketing platform for its more
sophisticated subscription-based FirstQuote market data and online brokerage
solutions. FirstQuote services will also be co-branded within the framework of
such joint-venture arrangements. The Company also intends to aggressively market
its FirstQuote services on a direct sales basis. Furthermore, the Company
markets its FirstQuote services directly from its website in a highly automated
e-commerce manner, requiring little or no human intervention in the sales
process.
Key elements of the Company's strategy include:
State of the Art Technology: The Company's technologies and services are
based on software licensed from Townsend Analytics Ltd. The Company believes
that Townsend Analytics is a recognized world leader in the development and
commercialization of software and technologies dedicated to Internet-based
quotation, trading and exchange activities. The owner and President of Townsend
Analytics, Mr. Stuart Townsend, has served on the Board of Directors of the
Company since April 1997.
European Focus: The Company believes that it offers Internet-based
information and on-line brokerage services that are uniquely European in nature.
Until now, the dominant providers of Internet-based information and brokerage
services in Europe have been US based companies which, in the opinion of the
Company, offer a service
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that is distinctly US in nature. The Company's quotation and financial services
cover all major world markets and exchanges. However, in the opinion of
management, the Company's services provide greater focus on pan-European markets
and exchanges than other competing services. In the case of joint-venture
arrangements for the provision of a co-branded service, the Company works with
its local partner to customize the offered service to suit the cultural need
and investment profile of the partner's existing and targeted clientele.
Target Existing Customer Bases: By focusing on the development of co-branded
information and brokerage services pursuant to strategic alliances, the Company
will acquire an immediate access to an existing client base. The Company plans
to enter into one or more strategic relationships with banks and securities
brokerages, financial services providers, financial news organizations and
Internet service providers in each of the major investment and geographical
communities of Western Europe. The Company believes that this strategy will
accelerate the expansion of its services throughout Europe and, at the same
time, reduce the marketing costs typically associated with the rollout of a
service of this nature throughout an area made up of several large and
culturally diverse communities.
Development of FirstQuote Brand Name: The Company has applied for trademark
registration of the FirstQuote mark in the USA, Switzerland and throughout the
European Union. The Company intends to market its services and solutions
throughout Europe under the FirstQuote brand name. The Company shall endeavor to
create a high degree of consumer awareness of the FirstQuote name and the
association of quality and reliable services with such name in the European
investment banking community. The Company intends to leverage its FirstQuote
brandname through the future development and marketing of additional services,
including a portal website linking the customer to an array of Internet websites
offering financial and investment services.
Services and Solutions
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Market Data and Financial Information Services
The Company provides real-time or delayed market data, news and financial
information using Internet technologies. The Company's services are marketed to
European financial institutions, including brokerage firms, banks, insurance
companies, fund managers, professional traders, and private investors. The
market data comprises a real-time `ticker plant' database of more than 380,000
securities, including stocks, options on stocks, major stock and option indices,
commodities and currencies, from over 44 exchanges worldwide, including major
European, North American and Asian exchanges.
The market data is gathered from ticker and news feeds from stock exchanges
and other sources and processed on demand into a single user data feed driven by
a range of client interfaces allowing clients to monitor market data symbols on
a dynamic real-time basis. The Company's primary data processing plant is
located in its executive offices in Geneva, Switzerland.
The Company's services are obtainable directly from its product web site at
http://www.firstquote.com/.
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The Company offers three versions of its market data and financial
information service, tailored to different segments of the investment community:
FirstQuote Professional: The service is a decision support interface for
investment related operations by institutional investors, brokerage firms and
corporations. The service provides wide real-time data coverage, sophisticated
analytical tools, alarm settings, historical data, news and all investment
indicators regularly used by professional traders. FirstQuote Professional
displays financial information in multiple windows on multiple pages, each of
which can be modified to suit individual requirements. Pages may be stored and
retrieved instantly by a single key press. FirstQuote Professional customers are
granted a floating license, allowing the software to be installed and used on
multiple machines, for example an office PC, home PC and portable PC, and thus
providing a highly mobile solution. However only one simultaneous access is
permitted per subscription.
The principal features of the FirstQuote Professional include:
Market Minder A quote screen with rows of symbols and columns of prices
and other data related to the symbols.
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MultiQuote Provides detailed fundamental information on a symbol in
a customizable layout
Ticker Scrolling ticker window showing trade price and volume
information.
Time & Sales Tabular display of each transaction showing transaction
type price and volume.
News A scrolling list of headlines with full news stories
where available.
Charts Graphical analysis of market data with a variety of
different studies available.
Point & Figure Market display of price trends.
QuickQuote Detailed quote information may be linked to other windows
to synchronize the symbol being viewed.
Forex Foreign exchange calculator
Table Tabular display of each transaction for a given symbol
Turbo Options Advanced options quote screen
Market Makers Comparative table of regional or NASDAQ Level II stocks'
showing bids and asks by market maker
Alarm Automated price-monitoring tool.
Internet Browser With built in drag and drop enables quick look up of
symbols on Internet based databases such as Yahoo and
Edgar On-line.
DDE Link Links live data into customers' own spreadsheet for real-
time modeling.
FirstQuote Lite: This service is designed for corporate treasurers,
portfolio managers, smaller brokers and sophisticated private investors. The
service provides real-time data and news, and includes a reduced range of
analytical tools and functions when compared to FirstQuote Professional. The
service consists of a fixed page market data screens featuring (from the above
table) Market Minder; MultiQuote; Ticker; Time and Sales; News; Charts; and
Internet Browser. The fixed page nature of this product provides for
customizable configurations to be implemented for larger groups, which are then
non-modifiable by users.
InvestMaster: The InvestMaster range of technologies is designed for the
personal investor and small professional user, directly or as clients of
strategic partners. The service is based on Web push-technology, using the same
server side data engine that powers the FirstQuote Professional Lite services,
and client side web plug-ins based on Java and ActiveX technologies, producing
tabular or chart format output. The InvestMaster technology provides either
delayed or real-time data or news in snapquote formats.
The Company's market data and financial information services are based on
software licenses from Townsend Analytics Ltd. of Chicago, Illinois. See
"Trademarks and Technology Licenses" below for a summary of the terms and
conditions of the Company's license agreement with Townsend Analytics. The
Company's operations are conducted pursuant to arrangements with other
significant third party providers, including Standard & Poor's Comstock (a
Division of McGraw-Hill International), Fides Informatique, Compaq Computer,
Swisscom, British Telecom, Transpac/France Telecom, Carrier One and Colt
Telecom. See `Third Party Providers" below for a summary of the terms of the
arrangements with these third party providers.
On-Line Trading Solution
FirstQuote Trader: the Company offers an on-line dealing solution under
the name FirstQuote Trader. The service consist of a turnkey solution to banks
and brokerage firms providing them the ability to offer Internet-based
electronic brokerage services to their clients. The service involves the design
of appropriate network architectures as well as the integration of the Company's
licensed trading server platform software with the institution's existing
settlement and administration systems. The Company provides the electronic order
entry and routing technologies as well as the security systems, while the
institution's existing computer systems provide order approval and execution
functions. As a result the institution's clientele is offered a complete order
entry, execution, and real time profit/loss portfolio information via the
Internet. The FirstQuote Trader interface also incorporates the
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FirstQuote Professional or FirstQuote Lite service functionality thus providing
a complete package of decision support, order entry, order routing and portfolio
monitoring capability.
The Company is not a licensed bank or securities brokerage firm nor does it
intend to obtain any such licenses at this time. Therefore, the Company intends
for the foreseeable future to offer the on-line trading solution as a co-branded
product to licensed banks and brokerage firms. The Company's on-line trading
solution is based on a software license from Townsend Analytics. See "Trademarks
and Technology Licenses" below for a summary of the terms and conditions of the
Company's license agreement with Townsend Analytics.
The FirstQuote Network Services
In order to offer a complete end-to-end package of services, the Company
also provides network development and connectivity services including Internet
access and network security services to its corporate and institutional clients.
The Company maintains its own wide-area Internet protocol network backbone
in Switzerland, enabling clients to access the market data, financial
information and online dealing services by way of dial-up or dedicated line. The
Company also leases bandwidth from various European telecommunications carriers
further enabling access to the Company's services from any Internet access point
worldwide.
The Company also provides services relating to the development and hosting
of customized web sites associated with the co-branded implementations of the
market data and financial information services and electronic brokerage
solutions described above.
Strategic Partnering Arrangements
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The Company's business plan focuses on the development of significant
partnering arrangements with key banks and securities brokerages, financial
service providers, news organizations and Internet content providers throughout
Europe. The purpose of these partnering arrangements is to provide investment
and financial related services, such as market data and financial information
services or on-line brokerage activities, to a targeted clientele as the co-
branded service of the Company and the particular partner. To date, the Company
has entered into three such arrangements, as follows:
Maerki Baumann: The Company has entered into a Real-Time Financial
Information and On-Line Dealing Agreement dated March 10, 1998 with Maerki
Baumann & Co. a Zurich, Switzerland based private bank. Pursuant to the
agreement, the Company and has developed for Maerki Baumann's use a real-time
Internet based order matching system for all stocks traded on the Swiss Stock
Exchanges, as well as for US securities. The Company has implemented a trading
server platform based on software licensed by the Company from Townsend
Analytics and has integrated this with Maerki Baumann's existing securities
settlement and client account administration systems. The result is a solution
that allows Maerki Baumann the ability to offer its clientele complete order
entry and execution, and real time account and portfolio information via the
Internet. Each on-line brokerage service will also include a subscription for
the FirstQuote Professional or FirstQuote Lite client interface as well.
Under their agreement, the Company is responsible for the development,
installation and maintenance of the trading servers and application software.
The Company is not licensed under the laws of Switzerland, or any other
jurisdiction, to engage in securities brokerage activities. Therefore, the
Company's role is that of a technology solution provider. Maerki Baumann is
responsible for all brokerage activities and client account responsibility.
In consideration for the above services, the Company will receive fixed
monthly fees, user license fees, plus a transaction fee on each electronic
trade.
Les Echos: The Company has entered into an agreement dated November 4, 1998
for the development and hosting of additional web site material (http://stocks.
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lesechos.fr/) including international market data and charts to the existing web
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site of Les Echos, a leading financial media group in France. Under the terms of
the agreement, Les Echos undertook to perform certain promotional activities for
a jointly marketed FirstQuote-Les Echos co-branded service. Revenues from
subscriptions to the FirstQuote-Les Echos co-branded service will be shared.
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Agefi: The Company has entered into an agreement dated November 6, 1998 for
the provision of web site material (http://www.agefi.com/) including
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international market data and charts for Agefi, a leading financial media group
in Switzerland. Under the terms of the agreement, Agefi has undertaken to
provide product marketing for FirstQuote within its own and other financial
publications.
Trademarks and Technology Licenses
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The Company has registered, or has applied for registration, for the
trademarks FirstQuote and InvestMaster in Switzerland and the European Union.
The Company has registered the InvestMaster mark with the US Patent and
Trademark Office and has applied for a US registration of the FirstQuote mark.
The Company's market data and financial information services and its on-line
brokerage solutions are based on software licensed to the Company by Townsend
Analytics Ltd. of Chicago, Illinois. Pursuant to a Computer Software License
Agreement dated January 16, 1997 between Townsend Analytics and the Company,
Townsend Analytics has appointed the Company as a distributor for the sale,
support and servicing of Townsend Analytics' proprietary software programs
relating to market data and financial information services and on-line brokerage
activities. Pursuant to the agreement, the Company is authorized to implement
and resell these software programs in return for agreed royalty payments.
In December 1998, the Company and Townsend Analytics amended their
agreement to restrict the right of Townsend Analytics to grant further software
licensing rights in those regions.
The Company's information services and brokerage solution are substantially
dependent on the technologies licensed to the Company by Townsend Analytics. In
the event the Company's continued access to the licensed software is terminated
or interrupted for a significant length of time, the Company would have to
either develop or acquire suitable replacement software, of which there can be
no assurance, or discontinue its present operations.
Third Party Providers
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The Company's services are provided with the assistance of the following
businesses:
Standard & Poor's ComStock: The Company receives stock and commodity
information pursuant to an Information Distribution License Agreement dated
August 23, 1996 between the Company and the Standard & Poor's ComStock (a
division of McGraw-Hill International (UK) Ltd.). Standard & Poor's ComStock is
licensed to distribute market data and financial information from most US and
international stock, mercantile, options and currency exchanges. Standard &
Poor's ComStock provides the Company with data 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 services.
Compaq Computer (formerly Digital Equipment Corporation): The Company's
Internet access and network equipment and implementation were provided pursuant
to Partnership Outsourcing Agreement dated September 9, 1996 between the Company
and Digital Equipment Corporation. Pursuant to the agreement the Company has
purchased from Digital 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 agreement is for an initial four-year term expiring in September
2000.
