Freei Networks, Inc.
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
Dated
as of
November 12,1999
TABLE OF CONTENTS
Page
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1. PURCHASE AND SALE OF STOCK
1.1 SALE AND ISSUANCE OF SERIES A STOCK...................................1
1.2 CLOSING...............................................................1
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY ............................1
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION.........................2
2.2 CAPITALIZATION........................................................2
2.3 SUBSIDIARIES..........................................................2
2.4 AUTHORIZATION ........................................................3
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK .........................3
2.6 GOVERNMENTAL CONSENTS; COMPLIANCE WITH LAWS...........................4
2.7 LITIGATION .......... ................................................4
2.8 INTELLECTUAL PROPERTY ................................................5
2.9 COMPLIANCE WITH OTHER INSTRUMENTS.....................................5
2.10 AGREEMENTS: ACTION...................................................6
2.11 DISCLOSURE...........................................................6
2.12 REGISTRATION RIGHTS..................................................6
2.13 CORPORATE DOCUMENTS .................................................7
2.14 TITLE TO PROPERTY AND ASSETS; CONDITION OF ASSETS ...................7
2.15 LICENSES ............................................................7
2.16 FINANCIAL STATEMENTS ................................................7
2.18 CHANGES..............................................................8
2.19 EMPLOYEE BENEFIT PLANS...............................................9
2.20 TAXES................................................................9
2.21 MINUTES.............................................................10
2.22 BROKERS OR FINDERS..................................................10
2.23 EMPLOYEES...........................................................10
2.24 ENVIRONMENTAL AND SAFETY LAWS ......................................10
2.25 OFFERING VALID......................................................11
2.26 REAL PROPERTY HOLDING CORPORATION...................................11
2.27 INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS............................11
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTOR...........................11
3.1 AUTHORIZATION........................................................11
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT....................................12
3.3 INVESTMENT EXPERIENCE................................................12
3.4 RESTRICTED SECURITIES................................................12
3.5 LEGENDS..............................................................13
3.6 RESIDENCY............................................................14
3.7 ACCES TO INFORMATION.................................................14
4. CONDITIONS OF INVESTOR'S OBLIGATIONS AT THE CLOSING......................14
4.1 REPRESENTATIONS AND WARRANTIES.......................................15
4.2 PERFORMANCE..........................................................15
4.3 COMPLIANCE CERTIFICATE...............................................15
4.4 QUALIFICATIONS.......................................................15
4.5 PROCEEDINGS AND DOCUMENTS............................................15
4.6 INVESTOR RIGHTS AGREEMENT............................................15
4.7 OPINION OF COMPANY COUNSEL...........................................15
4.8 BOARD OF DIRECTORS...................................................17
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING ..................18
5.1 REPRESENTATIONS AND WARRANTIES ......................................18
5.2 PAYMENT OF PURCHASE PRICE ...........................................18
5.3 SECURITIES LAWS QUALIFICATION .......................................18
5.4 PERFORMANCE .........................................................18
6. MISCELLANEOUS............................................................18
6.1 USE OF PROCEEDS......................................................18
6.2 SURVIVAL OF WARRANTIES...............................................19
6.3 SUCCESSORS AND ASSIGNS...............................................19
6.4 GOVERNING LAW........................................................19
6.5 COUNTERPARTS.........................................................19
6.6 TITLES AND SUBTITLES.................................................19
6.7 NOTICES..............................................................19
6.8 DUE DILIGENCE EXPENSES; ATTORNEYS' AND ACCOUNTANTS' FEES.............20
6.9 FINDER'S FEES........................................................20
6.10 AMENDMENTS AND WAIVERS..............................................20
6.11 SEVERABILITY........................................................20
6.12 ENTIRE AGREEMENT....................................................21
EXHIBIT A - ARTICLES OF INCORPORATION....................................
EXHIBIT B - SCHEDULE OF EXCEPTIONS.......................................
EXHIBIT C - BYLAWS.......................................................
EXHIBIT D - FORM OF INVESTOR RIGHTS AGREEMENT............................
SCHEDULE I...............................................................