Effective January 1, 1999, and following a transfer of know-how from Digital
to the Company, the Company has assumed full operating responsibility for the
equipment, in return for a reduced series of payments.
Swisscom/British Telecom/Carrier One/Transpac-France Telecom/Colt Telecom.
The Company's Internet access and network connectivity is carried over a frame
relay data communications network operated by Swisscom. In addition, the Company
has arranged for further dedicated connections to the Internet from British
Telecom (Sunrise), Carrier One, Transpac-France Telecom, and Colt Telecom.
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Competition
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The market for financial information and on-line brokerage services over the
Internet is rapidly evolving and becoming competitive. The Company expects
competition to continue and intensify in the future. In the area of market data
and financial services, the Company faces direct competition from several
companies that provide for the delivery of financial data over the Internet or
other electronic means. The Company believes its primary competitors include
Reuters, Bloomberg, and Bridge.
In the area of electronic brokerage services, the Company seeks to enter
into partnering arrangements with licensed banks and brokerage firms enabling
them to provide the service in turn to their own clients. Such arrangements will
compete with electronic brokerage firms as the eSchwab division of Charles
Schwab & Co., Inc., E-Trade Group and DLJdirect, a subsidiary of Donaldson,
Lufkin & Jenrette Securities Corporation. The partnering arrangements will also
encounter competition from brokerage firms offering conventional assisted sales
operations.
Many of the Company's competitors have longer operating histories and
significantly greater financial, technical, marketing and other resources than
the Company. In addition, many of the Company's competitors offer a wider range
of services and financial products, and thus may be able to respond more quickly
to new or changing opportunities, technologies and customer requirements. There
can be no assurance that the Company will be able to compete effectively with
current or future competitors or that such competition will not have a material
adverse affect on the Company's business, financial condition and operating
results.
Government Regulation
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The Company's market data and financial and on-line brokerage services are
not currently subject to direct regulation by Swiss, European Union 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, 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
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The Company is staffed with 25 full-time employees and 3 full-time
consultants at present, 6 of whom are involved in administration, 11 of whom are
involved in software development and engineering and 11 of whom are involved in
sales, sales support and marketing.
Item 2. Description of Property.
The Company's executive offices are located in Geneva, Switzerland and
consist of approximately 340 square meters of leased premises. The Company's
lease for these premises expires on August 30, 1999 and provides for monthly
rent of $10,800.
In addition the Company rents office space in Zurich, Switzerland (50 square
meters) and Paris, France (30 square meters) on a calendar year basis for a
combined total of approximately $4,900 per month.
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.
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<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, 1998, the high and low closing prices were $2.00 and $0.69, respectively.
These high and low prices reflect inter-dealer prices, without retail mark-up,
mark-down or commission and may not represent actual transactions. The following
table reflects the Company's stock price movements in more detail:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------------------------------
1998 1997
-------------------------- -----------------------
Quarter High Low High Low
------- ----------- ----------- ----------- --------
<S> <C> <C> <C> <C>
Fourth $ 2.00 $ 0.69 $ 2.63 $ 2.00
Third 1.13 0.91 3.25 2.50
Second 2.00 1.00 3.25 2.38
First 2.13 1.56 2.56 1.75
</TABLE>
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 22, 1999, 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, 1998, the Company sold
unregistered securities in the following transactions:
In June 1998, the Company granted three of its employees options to purchase
an aggregate of 110,000 shares of Common Stock pursuant to the Company's 1997
Stock Option Plan. The options had an exercise price of $2.00 per share, have a
one-year vesting period and expire in June 2001. The options were issued
pursuant to Section 4(2) of the 1933 Act. There was no underwriter involved in
this issuance.
In December 1998, the Company granted thirteen of its employees options to
purchase an aggregate of 270,000 shares of Common Stock pursuant to the
Company's 1997 Stock Option Plan. The options had an exercise price of $2.00 per
share, have a one-year vesting period and expire in December 2001. The options
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.
Background
- ----------
The Company is engaged in the business of developing and providing various
real-time market data and financial information services as well as online
dealing capabilities via a range of client interfaces based on Internet
technologies. Its services are marketed under the brand name "FirstQuote". Its
services are available via its own wide-area Internet protocol network by dial-
up or dedicated access, as well as from any other Internet access point. The
Company also provides related supporting network services to users of its
financial information services
-10-
<PAGE>
Unless the context otherwise requires, all references to the Company include
its wholly owned subsidiary, Virtual Telecom SA, a Swiss corporation and
FirstQuote Ltd. a UK company.
As of March 1999, the Company is providing financial information or
networking services to over 160 clients, with associated recurring monthly
revenues of approximately $80,000. Non-recurring revenues have averaged $12,000
per month since commercial marketing activities commenced.
Regarding the Company's plan of operations for the 1999 fiscal year, it has
targeted strategic alliances in key European financial centers from which to
leverage its growth. It plans to market its financial market information,
analytical tools and online order entry/matching systems both under its own
product names and as co-branded implementations with institutional clients.
Currency Exchange Rates: Although the Company reports its results in US
dollars, virtually all of its revenues and expenses are denominated in other
currencies, primarily Swiss francs, Euros and Pounds sterling. Consequently, the
Company's net results are directly affected by any changes in the exchange rate
between the US dollar on the one hand, and the Swiss franc, Euros or Pounds
sterling on the other. Transactions of the Company and its subsidiaries are
recorded based on the functional currency of each particular company. Assets and
liabilities of the Company and its subsidiaries are translated at the exchange
rate in effect at each year-end. Income statement accounts are translated at the
average rate of exchange prevailing during the year. Translation adjustments
arising from differences in exchange rates from period to period are included in
the cumulative translation adjustment account in stockholders' equity.
Results of Operations
- ---------------------
This section should be read in conjunction with the annual financial
statements presented on pages 15 to 32.
Revenue of $534,715 was reported for the year ended December 31, 1998 which
amounts to an increase of 376% over that of $112,446 for the prior year.
Revenues in the fourth quarter of 1998 were 20% above those of the third quarter
of 1998. Revenue is comprised of financial market data services and related
network connectivity services, including web services. While network related
revenues accounted for 53% of total revenue for the current year, the relative
importance of this source of revenue is diminishing as the Company's FirstQuote
user base expands. Financial market data services accounted for 52% of revenue
for the fourth quarter of 1998.
Selling & Market Development expenses for the current year were $1,430,597
or 115% above the amount of $664,591 for the prior year. This reflects increased
levels of operating activity as well as the commencement of commercial marketing
activities during the year.
General and administrative expenses were $2,861,662 for the current year, an
increase of 73% from $1,654,436 in the prior year. Staff costs represent the
major component of this expense and have increased 171% from $454,560 to
$1,232,645. Depreciation has increased by 182% from $184,794 to $520,421. Office
expenses (including travel expenses) have increased by 70% from $521,015 to
$885,316. Professional fees have decreased by 50% from $444,485 to $223,280.
The net operating loss for the year was $3,996,322, which is 69% above the
loss for the previous period of $2,357,781, and results from the factors
mentioned above.
The foreign exchange gains in the current year and losses in the previous
year arise essentially from the revaluation of amounts due by Virtual Telecom SA
to Virtual Telecom Inc., which have been denominated in US dollars.
Liquidity and Financial Condition
- ---------------------------------
As of December 31, 1998, the Company had negative working capital of
$1,595,476 including an amount of $1,000,000 due to a related party, which was
converted to Series C Preferred Stock in January 1999. The negative working
capital was the result of a build up of payables during the time that additional
financing was being secured.
-11-
<PAGE>
Subsequent to the year-end, the Company secured additional equity financing
through the sale of 3,783,784 shares of Series C Preferred Stock for $7,000,000,
including the conversion of $1,000,000 due from a related party.
The amount of cash and cash equivalents has decreased from $569,264 to
$229,450 during the current year. The Company has continued to generate negative
cashflows since its cost base exceeds its revenues from operating activities.
The net cash burn rate (excluding capital expenditure) during the current year
and fourth quarter of 1998 was approximately $270,000 and $350,000 per month,
respectively. The increase in the amount for the fourth quarter compared with
the whole year, reflects the increasing levels of operating activity during the
course of the year. Capital expenditure for the year amounted to $466,824.
Based on the current levels and trends of revenue and operating expenses,
the Company believes that it has sufficient capital to continue its activities
for the next twelve months. However, the plan of operations for the 1999 fiscal
year will require increases in the amounts of operating and capital expenditure
above those incurred to date. While revenues are similarly projected to increase
during the year, it is not certain that these revenues and the above-mentioned
financing will be sufficient to cover these expenditures until the time that a
breakeven situation may be achieved. At this time there are no firm commitments
or agreements on the part of any party to provide any additional debt or equity
capital to the Company and there can be no assurance that the Company will be
able to obtain additional capital. The Company's inability to increase revenue
or obtain additional debt or equity capital on a timely basis will, in all
likelihood, materially adversely affect its future planned growth of operations
and revenues.
Euro Conversion
- ---------------
On January 1, 1999, eleven of the fifteen member countries of the European
Union ("EU") establish fixed conversion rates between their existing sovereign
currencies and the Euro, and adopted the Euro as their common legal currency.
Switzerland is not a member of the EU and the Company currently denominates most
of its transactions in Swiss francs, the unit of currency of Switzerland.
Furthermore, subscribers to the Company's services are typically invoiced in the
currency of their resident jurisdiction. The Company has successfully adapted
its information systems and practices to accommodate the Euro in those EU member
countries in which it offers its services. Moreover, the content within the
financial information distributed by the Company (notably security quotations)
has successfully begun to be denominated in Euro, commencing on January 1, 1999.
Euro conversion is expected to generally increase cross-border price
transparency among the participating countries and result in a more competitive
European market. The Company is uncertain as to the effect, if any, that Euro
conversion will have on its ability to sell its products and services in the
European market. Euro conversion could potentially impact pricing strategies and
demand for the Company's services in the European market, lead to increased
competition within the European market for the specific types of services sold
by the Company, or impact the Company's relationships with vendors and
licensors. As a result of competitive pressures, the Company could also
potentially be required to denominate future transactions in the Euro and incur
currency risk and conversion costs as a result.
There can be no assurance that Euro conversion will not have a material,
adverse effect on the Company's business, financial condition and results of
operation.
Year 2000 Compliance
- --------------------
The Year 2000 problem results from the use by computers of two digits rather
than four digits to define the applicable year. The use of only two digits was
common during the period when computer resources were much more expensive than
today. As a result, when such computer systems must process dates both before
and after January 1, 2000, the two-digit year identification may create
processing errors and system failures. These effects may be apparent in both
information processing systems as well as mechanical operations controlled by
computers (embedded microprocessors). The effects of this issue are further
compounded by the interdependence of computer systems between suppliers and
customers.
-12-
<PAGE>
The Company utilizes computer software applications and operating systems in
distributing its financial information service, operating its network
infrastructure and various administrative and billing functions. In addition,
the Company's financial information service is reliant upon the receipt of
financial data from external vendors such Standard & Poor's Comstock, and the
processing of that information using software licensed to the Company by third
parties such as Townsend Analytics. To the extent the Company's computer
software applications, or those of its information vendors and software
licensers, are unable to operate accurately after January 1, 2000, some degree
of modification, or even possibly replacement of such applications, may be
necessary.
In the event that the Company's systems or the systems of its third party
information vendors and licensers are not materially Year 2000 compliant, the
Company could experience a disruption in the provision of its financial
information and network access services.
The Company has appointed a Year 2000 Committee to assess the scope of the
Company's risks in this regard and adopt appropriate measures to bring its
applications into compliance. To date the costs associated with this project
have amounted to approximately $10,000, all of which are internal expenses.
The committee has completed the process of identifying the core processes,
internal equipment as well as external services and software licenses that may
not be Year 2000 compliant. The cost of replacing internal IT equipment and
applications known to be not Year 2000 compliant is approximately $20,000.
Internal non-IT systems employed are not critical and have been determined not
to pose significant risks.
Where external risks have been identified, the Company has sent confirmation
letters to information vendors and software licensors to ascertain their
progress in identifying and addressing problems that their own computer systems
may face in correctly processing date information related to the Year 2000. The
Company is in the process of reviewing the responses received from these parties
in order to assess further steps to be taken.
In addition, and independent from Year 2000 issues but having the effect of
reducing risks related thereto, the Company has begun to diversify the equipment
and data suppliers that it uses and has identified alternative suppliers where
needed, should failures occur.
The most likely worst case scenario for the Company would involve the loss
of data feeds from external sources. If such were to occur the Company would
have to switch to alternate data suppliers which may result in certain
disruptions to its service and potential revenue losses as a result.
The future costs estimated to be required to resolve Year 2000 issues amount
to $20,000 of internal resources relating to a number of planned projects. The
further findings of this committee will be disclosed in due course.
No assurance can be given that any of the Company's or third party systems
is or will be Year 2000 compliant. Neither can assurance be given that the
eventual costs required to address remaining unresolved Year 2000 issues or that
the impact of the Company's failure to achieve substantial Year 2000 compliance
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
Safe Harbor
- -----------
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 report, 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 referred to herein, including, without
limitation, the Company's recent commencement of commercial and marketing
operations and the risks and uncertainties concerning the market acceptance of
its services and products; 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.
-13-
<PAGE>
Item 7. Financial Statements.
INDEX TO FINANCIAL STATEMENTS
- -----------------------------
Independent Auditors' Report............................................. 15
Consolidated Balance Sheets at December 31, 1998 and 1997................ 16-17
Consolidated Statements of Operations for the years ended December 31,
1998 and 1997......................................................... 18
Consolidated Statements of Cash Flows for the years ended December 31,
1998 and 1997......................................................... 19
Consolidated Statements of Stockholders' Equity (Deficit) for the years
ended December 31, 1998 and 1997...................................... 21
Notes to Consolidated Financial Statements.............................. 23-35
-14-
<PAGE>
Report of Independent Auditors
To the Board of Directors and Shareholders
Virtual Telecom, Inc., Delaware
We have audited the accompanying consolidated balance sheets of Virtual Telecom,
Inc. and its subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of operations, changes in stockholders' equity and cash
flows for the years 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.
We conducted our audit in accordance with generally accepted auditing standards
in the United States. 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
provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Virtual
Telecom, Inc. and its subsidiaries as of December 31, 1998 and 1997, and the
consolidated results of their operations and their cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States.
ARTHUR ANDERSEN LLP
Geneva
March 30, 1999
-15-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Balance Sheets as of December 31, 1998 and 1997
(Currency - U.S. dollars)
ASSETS
------
<TABLE>
<CAPTION>
December 31,
------------------------
1998 1997
---------- ----------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 229,450 $ 569,264
Trade accounts receivable, net 191,229 65,931
Subscriptions receivable from stockholders -- 2,000,000
Prepaid expenses and other receivables 62,108 138,107
---------- ----------
Total current assets 482,787 2,773,302
---------- ----------
NON-CURRENT ASSETS
Property and equipment, net 1,130,563 1,186,773
Other assets 28,487 25,874
---------- ----------
Total non-current assets 1,159,050 1,212,647
---------- ----------
Total Assets $1,641,837 $3,985,949
========== ==========
</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, 1998 and 1997
(Currency - U.S. dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CURRENT LIABILITIES
Trade accounts payable $ 658,700 $ 194,934
Accrued liabilities 102,274 179,448
Current portion of capital lease obligations 146,481 189,526
Advances/convertible loans from stockholders/related parties 1,000,000 315,672
Deferred income 170,808 33,756
----------- -----------
Total current liabilities 2,078,263 913,336
----------- -----------
LONG TERM CAPITAL LEASE OBLIGATIONS
Capital lease obligation, net of current portion 166,621 199,114
----------- -----------
COMMITMENTS (Notes 6, 9 and 12)
STOCKHOLDERS' EQUITY
Preferred Stock
10,000,000 shares authorized;
Class A: 68,500 and 147,938 shares issued and outstanding,
liquidation preference of $239,750 and $517,783 as of
December 31, 1998 and 1997, respectively 69 148
Class B: 1,923,716 shares issued and outstanding,
liquidation preference of $6,733,006 as of December 31,
1998 and 1997 ($10,003,323 after December 31, 1999) 1,924 1,924
Common Stock, $0.001 par value,
20,000,000 shares authorized; 5,781,309 and 5,375,272 shares
issued and outstanding in 1998 and 1997, respectively 5,781 5,375
Additional paid-in capital 6,381,315 6,156,642
Cumulative translation adjustment (148,610) 131,707
Accumulated deficit (6,843,526) (3,422,297)
----------- -----------
Total stockholders' (deficit) / equity (603,047) 2,873,499
----------- -----------
Total Liabilities and Shareholders' (Deficit) / Equity $ 1,641,837 $ 3,985,949
=========== ===========
</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, 1998 and 1997
(Currency - U.S. Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1998 1997
----------- -----------
<S> <C> <C>
INCOME $ 534,715 $ 112,446
EXPENSES
Selling & Market Development Expenses 1,430,597 664,591
General & Administrative Expenses 2,861,662 1,654,436
----------- -----------
4,292,259 2,319,027
----------- -----------
OPERATING RESULT (3,757,544) (2,206,581)
OTHER INCOME AND EXPENSES
Interest Expense (3,441) (52,394)
Foreign Exchange Gain / (Loss), net 339,756 (100,234)
----------- -----------
336,315 (152,628)
----------- -----------
NET LOSS $(3,421,229) $(2,359,209)
=========== ===========
Basic and diluted weighted average number of
common shares 5,781,309 4,465,486
=========== ===========
Basic and diluted net loss per common share $ (0.59) $ (0.53)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
-18-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
For The Years Ended December 31, 1998 and 1997
(Currency - U.S. Dollars)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $(3,421,229) $(2,359,209)
Adjustments to reconcile net loss to net cash used in
operating activities:
Exchange (gain) / loss (339,756) 100,234
Depreciation and amortization 520,421 184,794
Provision for doubtful debtors 15,840 --
Interest accrued on loans payable 5,417 39,309
Capitalization of interest -- (6,656)
Stock and stock options issued as compensation cost -- 72,400
Increase / decrease resulting from changes in:
Trade accounts receivable (141,138) (65,931)
Prepaid expenses and other receivables 75,999 (114,271)
Trade accounts payable 463,766 125,125
Accrued liabilities and provisions (77,174) 142,277
Deferred income 137,052 33,756
----------- -----------
Net cash used-in operating activities (2,760,802) (1,848,172)
CASH USED IN INVESTING ACTIVITIES:
Purchase of equipment (464,211) (332,982)
Other non-current asset expenditures (2,613) --
----------- -----------
Net cash used-in investing activities (466,824) (332,982)
CASH FLOWS FROM (USED IN) FINANCING ACTIVITIES:
Issuance of stock -- 2,848,600
Stock-related expenses -- 102,902
Commission on issuance of stock -- (63,500)
Collection of stock subscriptions receivable 2,000,000 --
Advances from stockholders and related parties 1,000,000 --
Payment to stockholder and related party -- (51,397)
Reimbursements of advances from stockholders and
related parties (96,089) (78,000)
Reimbursements of advances to related parties -- 66,180
Payment of capital lease obligations (75,537) (275,230)
----------- -----------
Net cash provided by financing activities 2,828,374 2,549,555
Effect of Exchange Rate Changes on Cash and cash equivalents 59,438 (18,276)
NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS (339,814) 350,125
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 569,264 219,139
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 229,450 $ 569,264
=========== ===========
</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
For The Years Ended December 31, 1998 and 1997
(Currency - U.S. Dollars)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Preferred stock Preferred stock Additional
------------------ ----------------- ----------------- paid-in
Shares Amount Shares Amount Shares Amount capital
--------- ------ -------- ------ --------- ------ ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996
Issuance of common stock in consideration
for consultancy fees 3,940,190 3,940 283,781 284 -- -- 994,465
--------- ----- -------- ---- --------- ----- ---------
Issuance of common stock through private
placement offering 80,000 80 19,920
Issuance of common stock through private
placement offering 534,063 534 872,466
Issuance of common stock to repay
the bridging loan 408,000 408 1,019,592
Issuance of common stock in consideration
for administrative fees 133,333 133 199,867
Issuance of common stock through private
placement offering 8,000 8 7,992
Conversion of preferred to common stock 1,923,716 1,924 2,998,076
Compensation cost related to stock option (136)
Net loss 44,400
Translation gain
--------- ----- -------- ---- --------- ----- ---------
Balance at December 31, 1997 5,375,272 5,375 147,938 148 1,923,176 1,924 6,156,642
Issuance of common stock to repay
convertible loan 145,161 145 224,855
Conversion of preferred to common stock 158,876 159 (79,438) (79) (80)
Issuance of common stock as a result of
price reset on private placement units 102,000 102 (102)
Net loss
Translation gain
--------- ----- -------- ---- --------- ----- ---------
Balance at December 31, 1998 5,781,309 5,781 68,500 69 1,923,716 1,924 6,381,315
========= ===== ======== ==== ========= ===== =========
<CAPTION>
Cumulative Total
translation Accumulated stockholders' Comprehensive
adjustment deficit equity loss
----------- ----------- ------------- --------------
<S> <C> <C> <C> <C>
Balance at December 31, 1996 65,460 (1,063,088) 1,061 (997,628)
Issuance of common stock in consideration
for consultancy fees 20,000
Issuance of common stock through private
placement offering 873,000
Issuance of common stock through private
placement offering 1,020,000
Issuance of common stock to repay
the bridging loan 200,000
Issuance of common stock in consideration
for administrative fees 8,000
Issuance of common stock through private
placement offering 3,000,000
Conversion of preferred to common stock --
Compensation cost related to stock option 44,400
Net loss (2,359,209) (2,359,209) (2,359,209)
Translation gain 66,247 66,247 66,247
----------- ----------- ------------- --------------
Balance at December 31, 1997 131,707 (3,422,297) 2,873,499 (3,290,590)
Issuance of common stock to repay
convertible loan 225,000
Conversion of preferred to common stock --
Issuance of common stock as a result of
price reset on private placement units --
Net loss (3,421,229) (3,421,229) (3,421,229)
Translation gain (280,317) (280,317) (280,317)
----------- ----------- ------------- --------------
Balance at December 31, 1998 (148,610) (6,843,526) (603,047) (6,992,136)
===========
</TABLE>
-20-
<PAGE>
VIRTUAL TELECOM, INC. AND SUBSIDIARIES
Notes to the Consolidated Financial Statements
As of December 31, 1998 and 1997
1. Description of the Company and its subsidiaries
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 Company include
its wholly-owned subsidiaries, Virtual Telecom SA, a Swiss corporation, as
well as FirstQuote Limited, an English corporation founded in December 1997.
The Company is engaged in the business of developing and marketing a range
of real-time market data and online dealing services over the Internet and
providing related supporting network connectivity services. Its principal
markets are currently Switzerland, Germany and France. During 1996 and early
1997, the Company acquired and implemented the necessary infrastructure,
comprising data feed handlers, data servers and telecommunication networks.
The Company commenced pilot commercial operations during the latter part of
1997. The Company commenced active marketing of its services during the
second quarter of 1998 and has concentrated on growing its client base as
well as offering additional service content (in the form of additional
exchange data, news as well as online dealing capabilities) during the
second half of 1998.
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.
b) Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles in the United States 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 subsidiary develops, installs, and maintains systems that
allow its clients to access the financial information and market data
services that it provides over an Internet connection as well as to
access the Internet at large. The Company therefore derives both single
installation and recurring revenues.
Installation revenues and related costs are recognized upon completion
of installation. Where installation revenues exceed installation costs,
then installation revenues are recognized over the service period and
not at installation.
-21-
<PAGE>
Recurring revenues for financial data services and network services are
normally invoiced in advance. The resulting amount of unearned income
not attributable to the period of invoicing is reflected under current
liabilities as deferred revenue, and recognized in the profit and loss
account according to the month of applicability of the underlying
services.
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
transaction and outstanding balances are revalued at the year-end rate
with the resulting exchange gain or loss being included in the statement
of operations.
The functional currency of the Company's main operating subsidiary
Virtual Telecom SA, is the Swiss Franc (CHF). The functional currency of
Virtual Telecom, Inc. and FirstQuote Limited is US dollars.
The resulting gain or loss on translation into the reporting currency is
included as a separate component of equity under "cumulative translation
adjustment".
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.
f) Property and equipment
Property and equipment is stated at cost and depreciated using the
straight-line method over their estimated useful lives, ranging 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.
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
-22-
<PAGE>
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 the continued application of 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 has elected to continue with the accounting method
prescribed by APB Opinion No. 25 and presented the required pro forma
disclosures of SFAS 123 in Note 11.d).
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) Segment Reporting
Statement No. 131, Disclosures about Segments of an Enterprise and
Related Information (Issue Date 6/97) requires the reconciliation of
total segment information presented to the corresponding amounts in the
consolidated financial statements, and establishes standards for related
disclosure about products and services, geographic areas and major
customers. The Company adopted SFAS 131 in 1998 and manages its
activities as one segment under the guidelines of the standards.
k) Advertising expenditure
Advertising is expensed as incurred.
l) Net loss per common share
Net loss per common share is based on the 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 antidilutive.
m) Comprehensive Income
Statement No. 130, Reporting Comprehensive Income (Issue Date 6/97)
requires companies to report all changes in equity during a period,
except those resulting from investment by owners and distribution to
owners. SFAS No. 130 was effective for periods beginning July 1, 1998
and the Company has disclosed Comprehensive Income / (Loss), which
encompasses net income and foreign currency translation adjustments, in
the Consolidated Statement of Changes in Shareholders' Equity.