SERIES B PREFERRED STOCK PURCHASE AGREEMENT
This SERIES B PREFERRED STOCK PURCHASE AGREEMENT (this "AGREEMENT") is made
as of November 12, 1999, by and between FREEI NETWORKS, INC., a Washington
corporation (the "COMPANY"), and ▇▇▇.▇▇▇, INC., AXP VARIABLE PORTFOLIO STRATEGY
AGGRESSIVE FUND ("AXPVP"), AXP STRATEGY AGGRESSIVE FUND ("AXPSAF"), and IDS LIFE
SERIES, FUND, INC. EQUITY PORTFOLIO ("IDS") (the "Investors")
THE PARTIES HEREBY AGREE AS FOLLOWS:
1. PURCHASE AND SALE OF STOCK
1.1 SALE AND ISSUANCE OF SERIES B STOCK
(a) The Company has adopted and filed with the Secretary
of State of the State of Washington the Restated Articles of Incorporation with
the designation of the Series B Convertible Preferred Stock (the "SERIES B
STOCK") in the form attached hereto as Exhibit A (the "ARTICLES OF
INCORPORATION").
(b) Subject to the terms and conditions of this
Agreement, each Investor agrees severally to purchase, the number of shares
listed on Schedule 1, and the Company agrees to sell and issue to each Investor,
at the Closing (as defined in Section* 1.2(a)) a total of 1,552,655 shares of
Series B Stock at $ 16.10146 per share, for a total purchase price of
$25,000,012.3 8. Each Investor's purchase price and number of acquired shares of
Series B Stock are listed on Schedule I hereto which is incorporated herein by
this reference.
1.2 CLOSING
(a) The purchase and sale of the Series B Stock (the
"Closing") shall take place at the offices of ▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇ PLLC,
▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, after satisfaction of the
conditions set forth in Sections 4 and 5 on a date mutually acceptable to the
Company and the Investors, but in no event later than November 12, 1999.
(b) At the Closing, the Company shall deliver to the
Investors certificates representing 1,552,655 shares of Series B Stock against
payment to the Company of the purchase price therefor by wire transfer of funds
or a bank check payable to the Company's order. The certificates and the
purchase price shall be as indicated on Schedule I.
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2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to the Investors that, except as
set forth on a Schedule of Exceptions attached hereto as Exhibit B:
2.1 ORGANIZATION, GOOD STANDING AND QUALIFICATION
The Company is a corporation duly organized and validly existing under
the laws of the State of Washington and has all requisite corporate power and
authority to own and operate its properties and assets, to execute and deliver
this Agreement and the Investor Rights Agreement as amended by the First
Amendment to Investor Rights Agreement, to issue and sell the Series B Stock and
the Common Stock issuable upon conversion thereof (the "CONVERSION SHARES"), to
carry out its obligations under this Agreement, the Investor Rights Agreement,
and the Articles of Incorporation and to carry on its business as presently
conducted and as recently proposed to be conducted. The Company is duly
qualified to transact business and is in good standing in each jurisdiction in
which the failure to so qualify would have a material adverse effect on its
business or properties.
2.2 CAPITALIZATION
The authorized capital stock of the Company consists of the preferred
stock, common stock and rights described in paragraphs (a), (b) and (c) below.
(a) PREFERRED STOCK
There are 10,000,000 shares of preferred stock authorized, 4,812,074 of
which have been designated as Series A Stock, all of which is outstanding.
1,552,655 of which have been designated as Series B Stock, none of which is
outstanding. The rights, privileges, and preferences of the preferred stock
generally and of the Series A and Series B Stock are as stated in the Articles
of Incorporation, as amended,
(b) COMMON STOCK
There are 50,000,000 shares of Common Stock authorized, 13,439,500 shares
of which arc currently outstanding. Of the authorized but unissued Common Stock,
4,812,074 shares are reserved for issuance upon the conversion of the Series A
Stock; 4,210,564 shares are reserved for issuance upon the exercise of stock
options granted or to be granted under the Company's stock option plan (the
"OPTION PLAN"); 1,439,500 shares are reserved by board action for issuance upon
the exercise of warrants granted to certain investors (the "First Round
Investors"); 165,775
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shares are reserved by board action for issuance upon the exercise of warrants
granted to Lucent Technologies f/k/a Ascend Communications, Inc. ("Lucent"); and
153,987 shares are reserved by board action for issuance upon the exercise of
warrants granted to Pacific Crest Securities Inc. pursuant to an engagement
letter executed March 16, 1999.