-23-
<PAGE>
n) Recent Accounting Pronouncements
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities (Issue Date 6/98) establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the
balance sheet as either an asset or liability measured at its fair
value. The Statement requires that changes in the derivative's fair
value be recognized in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results on the hedged
item in the income statement, and requires that a company must formally
document, designate, and assess the effectiveness of transactions that
receive hedge accounting. Statement No. 133 is effective for fiscal
years beginning after June 15, 1999and must be applied to (a) derivative
instruments and (b) certain derivative instruments embedded in hybrid
contracts that were issued, acquired, or substantively modified after
December 31, 1997. The Company has not yet quantified the impact of
adopting Statement No. 133.
Statement of Position 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" provides guidance on
accounting for the costs of computer software developed or obtained for
internal use. This SOP requires computer software costs that are
incurred in the preliminary project stage to be expensed as incurred.
Once the capitalization criteria of the SOP have been met, directly
attributable development costs should be capitalized. It also provides
guidance on the treatment of upgrade and maintenance expenditures. SOP
98-1 is effective for fiscal years beginning after December 15, 1998.
Costs incurred prior to initial application of this SOP, whether
capitalized or not, should not be adjusted to the amounts that would
have been capitalized had this SOP been in effect when those costs were
incurred. The Company has not determined the impact that this SOP will
have on its consolidated financial statements.
Statement of Position 98-5, "Reporting on the Costs of Start-up
Activities" (Issued 4/98), requires that costs for start-up activities
and organization costs should be expensed as incurred. SOP 98-5 is
effective for fiscal years beginning after December 15, 1998 and initial
adoption is required to be reflected as a cumulative effect of
accounting change. The Company has not determined the impact that this
SOP will have on its consolidated financial statements.
o) Reclassifications
Certain reclassifications have been made to the prior year financial
statements to conform to the current year's presentation.
3. Trade Receivables
December 31,
----------------------
1998 1997
--------- --------
Trade accounts receivable $ 205,764 $ 75,622
Less: Allowance for doubtful (14,535) (9,691)
--------- --------
Trade accounts receivable, net $ 191,229 $ 65,931
========= ========
Deferred income of $170,808 and $33,756 is included in trade accounts
receivable as of December 31, 1998 and 1997 respectively.
4. Subscriptions receivable from shareholders
The subscriptions receivable from shareholders of $2,000,000 as at December
31, 1997 arose on the issue of $3,000,000 of series "B" Preferred Stock in
December 1997 and was paid in March 1998. (See Note 11).
-24-
<PAGE>
5. Property and Equipment
Property and equipment consists of the following:
December 31,
------------------------
1998 1997
---------- ----------
Software $ 23,761 $ 3,960
Computer equipment 773,837 401,924
Computer equipment under capital lease 48,393 45,766
Furniture and fixtures 112,387 86,295
Vehicles under capital lease 61,065 34,381
Network equipment under capital lease 878,085 830,409
---------- ----------
1,897,528 1,402,735
Less: Accumulated Depreciation (766,965) (215,962)
---------- ----------
$1,130,563 $1,186,773
---------- ----------
Depreciation amounted to $520,421 and $184,794, including $301,828 and
$84,833 in depreciation of assets under capital leases, for the years ended
December 31, 1998 and 1997 respectively.
Capitalized interest expense incurred during the installation of the network
amounted to $6,656 for the year ended December 31, 1997. The network
equipment was used in operations with effect 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.
6. Capital lease obligations
The Company's Swiss subsidiary is obligated under capital leases (network,
computer and cars) and operating leases (offices) expiring at various dates
through September 2002.
Minimum lease payments for leases that have initial or remaining non-
cancelable terms in excess of one year are:
Operating Leases Captial Leases
---------------- --------------
Future minimum lease payments
1999 $ 151,114 $ 159,695
2000 -- 159,695
2001 -- 12,406
2002 -- 4,892
--------- ---------
Minimum lease payments $ 151,114 $ 336,688
---------
Less: Amount representing interest 23,586
---------
313,102
---------
Less: Current maturities 146,481
---------
Long term capital lease obligations $ 166,621
=========
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<PAGE>
7. Advances and convertible loans from stockholders and related parties
Advances and loans from stockholders and related parties consist of the
following:
December 31, 1998 December 31, 1997
----------------- -----------------
Bridge loan from related party $ - $ 315,672
Advances from stockholder 1,000,000 -
----------------- -----------------
$ 1,000,000 $ 315,672
================= =================
As at December 31, 1997, the Company owed $250,000 plus accrued interest in
respect of the balance of two convertible loans received during 1996. In
April 1998, the Company converted $225,000 of the principal to 145,161
shares of Common Stock, and repaid $25,000 of principal and $71,089 of
accrued interest in cash.
As at December 31, 1998 the Company owed $1,000,000 in respect of a loan
convertible into preferred stock of the Company upon the conclusion of
additional equity financing, or redeemable, at the option of the lender. In
January 1999, the loan was converted into 540,541 shares of Series C
Preferred Stock (see Note 11.b)
8. Related party transactions
a) Software Solution provider
In January 1997 the Company entered into a 3-year software distributor
agreement with a financial software solution provider as disclosed in
Note 9.c)
b) Employment agreements
Commencing May 1, 1996, the Company entered into five-year term
employment agreements with two stockholders. Both agreements provide for
compensation of at least 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 amounted to $144,480 during both 1998 and 1997.
c) Administrative assistance
In May 1996, the Company entered into an agreement with a related party
for the provision of certain administrative services to the U.S. holding
corporation. Amounts paid under this agreement amounted to $24,000 and
$48,000 during 1998 and 1997 respectively.
In addition to this fee, the related party received a total of 8,000
shares of Common Stock during 1997.
d) Office lease
The Company entered into a month to month sublease agreement with a
company affiliated with a stockholder, whereby the Company recovers
certain costs for the use of its premises, utilities and computer
systems usage. Amounts charged to the affiliate amounted to
approximately $9,000 per annum during both 1998 and 1997.
-26-
<PAGE>
9. Major agreements
a) 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 apply if the Company
terminates the agreement before the end of the four-year term of the
agreement, ranging from approximately $480,000 to $100,000.
During December 1998, the Company concluded negotiations to take over
certain operations and maintenance elements envisaged within the
agreement for a reduction in the amount of ongoing payments.
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.
b) 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. According to the default terms of the
agreement, a twelve-month renewal period commenced in February 1999.
c) Financial software solution provider
In January 1997 the Company entered into a 3-year software distributor
agreement with a financial software solution provider based in the USA
controlled by a director of the Company. Under the agreement, the
Company is required to pay royalties based on the number of its clients
using the software. After the initial term, the agreement is renewable
on a 12 monthly basis. A 90-day cancellation period applies throughout
the contract.
In December 1998 the Company extended the scope of this agreement
whereby the software provider agreed not to undertake any new licensing
agreements for Switzerland, Germany, France, and the Benelux countries
until December 31, 2001. Under the terms of the agreement, the Company
was committed to paying a single amount of $500,000 ($250,000 of which
was settled in February 1999 in cash and the remainder in March 1999
through the issuance of 135,000 common shares), and is further committed
to minimum royalty payments of $50,000 per month from July 1, 1999,
$100,000 per month from January 1, 2000 and $150,000 per month from July
1, 2000.
While there are other providers of related 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.
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 incurred losses for the years
ended December 31, 1998 and 1997. For US tax reporting purposes the Company
has a net operating loss carry forward of approximately
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<PAGE>
$1,034,443 (1997: $656,260) to offset federal income taxes which expire at
different dates through the year 2013. These net operating losses could be
restricted due to a change in ownership. Its Swiss subsidiary has a net
operating loss carry forward of $5,826,944 (1997: $2,676,718) to offset
future income taxes in Switzerland which expires between the years 2002 and
2005.
Temporary differences that give rise to deferred income tax assets and
liabilities are:
December 31,
--------------------------
1998 1997
----------- -----------
Net operating loss carry forward $ 1,760,666 $ 967,030
Less: Valuation allowance (1,760,666) (967,030)
----------- -----------
Net deferred tax asset $ -- $ --
----------- -----------
A valuation allowance is used to reduce the deferred tax asset to a level
which, more likely than not, will be realized. A valuation allowance for the
full amount of deferred tax assets has been recorded since certain doubts
exist regarding the use of the tax losses carried forward to offset future
taxable income. It is at least reasonably possible that the Company's
estimate of the valuation allowance may change in the near term and result
in a partial or total reversal of the allowance during 1999.
11. Stockholders' equity
a) Common Stock
The Company is authorized to issue 20,000,000 shares of Common Stock,
$.001 par value ("Common Stock"). As of December 31, 1998, 5,781,309
shares were issued and outstanding and held by approximately 328
stockholders of record.
As of December 31, 1998, there are no outstanding options, warrants or
other securities, which upon exercise or conversion entitle their holder
to acquire shares of Common 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.
During January to March 1997, the Company issued 534,063 shares of
Common Stock in a private placement offering for total consideration of
$873,000.
In February 1997, the Company issued 10,000 shares of Common Stock to a
Director and a further 20,000 shares to an individual in consideration
for consulting services rendered on behalf of the Company.
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<PAGE>
In May 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.
In June 1997, the Company conducted a further private placement of
204,000 units, each consisting of two shares of Common Stock plus one
Common Stock warrant, at a price of $5.00 per unit. In February 1998,
the Company reduced the price per Unit to $4.00 and consequently issued
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 below).
In December 1997, the Company issued 133,333 shares in repayment of a
bridge loan to stockholders and other related parties amounting to
$200,000.
During 1997, the Company issued a further 8,000 shares of its Common
Stock for various administrative services (see Note 8.c).
In April 1998, the Company issued 145,161 shares of its common stock in
conversion of $225,000 of loan principal at a price of $1.55 per share
(see Note 7).
Subsequent to December 31, 1998, the Company issued 135,000 shares in
settlement of half of the amount due to the financial software solution
provider as reflected in Note 9.c).
b) 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 designated an initial series of
Preferred Stock as "Series A Preferred Stock" consisting of 750,000
authorized shares with a par value of $0.001 and a liquidation
preference of $3.50. In November 1997 the conversion price of the Series
A Preferred Stock was reset to $1.75 per share, which allows converting
one Series A Preferred Stock into two shares of Common Stock. The Series
A Preferred Stock does not carry dividend rights or any other rights
senior to the Common Stock and has equal voting rights with the Common
Stock. 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 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.
During 1996, the Company issued 283,781 units of its securities
("Units"), each Unit consisting of one share of Series A Preferred stock
and one Common Stock purchase warrant ("Unit Warrant") 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
Units. 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.
As at December 31, 1998, 215,281 shares of Series A Preferred Stock have
been converted into 430,562 Common Shares, and 68,500 shares of Series A
Preferred Stock remained outstanding. In March 1999, a further 50,000
shares of Series A Preferred Stock were converted.
-29-
<PAGE>
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 authorized shares with a par value of $0.001. On
December 30, 1997, the Company sold 1,923,716 shares of its Series B
Preferred Stock to three affiliated Alta-Berkeley venture capital funds
(collectively referred to as "Alta-Berkeley") for $3,000,000 of which
$1,000,000 was received in December 1997 and $2,000,000 in March 1998.
Subsequent to December 31, 1998, the Board of Directors of the Company
designated a third series of preferred shares as "Series C Preferred
Stock" consisting of 3,783,784 authorized shares with a par value of
$0.001. On January 25, 1999, the Company sold 3,783,784 shares of its
Series C Preferred Stock to five parties, including Alta-Berkeley, two
other venture capital funds, a bank and a private investor, for a total
consideration of $7,000,000.
Concurrent with the issuance of the Series B Preferred Stock, the
Company and Alta-Berkeley entered into an Investors' Rights Agreement,
which has been amended to include the holders of the Series C Preferred
Stock. Pursuant to the terms of this agreement, the Company increased
the authorized number of its directors to nine. Holders of the shares of
both the Series B Preferred Stock as a class, and the Series C Preferred
Stock as a class, are each entitled to elect two members of the
Company's Board (four in total). In addition, the Company has granted
the holders of the Series B Preferred Stock and the Series C Preferred
Stock (the "Holders") the right of first refusal to purchase a pro rata
share of any new equity securities which the Company may issue. The
right of first refusal expires on January 24, 2006. The Investors'
Rights Agreement also grants the Holders registration rights in certain
circumstances as well as certain approval and disclosure rights over
certain management and strategic matters.
The shares of both the Series B Preferred Stock and the Series C
Preferred Stock have a liquidation preference of the greater of (i)
$3.50 per share if the event of liquidation, dissolution or winding up
occurs on or before December 31, 2000 and thereafter of $5.20 per share
and (ii) $1.85 plus a pro-rata share of any excess liquidation proceeds
accruing to the common shareholders. The shares are all 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.
c) Warrant Issues
During 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").
During 1997, the Company issued a further 204,000 units ("Units") of its
securities, each Unit consisting of two Common Shares and one 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.
d) Stock Option Plan
During 1997, the Company adopted a Stock Option Plan (the "Plan"). As at
December 31, 1998 a total of 750,000 common shares may be issued under
the Plan and have been reserved by the Directors for that purpose.
Pursuant to the issuance of the Series C Preferred Stock an additional
400,000 shares were reserved for the Plan. The Board of Directors
determines the terms and exercise prices of all options to be granted.
Officers and directors of the Company, as well as consultants,
independent contractors or other service providers are eligible for
"Non-qualified Options". Only employees of the Company or its
subsidiaries (including officers and directors) are eligible to receive
grants of "Incentive Stock
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<PAGE>
Options". No option may be granted under the Plan after March 19, 2008,
but options granted before that date may be exercisable after that date.
Options granted under the Plan are subject to a minimum vesting period
of one year.
Pro forma information concerning the Company's net loss and earnings per
share had compensation cost on all options granted been determined
consistent with SFAS No. 123, is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Net loss, as reported $ 3,421,229 $ 2,359,209
Net loss, pro forma 3,470,629 2,510,409
Basic and diluted loss per share, as reported $ 0.59 $ 0.53
Basic and diluted loss per share, pro forma 0.60 0.56
</TABLE>
The effects of applying SFAS No. 123 in this pro-forma disclosure are
not indicative of future amounts.
The following additional information has been used in determining the
above disclosures regarding the Plan:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
----------- -----------
<S> <C> <C>
Weighted-average assumptive information used:
Risk-free rate 5.00% 5.75%
Expected life (days) 1,113 1,186
Expected volatility 57% 69%
Expected dividends $ -- $ --
Weighted-average grant-date fair value of
options $ 0.13 $ 0.63
Options granted during the year:
Directors and employees 380,000 240,000
Consultants -- 70,000
Fair value of options granted during the year:
Directors and employees $ 49,400 $ 151,200
Consultants $ -- $ 44,400
</TABLE>
A summary of the status of the Company's stock option plan as of
December 31, 1998 and 1997 is presented below:
<TABLE>
<CAPTION>
Year ended December 31,
----------------------------------------------------------------
1998 1997
----------------------------- -----------------------------
Weighted- Weighted-
Number of Average Number of Average
Options Exercise Price Options Exercise Price
--------- -------------- --------- --------------
<S> <C> <C> <C> <C>
Outstanding at the beginning of the year 310,000 $ 3.33 -- --
Add: Granted during the year 380,000 2.00 310,000 $ 3.33
Less: Exercised during the year -- -- -- --
Forfeited during the year 35,000 2.00 -- --
Expired during the year -- -- -- --
--------- -------------- --------- --------------
Options outstanding at the end of the year 655,000 $ 2.00 310,000 $ 3.33
Weighted-average remaining contractual life 910 days 954 days
Options exercisable at the end of the year 200,000 $ 2.00 190,000 $ 3.50
</TABLE>
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<PAGE>
In March 1998, the strike price applicable to all of the options
existing at that time was reset to $2.00. Since the revised fair value
of the options based on the reset strike price was lower than the amount
originally recorded as compensation cost, no adjustment was made as a
result of the reset.
12. Retirement plans
All of the Company's Swiss-based employees, including its executive
officers, are required to participate in the pension or retirement plans
required by law in Switzerland, which are similar to defined contribution
plans.
The Assurance Vieillesse et Survivants ("AVS") is a state-administered plan,
under which the Company and the employee each contribute an amount of 5.05%
of salary to the AVS fund. The Prevoyance Professionnelle plan ("LPP") is
administered by an independent insurance company whereby amounts of between
5% and 15% of each employee's compensation are contributed to the LPP fund.
The Company and employees each contribute 50% of this cost. In addition to
the legally required plans, the Company undertakes supplemental LPP programs
for its management.
The Company has no pension or retirement liability other than its obligation
to make employer and employee contributions to the AVS and LPP funds.
Amounts charged to income in respect of the AVS and LPP plans (including
supplemental programs) for executive officers and other employees was
approximately $176,561 and $59,586 for the years ended December 31, 1998 and
1997 respectively.
The Company does not maintain any plans for other post-employment or post-
retirement employee benefits.
13. Subsequent events
Subsequent to December 31, 1998, the Board of Directors of the Company
designated a third series of preferred shares as "Series C Preferred Stock"
and on January 25, 1999, the Company sold 3,783,784 shares of its Series C
Preferred Stock for a total consideration of $7,000,000, as disclosed in
Note 11.b).
14. Supplementary disclosure to cash flow statement
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------- -----------------
<S> <C> <C>
Cash paid during the year for:
Interest $ 5,417 $ 1,268
Income taxes - -
Non-cash investing and financing transactions:
Capitalization of interest - 6,656
Capital leases relating to finance equipment 197,545 532,500
Common stock issued in consideration for
consultancy fees - 20,000
Common stock issued to repay a bridging loan 225,000 200,000
Common stock issued in consideration for
administrative fees - 8,000
</TABLE>
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<PAGE>
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
---- --- --------
<S> <C> <C>
Neil Gibbons 50 Chairman of the Board, Chief Executive Officer and President
Daniel Huber 31 Vice President, Chief Operating Officer, Secretary and Director
Mark Benn 35 Chief Financial Officer
William Cordeiro 53 Director
Stuart Townsend 52 Director
Bryan Wood 53 Director
Frank Verschoor 38 Director
Paul Goossens 43 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 and marketing consultant in the financial
services. Mr. Gibbons holds an MBA (Cum Laude) from IMO, Lausanne, Switzerland.
Mr. Huber co-founded Virtual Telecom SA in 1994 and has served as Vice
President, Chief Operating 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. Huber holds a degree in portfolio management and financial
analysis.
Mr. Benn has served as Chief Financial Officer of the Company since April
1998. From January 1994 to March 1998 he was finance manager for Radcliffes
Trustee Company S.A., an international financial services company. Mr. Benn
holds a B.Com (Hons) in Information Systems and is a qualified Chartered
Accountant.
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. in Executive Management from
the Peter F. Drucker Graduate Management Center of the Claremont Graduate
School.
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. Mr. Wood holds an MBA from Harvard Business
School and BSc in Industrial Engineering from Virginia Polytechnic Institute.
Mr. Verschoor has served as a director of the Company since February 1999.
Since February 1998, he has served as the Investment Director of the NeSBIC CTE
Fund. From January 1997 to January 1998, he was managing partner of FMR
International BV, a Dutch information technology consulting firm. From 1994 to
December 1996, Mr. Verschoor held several positions in USoft UK Ltd., a
development tools software company. Mr. Verschoor holds an MBA from Rotterdam
School of Management/Erasmus University.
-33-
<PAGE>
Mr. Goossens has served as a director of the Company since February 1999. He
is currently a Senior Investment Manager and was previously a portfolio manager
with GIMV, having commenced there in September 1996. From September 1995 to
August 1996 he completed a MBA at Nijenrode University in the Netherlands.
Previously, since 1994, he worked in the field of high-tech services to the oil
industry. Mr. Goossens also holds a degree in Electromechanical engineering from
Leuven University in Belgium.
Those required to make filings under Section 16(a) have done so on a timely
basis.
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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------------------------------- -------------------------------------
Common Shares All Other
Restricted Stock Underlying Options Compensation
Name & Position Year Salary Bonus Other Awards Granted (Shares) (\\1\\)
- ----------------------------------------------------------------------------------------------------------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Neil Gibbons, CEO 1998 CHF 120,000 -- -- -- 40,000 CHF 7,200
1997 CHF 96,000 -- -- -- 50,000 CHF 7,200
1996 CHF 62,000 -- -- -- -- --
Daniel Huber, COO 1998 CHF 120,000 -- -- -- 40,000 CHF 7,200
1997 CHF 96,000 -- -- -- 50,000 CHF 7,200
1996 CHF 64,000 -- -- -- -- --
Mark Benn, CFO (\\2\\) 1998 CHF 81,000 -- -- -- 95,000 --
(\\1\\) Represents an allowance of CHF 600 per month
(\\2\\) Commenced April 1998
</TABLE>
The following table sets forth the options granted by the Company to its
executive officers for services rendered during the current fiscal year:
<TABLE>
<CAPTION>
Option/SAR Grants in Last Fiscal Year
Individual Grants
- -------------------------------------------------------------------------------------------------------------------
% of Total Options
Number of Securities /SARs Granted to
Underlying Options Employees in Fiscal Exercise or Base
Name /SARs Granted (#) Year Price ($/Share) Expiration Date
- -------------------- -------------------- ------------------- ----------------- ---------------
<S> <C> <C> <C> <C>
Neil Gibbons, CEO 40,000 11% 2.00 12/31/2001
Daniel Huber, COO 40,000 11% 2.00 12/31/2001
Mark Benn, CFO 95,000 25% 2.00 12/31/2001
</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.
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, 1999 by (i) each person
who is known by the Company to be the beneficial owner of more than
-34-
<PAGE>
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) 1,446,770 (2) 23.8%
Daniel Huber (1) 1,146,770 (2) 18.9%
William Cordeiro (3) 10,000 (4) (5)
Stuart Townsend (6) 185,000 (7) 3.0%
Bryan Wood (8) 2,464,257 (9) 29.1%
Frank Verschoor (10) 1,351,351 (11) 18.3%
Paul Goossens (12) 1,081,081 (13) 15.2%
Alta-Berkeley (8) 2,464,257 (9) 29.1%
NeSBIC CTE Fund (10) 1,351,351 (11) 18.3%
GIMV (12) 1,081,081 (13) 15.2%
Directors and executive officers as a group 7,685,229 69.5%
</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) Includes 50,000 shares of Common Stock underlying immediately exercisable
options, and 135,000 shares of Common Stock held by Townsend Analytics,
Ltd. of which Mr. Townsend is President and owner.
(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 and
C Preferred Stock held by Alta-Berkeley V, C.V. and two affiliated funds.
Mr. Bryan Wood is a partner of Alta-Berkeley Associates which serves as
manager of the three funds.
(10) Address is NeSBIC CTE Fund, Savannahweg 17, 3542 AW, RM Utrecht,
Netherlands
(11) Represents shares of Common Stock issuable upon conversion of Series C
Preferred Stock held by the NeSBIC CTE Fund. Mr. Frank Verschoor is the
investment director of the NeSBIC CTE Fund.
(12) Address is GIMV, Karel Oomsstraat 37, B-2018 Antwerp, Belgium
(13) Represents shares of Common Stock issuable upon conversion of Series C
Preferred Stock held by the GIMV. Mr. Paul Goossens is an investment
manager of the GIMV.
Item 12. Certain Relationships And Related Transactions.
Profilinvest: The Company's Chief Operating 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.
Townsend Analytics, Ltd.: Mr. Stuart Townsend, a director of the Company, is
the founder and president of Townsend Analytics, Ltd., the provider of the
financial software used extensively by the Company. In December 1998 the Company
extended the scope its agreement with Townsend Analytics, Ltd. whereby the
latter agreed not to undertake any new licensing agreements for Switzerland,
Germany, France, and the Benelux countries until December
-35-
<PAGE>
31, 2001. Pursuant to this, the Company was committed to paying a single amount
of $500,000 ($250,000 of which was settled in February 1999 in cash and the
remainder in March 1999 through the issuance of 135,000 common shares), and is
further committed to minimum royalty payments of $50,000 per month from July 1,
1999, $100,000 per month from January 1, 2000 and $150,000 per month from
July 1, 2000.
Alta-Berkeley Associates: As At December 31, 1998 the Company owed
$1,000,000 to Alta-Berkeley Associates, holders of the Series B Preferred Stock.
This amount was converted into Series C Preferred Stock in January 1999.
Item 13. Exhibits And Reports On Form 8-K.
<TABLE>
<CAPTION>
(a) Index To Exhibits
- --- -----------------
<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
10.11 (3) Series B Preferred Stock Purchase Agreement dated December 18, 1997
10.12 (3) Investor Rights Agreement dated December 18, 1997
10.13 (3) Software License Agreement between the Company and IQ Net
10.14 Series C Preferred Stock Purchase Agreement dated January 25, 1999
10.15 Amended and Restated Investor Rights Agreement dated January 25, 1999
16.1 (2) Letter from Raimondo, Pettit & Glassman regarding Change of Independent Public Accountant
</TABLE>
-36-
<PAGE>
<TABLE>
<C> <S>
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.
(3) Previously filed as part of annual report on Form 10-KSB (SEC File No. 0-
22351) filed with the Securities and Exchange Commission on March 31, 1998.
(b) Reports On Form 8-K
-------------------
None.
-37-
<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, 1999 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.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Neil Gibbons Chief Executive Officer March 30, 1999
- -----------------------
Neil Gibbons
/s/ Daniel Huber Chief Operating Officer March 30, 1999
- -----------------------
Daniel Huber
/s/ Mark Benn Chief Financial Officer March 30, 1999
- -----------------------
Mark Benn
Director
- -----------------------
William Cordeiro
/s/ Stuart Townsend Director March 30, 1999
- -----------------------
Stuart Townsend
/s/ Bryan Wood Director March 30, 1999
- -----------------------
Bryan Wood
Director
- -----------------------
Frank Verschoor
/s/ Paul Goossens Director March 30, 1999
- -----------------------
Paul Goossens
-38-
<PAGE>
Second 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 215,281 shares were converted into Common Stock and 68,500 shares of
Series A Preferred Stock are outstanding as of the date of this Certificate of
Designations. The Board of Directors of the Corporation has also previously
designated 1,923,716 shares of preferred stock authorized by the Certificate of
Incorporation as Series B Preferred Stock, all of which are outstanding as of
the date of this Second Amended Certificate of Designations.
3. By resolution, the Board of Directors of the Corporation has also
designated 3,783,784 shares of preferred stock authorized by the Certificate of
Incorporation as Series C Preferred Stock. No shares of Series C 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
substantially 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 Amended Certificate of
Designations with respect to the issued and outstanding shares of Series A
Preferred Stock and Series B Preferred Stock to designate 3,783,784 shares of
Series C 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 68,500. The Series A Preferred Stock
shall have a par value of US$.001 per share. The second series of Preferred
Stock shall be designated and known as "Series B Preferred Stock." The number
of authorized shares constituting such series shall be 1,923,716. The Series B
<PAGE>
Preferred Stock shall have a par value of US$.001 per share. The third series
of Preferred Stock shall be designated and known as "Series C Preferred Stock."
The number of authorized shares constituting such series shall be 3,783,784.
The Series C Preferred Stock shall have a par value of US$.001 per share.
Section 2. Definitions. For the purposes of this Second Amended
-----------
Certificate of Designations, the following terms shall have the meanings
indicated:
"Alternative Liquidation Preference" shall mean $3.50 per share of
----------------------------------
Preferred Stock plus any accrued and unpaid dividends if the event of
liquidation occurs on or before December 31, 2000 and thereafter shall mean
$5.20 per share of Preferred Stock plus any accrued and unpaid dividends.
"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; with respect to
Series B Preferred Stock, shall mean US$1.5595 per share of Series B Preferred
Stock; and with respect to Series C Preferred Stock, shall mean US$1.85 per
share of Series C 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, the Series B Preferred Stock, or the Series C
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; shall mean with respect to the Series B Preferred Stock and
Series C Preferred Stock $1.85 per share of 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, the Series B
Preferred Stock or the Series C 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 the Series A Preferred Stock, the
---------------
Series B Preferred Stock and the Series C Preferred Stock, unless the context
denotes otherwise.
-2-
<PAGE>
"Senior Stock" shall mean any capital stock of the Corporation
------------
ranking senior to either the Series A Preferred Stock, the Series B Preferred
Stock or the Series C 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 and the Series C
-------
Preferred Stock shall, with respect to rights on liquidation, dissolution or
winding up, as a group 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 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 nine (9)
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 Series C 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 five
-3-
<PAGE>
(5) 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, the Series B Preferred
Stock or the Series C 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 Second 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 Second Amended Certificate of Designations 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) Except as otherwise provided in subpart (b) below, 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 and Series C
Preferred Stock as a group; 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. Subsequent to the payment of all
Liquidation Preferences plus all accrued or declared but unpaid dividends on
such shares pursuant to this subpart (a), each share of Series B Preferred Stock
and Series C Preferred Stock shall participate with the holders of the Common
Stock on any further distributions or payments in proportion to their holdings
assuming that such shares of Preferred Stock had been converted, on the record
date for determining the stockholders entitled to receive distributions or
payments, into the maximum number of shares of Common Stock into which such
shares of Preferred Stock are then convertible as provided in Section 7(c).
(b) If in the event of any liquidation, dissolution or winding up of the
Corporation, either voluntary or involuntary, the holders of the Series B
Preferred Stock and Series C Preferred Stock would receive distributions
pursuant to subpart (a) of this Section 6 in an amount less than the Alternative
Liquidation Preference, then the holders of the Series B Preferred Stock and the
Series C Preferred Stock shall receive, prior to and in preference to the
holders of any
-4-
<PAGE>
Common Stock or Series A Preferred Stock, the Alternative Liquidation Preference
and no more.
(c) 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 B Preferred Stock and Series C Preferred Stock, as
a group, or the Series A Preferred Stock shall be insufficient to permit payment
of the Liquidation Preference payable in full to the holders of such series,
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 any
Series A 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 of such
----------------------
series and the denominator of which is the applicable Conversion Price and (Y)
is the number of shares of Preferred Stock to be converted. The number of shares
of Common Stock to be issued upon conversion of shares of any Series B or Series
C Preferred Stock shall be equal to the product of (X) and (Y), where (X) is a
fraction, the numerator of which is the Initial Conversion Price of such series
and the denominator of which is the applicable Conversion Price and (Y) is the
number of shares of Preferred Stock to be converted.
(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
-5-
<PAGE>
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 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;
-6-
<PAGE>
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
-----------------
Second 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.
(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
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<PAGE>
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 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) 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 applicable to such share of Series A Preferred Stock,
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
-8-
<PAGE>
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 and Series C Preferred Stock, voting as a group.
(b) The Corporation shall give written notice of its intention to
redeem the Series A 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 Series A Preferred
Stock being redeemed (which shall be all of such shares then outstanding); (ii)
the number of shares of Series A 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 Series A 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 Series A Preferred Stock called for redemption.
(c) For the purpose of determining whether funds are legally available
for redemption of shares of Series A 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 Series A
Preferred Stock required to be redeemed as provided herein, funds to the extent
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 Series A 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
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<PAGE>
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 Second Amended Certificate of Designations
and to enforce specifically the terms and provisions of this Second 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 Second 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.
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 January __, 1999.
/s/ NEIL GIBBONS
----------------
NEIL GIBBONS
Chief Executive Officer
/s/ DANIEL HUBER
----------------
DANIEL HUBER
Secretary
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<PAGE>
EXHIBIT 10.14
VIRTUAL TELECOM, INC.
SERIES C PREFERRED STOCK
PURCHASE AGREEMENT
January 25, 1999
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
1. Purchase and Sale of Stock.................................................1
1.1 Sale and Issuance of Series C Preferred Stock..........................1
1.2 Closing................................................................1
2. Representations and Warranties of the Company..............................2
2.1 Organization, Good Standing; Qualification.............................2
2.2 Authorization..........................................................2
2.3 Valid Issuance of Preferred and Common Stock...........................3
2.4 Governmental Consents..................................................3
2.5 Capitalization and Voting Rights.......................................3
2.6 Subsidiaries...........................................................4
2.7 Contracts and Other Commitments........................................4
2.8 Related-Party Transactions.............................................4
2.9 Registration Rights....................................................5
2.10 Permits...............................................................5
2.11 Compliance With Other Instruments.....................................5
2.12 Litigation............................................................5
2.13 Customer Complaints...................................................6
2.14 Disclosure............................................................6
2.15 SEC Filings...........................................................6
2.16 Offering..............................................................6
2.17 Title to Property and Assets; Leases..................................6
2.18 Financial Statements..................................................7
2.19 Changes...............................................................7
2.20 Patents and Trademarks................................................7
2.21 Manufacturing and Marketing Rights....................................8
2.22 Employees; Employee Compensation......................................8
2.23 Proprietary Information Agreements....................................8
2.24 Tax Returns, Payments and Elections...................................8
2.25 Insurance.............................................................9
2.26 Environmental and Safety Laws.........................................9
2.27 Minute Books..........................................................9
2.28 Use of Proceeds.......................................................9
2.29 Townsend Analytics....................................................9
3. Representations and Warranties of Investors...............................10
3.1 Authorization.........................................................10
3.2 Restricted Securities.................................................10
3.3 Investor Sophistication and Ability to Bear Risk of Loss..............11
3.4 Independent Investigation and Advisors................................11
3.5 Foreign Jurisdictions.................................................11
4. Conditions of Investors' Obligations at Closing...........................11
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<PAGE>
4.1 Representations and Warranties........................................12
4.2 Performance...........................................................12
4.3 Qualifications........................................................12
4.4 Proceedings and Documents.............................................12
4.5 Certificate of Designations...........................................12
4.6 Opinion of Company Counsel............................................12
4.7 Investors' Rights Agreement...........................................12
4.8 Co-Sale Agreement.....................................................12
4.9 Minimum Offering......................................................12
4.10 Due Diligence........................................................12
4.11 Approval of NeSBIC Supervisory Board.................................13
4.12 Townsend Analytics, Ltd..............................................13
5. Conditions of the Company's Obligations at Closing........................13
5.1 Representations and Warranties........................................13
5.2 Qualifications........................................................13
6. Indemnification...........................................................13
6.1 Indemnity by the Company..............................................13
6.2 Indemnity by the Investors............................................13
6.3 Indemnification Procedure.............................................13
7. Miscellaneous.............................................................14
7.1 Entire Agreement......................................................14
7.2 Survival of Warranties................................................14
7.3 Successors and Assigns................................................14
7.4 Governing Law.........................................................15
7.5 Counterparts..........................................................15
7.6 Titles and Subtitles..................................................15
7.7 Notices...............................................................15
7.8 Finders' Fees.........................................................15
7.9 Attorneys' Fees.......................................................15
7.10 Amendments and Waivers...............................................15
7.11 Severability.........................................................15
7.12 Expenses.............................................................16
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<PAGE>
VIRTUAL TELECOM, INC. SERIES C PREFERRED STOCK PURCHASE AGREEMENT
-----------------------------------------------------------------
THIS SERIES C PREFERRED STOCK PURCHASE AGREEMENT (this "Agreement") is made
as of the 25th of January 1999 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."
R E C I T A L S
- - - - - - - -
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 up to 3,783,784 shares of the Company's Series C Preferred Stock
for the aggregate payment of Seven Million U.S. Dollars (US$7,000,000).
B. Upon the Closing (as defined below), each of the Investors intends
to purchase, and the Company intends to issue and sell, that number of shares of
the Company's Series C 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.
A G R E E M E N T
- - - - - - - - -
It is agreed as follows:
1. Purchase and Sale of Stock.
--------------------------
1.1 Sale and Issuance of Series C Preferred Stock.
---------------------------------------------
(a) The Company shall adopt and file with the Secretary of State of
Delaware on or before the Closing a Second Amended Certificate of Designations
in the form attached hereto as Exhibit A (the "Amended 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 C Preferred Stock set
forth opposite each Investor's name on Schedule A hereto at a price of US$1.85
per share. The Series C Preferred Stock will have the rights, preferences,
privileges and restrictions set forth in the Amended Certificate.
1.2 Closing. The initial closing of the transactions contemplated by this
-------
Agreement ("Closing") shall take place at 4:00 p.m., Switzerland Time, at the
offices of the Company, 12 Avenue Des Morgines, 1213 Petit-Lancy, Geneva,
Switzerland on January 22, 1999, or at such other time or place as the Company
and the Investors acquiring in the aggregate more than half the shares of Series
C Preferred Stock sold pursuant hereto shall mutually agree, either orally or in
writing. Except as otherwise provided herein, the Closing may be conducted by
means of exchange
-1-
<PAGE>
of documents via facsimile with original documents to be exchanged by overnight
mail. At the Closing, or as soon thereafter as practicable, the Company shall
deliver to each Investor the certificates representing the shares of Series C
Preferred Stock purchased by the Investor under this Agreement in definitive
form and registered in the name of each Investor, as set forth in Exhibit A,
against delivery to the Company by the Investor of a check or wire transfer to
the Company's general account for the Shares purchased by the Investor;
provided, however, that Alta-Berkeley V., C.V. and its affiliates ("Alta-
Berkeley") may purchase shares of Series C Preferred Stock through the
cancellation of loans previously made by Alta-Berkeley to the Company at a rate
of $1.85 of indebtedness per share of Series C Preferred Stock. Additional
Closings, upon substantially identical terms and conditions to those contained
herein, may be held until 3,783,784 Shares have been sold for the aggregate
payment of $7,000,000 or March 31, 1999, whichever comes earlier. Unless
otherwise stated, the initial Closing and any additional Closings shall be
referred to herein as the "Closing."
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 properties and assets and to carry on its business as now
conducted, to execute and deliver this Agreement, the Amended and Restated
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 C
Preferred Stock and the Common Stock issuable upon conversion thereof, and to
carry out the provisions of this Agreement, the Investors' Rights Agreement, the
Amended 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 C 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
-2-
<PAGE>
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 this Agreement, the
Investors' Rights Agreement and any Ancillary Agreement may be limited by
applicable federal or state securities laws.
2.3 Valid Issuance of Preferred and Common Stock. The Series C 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. The Common Stock issuable upon conversion of the Series
C Preferred Stock purchased under this Agreement has been duly and validly
reserved for issuance and, upon issuance in accordance with the terms of the
Amended 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 C Preferred Stock by the Company or the issuance
of Common Stock upon conversion of the Series C Preferred Stock, except (a) the
filing of the Amended 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) 68,500 shares have been designated
Series A Preferred Stock, all of which are issued and outstanding, (ii)
1,923,716 shares have been designated Series B Preferred Stock, all of which are
issued and outstanding, and (iii) 3,783,784 shares have been designated Series C
Preferred Stock, up to all of which will be sold pursuant to this Agreement. The
rights, privileges and preferences of the Series A, Series B and Series C
Preferred Stock will be as stated in the Amended Certificate.
(b) Common Stock. 20,000,000 shares of common stock ("Common
------------
Stock"), par value US$.001, of which 5,781,309 shares are issued and
outstanding.
The outstanding shares of Series A and Series B 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 January 18, 1999. The
outstanding shares of Series A Preferred Stock, Series B Preferred Stock and
Common Stock have been duly authorized and validly issued,
-3-
<PAGE>
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, Series B and Series C Preferred Stock
(ii) the rights provided in 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 385,000 shares of Common
Stock granted to officers, directors and 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 or which obligates the Company in
any way with respect to any shares of its capital stock. In addition to the
aforementioned options, the Company has reserved an additional 765,000 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 Virtual Telecom SA, a Swiss corporation,
------------
Firstquote Limited, an English corporation, and Virtual Telecom Limited, an
English corporation, all of which are 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. None
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 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 the 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.
2.8 Related-Party Transactions. 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
-4-
<PAGE>
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 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
-5-
<PAGE>
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 that Investors have requested for deciding whether to purchase the
Series C Preferred Stock. Neither this Agreement nor any other written
statements or certificates prepared by the Company and delivered in connection
herewith or, to the best of the Company's knowledge, any written statements
prepared by third parties and delivered by the Company in connection herewith,
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements herein or 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 Series C Preferred Stock (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 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 C Preferred Stock as contemplated by this Agreement are exempt from the
registration requirements of the Securities Act, and neither the Company nor 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
-6-
<PAGE>
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, 1997 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, 1998 (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, the Company has no material liabilities, contingent or
otherwise, other than (i) liabilities incurred in the ordinary course of
business subsequent to September 30, 1998, 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, 1998, 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. 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 and,
to its knowledge, these rights do not conflict with or infringe 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 2.22
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
-7-
<PAGE>
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 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, other than the Subsidiaries, 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 Code of Conduct. 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 Code of Conduct 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 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
-8-
<PAGE>
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
depositories.
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.. 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 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.
2.28 Use of Proceeds. The Company shall use the proceeds from the sale of
---------------
the Shares solely for marketing expenses and general working capital purposes.
2.29 Townsend Analytics. With respect to that certain Software
------------------
Distributor Agreement between the Company and Townsend Analytics Ltd. ("Townsend
Agreement") dated January 16, 1997, the Company shall use its best efforts to
amend the Townsend Agreement within three months from the Closing to (i) provide
for the Company's access to the source codes of Townsend Analytics Ltd.'s
software in the event Townsend Analytics Ltd. either declares bankruptcy or does
not perform pursuant to the Townsend Agreement and (ii) delete the provision of
the Townsend Agreement providing for the termination of the Townsend Agreement
upon the termination of that certain license agreement between Townsend
Analytics Ltd. and the CBOT.
-9-
<PAGE>
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 C
---------------------
Preferred Stock have not been registered under the Securities Act or any other
applicable securities laws and that the Series C Preferred Stock are being
offered and sold pursuant to Section 4(2) of the Securities Act and that the
Company's reliance upon Section 4(2) is predicated in part on Investors'
representations as contained herein.
(a) The Investors and their beneficial owners are domiciled in Europe
and are "accredited investors" as defined under Rule 501 under the 1933 Act.
(b) Investor acknowledges that neither the Series C Preferred Stock
nor the shares of Common Stock issuable upon conversion of the Series C
Preferred Stock ("Underlying Common Shares") have been registered under the
1933 Act or the securities laws of any state and are being offered, and will be
sold, pursuant to applicable exemptions from such registration for nonpublic
offerings and will be issued as "restricted securities" as defined by Rule 144
promulgated pursuant to the 1933 Act. The Series C Preferred Stock and the
Underlying Common Shares may not be resold in the absence of an effective
registration thereof under the 1933 Act and applicable state securities laws
unless, in the opinion of the Company's counsel, an applicable exemption from
registration is available.
(c) Investor is acquiring the Series C Preferred Stock for its own
account, for investment purposes only and not with a view to, or for sale in
connection with, a distribution, as that term is used in Section 2(11) of the
1933 Act, in a manner which would require registration under the 1933 Act or any
state securities laws.
(d) Investor understands and acknowledges that the Series C Preferred
Stock and the Underlying Common Shares will bear the following legend:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR THE SECURITIES LAWS OF ANY
STATE. THE SECURITIES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR
TRANSFERRED FOR VALUE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION THEREOF UNDER
THE SECURITIES ACT OF 1933 AND/OR THE SECURITIES ACT OF ANY STATE HAVING
JURISDICTION OR AN OPINION OF COUNSEL ACCEPTABLE TO THE CORPORATION THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER SUCH ACT OR ACTS.
(e) Investor acknowledges that an investment in the Series C Preferred
Stock is not liquid and is transferable only under limited conditions. Investor
acknowledges that such securities must be held indefinitely unless they are
subsequently registered under the 1933 Act or
-10-
<PAGE>
an exemption from such registration is available. Investor is aware of the
provisions of Rule 144 promulgated under the 1933 Act, which permits limited
resale of securities purchased in a private placement subject to the
satisfaction of certain conditions and that such Rule is not now available and,
in the future, may not become available for resale of the Series C Preferred
Stock or the Underlying Common Shares.
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 C 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 C
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 C 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 C Preferred Stock,
Investor has relied upon, apart from the representations and warranties of the
Company, its own independent investigation of the Company, 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 Investor of the Series C 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 C Preferred Stock or any use of this Agreement,
including (a) the legal requirements within its jurisdiction for the purchase of
the Series C 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 income tax and other tax consequences, if any, which may
be relevant to the purchase, holding, redemption, sale or transfer of the Series
C Preferred Stock. Investor's subscription and payment for, and its continued
beneficial ownership of, the Series C Preferred Stock will not violate any
applicable securities or other laws of Investor's jurisdiction.
4. Conditions of Investors' Obligations at Closing. The obligations of
-----------------------------------------------
each Investor under subparagraph l.l(b) of this Agreement are subject to the
fulfillment on or before the Closing of each of the following conditions:
-11-
<PAGE>
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, and the Investors shall have been provided
with a certificate duly executed by an officer of the Company to such effect.
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, and
the Investors shall have been provided with a certificate duly executed by an
officer of the Company to such effect.
4.3 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.
4.4 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.
4.5 Certificate of Designations. The Amended Certificate shall provide
---------------------------
that the holders of a majority of the outstanding shares of Series C Preferred
Stock shall be entitled to elect two (2) directors to the Company's Board of
Directors. The provision of the Amended 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 C Preferred Stock.
4.6 Opinion of Company Counsel. Investors shall have received from
--------------------------
Oppenheimer Wolff & Donnelly, LLP, counsel for the Company, an opinion, dated
the date of the Closing, in substantially the form attached hereto as Exhibit E.
4.7 Investors' Rights Agreement. The Company and each investor shall have
---------------------------
entered into the Investors' Rights Agreement in the form attached hereto as
Exhibit C.
4.8 Co-Sale Agreement. The Company, each Investor, the holders of the
-----------------
Series B Preferred Stock, Neil Gibbons and Daniel Huber shall each have entered
into an Amended and Restated Co-Sale Agreement in the form attached hereto as
Exhibit F.
4.9 Minimum Offering. The Investors shall have purchased a minimum of
----------------
2,972,973 shares of Series C Preferred Stock for the aggregate proceeds of
US$5,500,000, of which Alta Berkeley shall have purchased a minimum of 540,541
shares for the aggregate proceeds of US$1,000,000.
4.10 Due Diligence. Investors or their representatives shall have
-------------
performed to their satisfaction a due diligence review of the legal and
financial issues regarding the Company.
-12-
<PAGE>
4.11 Approval of NeSBIC Supervisory Board. The Agreement, the Investors'
------------------------------------
Rights Agreement, the Co-Sale Agreement and the transactions contemplated
thereby shall have been approved by the supervisory board of directors of NeSBIC
CTE Fund BV.
4.12 Townsend Analytics, Ltd. In addition to the amendment to the
-----------------------
Townsend Agreement contemplated by Section 2.29 herein, the Company and Townsend
Analytics, Ltd shall have entered into that certain Letter Agreement in the form
attached hereto as Exhibit G.
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 C Preferred Stock pursuant to this Agreement shall be duly obtained and
effective as of the Closing.
6. Indemnification.
---------------
6.1 Indemnity by the Company. The Company agrees to and does hereby
indemnify and hold each Investor, their successors and assigns and their
shareholders, directors, officers, employees and agents, harmless from and
against any and all loss, damage, liability, injury, cost and expense (including
attorneys fees) incurred by such party in connection with or arising from: (a)
the non-performance, partial or total, by the Company of any of its agreements
and covenants contained in this Agreement; (b) the inaccuracy of any
representation of the Company contained or referred to in this Agreement or any
Schedule, Exhibit or certificate delivered by or on behalf of the Company
pursuant hereto; (c) claims for any brokers' or finders' fees made or asserted
by any party claiming to have been employed by the Company or any shareholder,
director, officer, employee or agent of the Company; and (d) any and all
actions, suits, proceedings, demands, assessments or judgments, cost and
expenses incidental to any of the foregoing matters set forth in this Section
6.1.
6.2 Indemnification Procedure.
-------------------------
(a) In order for an Investor to be entitled to any indemnification
provided for under this Agreement, such Investor must notify the Company in
writing of the claim within thirty (30) business days after receipt or knowledge
by such Investor of such claim; provided, however, that failure to give such
-------- -------
notification shall not affect the indemnification provided hereunder except to
the extent the Company can demonstrate actual monetary prejudice as a direct or
indirect result of such failure. Thereafter, the Investor shall deliver to the
Company, within thirty (30) business days' time after the Investor's receipt
thereof, copies of all notices and documents (including court papers) received
by the Investor relating to the claim.
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<PAGE>
(b) If a claim is made against an Investor, the Company will defend
such claim, at its expense, with counsel selected by the Company but reasonably
satisfactory to the Investor. The Investor shall have the right to participate
in the defense thereof and to employ counsel, which shall be at its own expense,
unless the parties are co-defendants, in which case the Company shall bear such
expense separate from the counsel employed by the Company. The Company shall be
liable for the fees and expenses of counsel employed by the Investor for any
period during which the Company has not assumed the defense thereof (other than
after the thirty (30)-day period described in Section 6.2(a) if the Investor
shall have failed to give notice of the claim). All the parties hereto shall
cooperate in the defense or prosecution thereof. Such cooperation shall include
the retention after reasonable notice of the need therefor and (upon the
Company's request) the provision to the Company of records and information which
are reasonably relevant to such claim, and making employees available on a
mutually convenient basis to provide additional information and explanation of
any material provided hereunder. The Company shall keep the Investor fully
informed of the status of the claim and shall furnish the Investor such
information and documents as it may request concerning the claim. The Investor
shall have the right to monitor the Company's defense or challenge of the claim.
If the Investor determines, in its reasonable discretion, that the Company's
conduct of the defense may subject the Investor to a criminal fine or penalty,
or adverse economic harm, the Investor may obtain, at the Company's expense,
counsel or other advisors of the Investor's own choosing to defend or challenge
the claim. An Company shall have no liability under this Section 6.3 for any
settlements entered into by the Investor without the prior written consent of
the Company.
7. Miscellaneous.
-------------
7.1 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.
7.2 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.
7.3 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
transferees of any shares of Series C 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 C Preferred Stock.
-14-
<PAGE>
7.4 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.
7.5 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.
7.6 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.
7.7 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.
7.8 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 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.
7.9 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 Amended 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.
7.10 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 written consent of each of the
Investors. 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.
7.11 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
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<PAGE>
balance of the Agreement shall be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
7.12 Expenses. Irrespective of whether the Closing is effected, the
--------
Company shall reimburse Investors for all of their reasonable and customary
expenses for legal and financial counsel.
IN WITNESS WHEREOF the parties have executed this Agreement as of the date
first above written.
"COMPANY"
VIRTUAL TELECOM, INC.,
a Delaware corporation
By: /s/ Neil G. Gibbons
-------------------
Neil G. Gibbons, Chief Executive Officer
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<PAGE>
SCHEDULE A
----------
LIST OF INVESTORS
-----------------
<TABLE>
<CAPTION>
Name and Number of
Address of Investor Signature Shares Purchased
------------------- --------- ----------------
<S> <C> <C>
Alta-Berkeley V, C.V /s/ Alta-Berkeley V., C.V. 486,749
--------------------------
6 rue d'Italie
CH-1211
Geneva
3 Switzerland
Alta-Berkeley V, S by S, C.V /s/ Alta-Berkeley V, S by S, C.V. 15,040
-------------------------------------
6 rue d'Italie
CH-1211
Geneva
3 Switzerland
Alta-Berkeley Nordic Partners, KY /s/ Alta-Berkeley Nordic Partners, KY 38,752
-------------------------------------
6 rue d'Italie
CH-1211
Geneva
3 Switzerland
NeSBIC CTE Fund BV /s/ NeSBIC CTE Fund BV 1,351,352
-------------------------------------
Savannahweg 17
3542 AW
Utrecht
The Netherlands
GIMV /s/ GIMV 1,081,081
-------------------------------------
Karel Oomsstraat 37
B-2018 Antwerp
Belgium
</TABLE>
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EXHIBIT 10.15
AMENDED AND RESTATED
INVESTORS' RIGHTS AGREEMENT
THIS AMENDED AND RESTATED INVESTORS' RIGHTS AGREEMENT (this "Agreement") is
made and entered into as of the 25th day of January 1999 by and among Virtual
Telecom, Inc., a Delaware corporation (the "Company"), and the persons
identified on Exhibit A attached hereto (the "Stockholders").
R E C I T A L S
A. The Company and the holders of the issued and outstanding shares of
Series B Preferred Stock ("Series B Holders") have previously entered into that
certain Investors' Rights Agreement ("Original Agreement") dated December 18,
1997.
B. In connection with the Company's proposed sale of shares of Series C
Preferred Stock, the Company and the Series B Holders wish to amend and restate
the Original Agreement for purposes of including the purchasers of the shares of
Series C Preferred Stock among the holders of the rights and privileges bestowed
by the Company upon the Series B Holders.
A G R E E M E N T
In consideration of the mutual covenants set forth herein, the parties
agree as follows:
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 C 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.
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(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 or the Series C 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 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 of
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.
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<PAGE>
(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 dated December 18, 1997 between the Company and the
purchasers of the Series B Preferred Stock included among the Stockholders.
(p) "Series C Agreement" shall mean the Series C Preferred Stock
Purchase Agreement of even date herewith between the Company and the purchasers
of the Series C Preferred Stock included among the Stockholders.
(q) "Shares" shall mean either or both, as the case may be, the
Company's Series B Preferred Stock and the Series C Preferred Stock.
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 the 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
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<PAGE>
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
(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
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<PAGE>
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 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:
(i) promptly give to each Holder written notice thereof; and
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<PAGE>
(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.
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 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.
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<PAGE>
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 on 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 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:
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(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;
(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;
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<PAGE>
(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 customer contribution
provisions.
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).
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(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 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
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indemnifying such Indemnified Party hereunder, shall contribute to the amount
paid or payable by such 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.
(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
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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 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 1.2 or 1.5 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.
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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 an Initial Public
Offering, as defined in Section 2.17 herein.
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.
(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 fourteen (14) days thereafter a consolidated balance sheet of the
Company and its subsidiaries, if any, as of 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) As soon as practical after the end of each quarter (except
for the fourth quarter) and in any event within thirty (30) days thereafter a
consolidated balance sheet of the Company and its subsidiaries as of the end of
such quarter and consolidated statements of
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income and cash flows of the Company and its subsidiaries, for each quarter 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.
(iii) As soon as practical after the end of each fiscal year and in any
event within ninety (90) days thereafter a consolidated balance sheet of the
Company and its subsidiaries as of the end of such fiscal year and consolidated
statements of income and cash flows of the Company and its subsidiaries, for the
fiscal year of the Company then ended, 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 prior fiscal year and to the Company's
operating plan then in effect and approved by its Board of Directors.
(iv) Annually (but in any event within forty-five (45) days after the
commencement of fiscal year 1998 and at least forty-five (45) 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, and the holders of at least a majority of the Shares, which
financial plan shall include a projected balance sheet and projected statements
of income and cash flows as of and for such fiscal year and each of the next two
fiscal years thereafter.
(v) 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.
(vi) 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.
(vi) 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 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.
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(d) 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 C 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,
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, options or other rights to purchase
capital stock and are not 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;
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(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
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 and approved by the holders of at
least a majority of the Shares, 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
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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. The Company shall reimburse the
reasonable out-of-pocket expenses incurred by each of the Stockholders' nominees
to the Board of Directors incurred in connection with the attendance of those
directors at any meeting of the Board of Directors. Each Significant Holder (or
its representative) shall have the right to attend, at its own expense, all
meetings of the Board of Directors, which shall be held on a quarterly basis, in
a nonvoting 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 representative) 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 as a direct competitor of the Company.
2.6 Key Person Life Insurance. The Company has as of the date hereof term
life insurance on the lives of Neil Gibbons and Daniel Huber in the amount of
$1,500,000 each. 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
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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
Certificate 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. 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 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) appoint or
dismiss any of its directors or employees who are paid more than $ 10,000 per
month, (ii) vary the terms of employment or the compensation payable to any of
its directors or employees who are paid more than $ 10,000 per month (other than
Neil Gibbons and Daniel Huber) except as provided for in the Company's approved
budget or (iii) 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.
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2.17 Rights of Stockholders. Notwithstanding the provisions of Sections
2.10 and 2.11, the Company shall not, without the prior approval of each of the
Stockholders, (i) amend its Certificate of Incorporation, its Bylaws, this
Agreement, that certain Series C Preferred Stock Purchase Agreement of even date
herewith between the Company and the Stockholders, and that certain Amended and
Restated Co-Sale Agreement of even date herewith by and among the Company, Neil
Gibbons, Daniel Huber and the Stockholders, (ii) enter into any agreement
providing for the liquidation, dissolution or winding up of the Company or any
of its subsidiaries, (iii) enter into any agreement providing for the merger or
consolidation of the Company with or into another corporation in which the
Company is not the surviving Company, or the sale of substantially all of the
Company's assets, (iv) increase, alter or reduce the authorized capital stock of
the Company, or (v) issue any shares of capital stock except (a) in accordance
with the exception set forth in Section 2.11 of this Agreement, or (b) in
connection with an Initial Public Offering. For purposes of this Section 2.17,
the term "Initial Public Offering" shall refer to the initial public offering of
securities of the Company or any subsidiary underwritten on a firm commitment
basis by one or more U.S. broker-dealers or European banks and the subsequent
listing of those securities on any U.S. or European stock exchange.
Notwithstanding Section 3.2 herein, the provisions of this Section 2.17 shall
inure solely to the benefit of the Stockholders and shall not be assignable by
them and any attempted assignment by a Stockholder shall be void and without
effect.
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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 Assignment of Rights. This Agreement and the rights and
obligations of the parties hereunder shall inure to the benefit of, and be
binding upon, their respective successors, assigns and legal representatives.
The rights of the Stockholders hereunder are only assignable (a) by each of such
Stockholders to any other Stockholder, (b) to one or more affiliates of such
Stockholders, or (c) to one or more persons or entities organized by the
Stockholders for the purpose of investing in the 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. In
particular, this Agreement shall amend and restate and effectively supersede the
Original Agreement. Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated, except by a written instrument signed by the
Company and each of the Stockholders and any such amendment, waiver, discharge
or termination shall be binding on all the Holders, but in no event shall 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
(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
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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.
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.
3.10 Indemnification.
(a) Indemnification by the Company. The Company agrees to and
does hereby indemnify and hold each Stockholder, their successors and assigns
and their shareholders, directors, officers, employees and agents, harmless from
and against any and all loss, damage, liability, injury, cost and expense
(including attorneys fees) incurred by such party in connection with or arising
from: (a) the non-performance, partial or total, by the Company of any of its
agreements and covenants contained in this Agreement; (b) the inaccuracy of any
representation of the Company contained or referred to in this Agreement; and
(c) any and all actions, suits, proceedings, demands, assessments or judgments,
cost and expenses incidental to any of the foregoing matters set forth in this
Section 3.10.
(b) Indemnification Procedure.
(1) In order for a Stockholder to be entitled to any
indemnification provided for under this Agreement, such Stockholder must notify
the Company in writing of the claim within thirty (30) business days after
receipt or knowledge by such Stockholder of such claim; provided, however, that
failure to give such notification shall not affect the indemnification provided
hereunder except to the extent the Company can demonstrate actual monetary
prejudice as a direct or indirect result of such failure. Thereafter, the
Stockholder shall
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deliver to the Company, within thirty (30) business days' time after the
Stockholder's receipt thereof, copies of all notices and documents (including
court papers) received by the Stockholder relating to the claim.
(2) If a claim is made against a Stockholder, the Company will defend
such claim, at its expense, with counsel selected by the Company but reasonably
satisfactory to the Stockholder. The Stockholder shall have the right to
participate in the defense thereof and to employ counsel, which shall be at its
own expense, unless the parties are co-defendants, in which case the Company
shall bear such expense separate from the counsel employed by the Company. The
Company shall be liable for the fees and expenses of counsel employed by the
Stockholder for any period during which the Company has not assumed the defense
thereof (other than after the thirty (30)-day period described in Section
3.10(b)(1) if the Stockholder shall have failed to give notice of the claim).
All the parties hereto shall cooperate in the defense or prosecution thereof.
Such cooperation shall include the retention after reasonable notice of the need
therefor and (upon the Company's request) the provision to the Company of
records and information which are reasonably relevant to such claim, and making
employees available on a mutually convenient basis to provide additional
information and explanation of any material provided hereunder. The Company
shall keep the Stockholder fully informed of the status of the claim and shall
furnish the Stockholder such information and documents as it may request
concerning the claim. The Stockholder shall have the right to monitor the
Company's defense or challenge of the claim. If the Stockholder determines, in
its reasonable discretion, that the Company's conduct of the defense may subject
the Stockholder to a criminal fine or penalty, or adverse economic harm, the
Stockholder may obtain, at the Company's expense, counsel or other advisors of
the Stockholder's own choosing to defend or challenge the claim. The Company
shall have no liability under this Section 3.10 for any settlements entered into
by the Stockholder without the prior written consent of the Company.
-22-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Investors
Rights Agreement effective as of the day and year first above written.
"COMPANY"
VIRTUAL TELECOM, INC.
a Delaware Corporation
By: /s/ Neil G. Gibbons
----------------------------------------
Neil G. Gibbons, Chief Executive Officer
-23-
<PAGE>
EXHIBIT A
List of Stockholders
Name and
Address of Investor Signature
Alta-Berkeley V, C.V. /s/ Alta-Berkeley V, C.V.
Leidseplein 29 -------------------------
1017 PS Amsterdam (Postbus 1970)
1000 GS Amsterdam
The Netherlands
Alta-Berkeley V, S by S, C.V. /s/ Alta-Berkeley V, S by S, C.V.
Leidseplein 29 ---------------------------------
1017 PS Amsterdam (Postbus 1970)
1000 GS Amsterdam
The Netherlands
Alta-Berkeley Nordic Partners, KY /s/ Alta-Berkeley Nordic Partners, KY
Aleksanterinkaru 15B -------------------------------------
00100 Helsinki
Finland
NeSBIC Converging Technologies Europe (CTE)
Fund B.V. /s/ NeSBIC Converging Technologies Europe CTE)
Savannahweg 17 ----------------------------------------------
3542 AW
Utrecht
The Netherlands
GIMV /s/ GIMV
Karel Oomsstraat 37 --------
B-2018 Antwerp
Belgium
-24-
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<PAGE>
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
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<SECURITIES> 0
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0
1,992
<COMMON> 5,781
<OTHER-SE> (610,821)
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