(c) RIGHTS
Except for the conversion privileges of the Series A Stock and other
rights, privileges and agreements contemplated for the Series B Stock pursuant
to this Agreement, and as set forth in subsection 2.2(b), there are not
outstanding any options, warrants, subscriptions, rights (including conversion
or preemptive rights or first refusal rights), agreements for the purchase or
acquisition from the Company or by the Company of any shares of the Company's
capital stock or securities convertible into its capital stock or, to the
Company's knowledge, any voting agreements with respect to the Company's
securities.
2.3 SUBSIDIARIES
The Company does not presently own or control, directly or indirectly, any
interest in any other corporation, association, partnership or other business or
investment entity.
2.4 AUTHORIZATION
All corporate action necessary for the authorization, execution, and
delivery by the Company of this Agreement and the other agreements and
transactions provided for herein, the performance of all obligations of the
Company hereunder and thereunder, and the authorization, issuance, and delivery
of the Series B Stock and the Conversion Shares have been taken or will be taken
before the Closing. This Agreement and the other agreements provided for herein
constitute valid and legally binding obligations of the Company, enforceable in
accordance with their terms, subject to (a) the laws of bankruptcy and the laws
affecting creditors' rights generally, (b) the effect. of public policy on the
indemnification provisions of Section 2.9 of the Investor Rights Agreement, and
(c) the availability of equitable remedies.
2.5 VALID ISSUANCE OF PREFERRED AND COMMON STOCK
(a) The Series B Stock, when issued, sold, and delivered
in accordance with the terms hereof for the consideration expressed herein; will
be duly and. validly issued, fully paid and nonassessable, and free of any liens
or encumbrances created by the Company. The Conversion Shares have been duly and
validly reserved for issuance and, upon issuance in accordance with the terms of
the Articles of Incorporation, as amended, will be duly and validly
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issued, fully paid and nonassessable, and free of any liens or encumbrances
created by the Company.
(b) The outstanding shares of Common Stock (i) have been
duly authorized and validly issued to the persons listed on the Schedule of
Exceptions, (ii) are fully paid and nonassessable, and (iii) were issued in
compliance with all applicable state and federal laws concerning the issuance of
securities.
2.6 GOVERNMENTAL CONSENTS; COMPLIANCE WITH LAWS
No consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any federal, regional,
state or local governmental authority on the part of the Company is required in
connection with the consummation of the transactions contemplated by this
Agreement, except for filings, if any, required pursuant to applicable state
securities laws, which filings will be made within the required statutory
period, and the filing pursuant to Regulation D of the Securities and Exchange
Commission (the "SEC"), which filing will be effected within 15 days of the
Closing. The Company is not in violation of any applicable statute, rule,
regulation, order or restriction of any domestic or foreign government or any
instrumentality or agency thereof in respect of the conduct of its business or
the ownership of its properties which violation would materially and adversely
affect the business, assets, financial condition, or operations of the Company.
2.7 LITIGATION
There is no action, suit, claim, proceeding or investigation pending or, to
the Company's knowledge, currently threatened against the Company that questions
the validity of this Agreement or the other agreements provided- for herein or
the right of the Company to enter into any of such agreements, or to consummate
the transactions provided for hereby or thereby, or that could, individually or
in the aggregate, have a material adverse effect on the business, assets,
financial condition or operations of the Company, or any change in the current
equity ownership of the Company, nor is the Company aware that there is any
basis for the foregoing. The foregoing includes, without limitation, actions
pending or threatened (or any basis therefor known to the Company) involving the
prior employment 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, or their obligations under any agreements with prior
employers. There is no action, suit, proceeding or investigation by the Company
currently pending or that the Company intends to initiate. The Company is not a
party or subject to the provisions of any order, writ, injunction, judgment or
decree of any court or government agency or instrumentality that could have a
material adverse' effect on its business, assets, financial condition or
operations.
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2.8 INTELLECTUAL PROPERTY
To its knowledge, the conduct of the Company's business does not conflict
with or infringe on the patents, trademarks, service marks, trade names,
copyrights, trade secrets, proprietary rights and processes (the "INTELLECTUAL
PROPERTY") of others. To its knowledge, the Company has sufficient title to or
rights to use all Intellectual Property necessary for the conduct of its
business.- The ' Company has not granted any options, licenses or agreements of
any kind relating to any of its Intellectual Property, nor is the Company bound
by or a party to any options, licenses or agreements with respect to the
Intellectual Property of any other person or entity. The Company is not aware
that any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with their duties to the Company or that would conflict with the
Company's business. The execution or delivery of this Agreement, the carrying on
of the Company's business by the employees of the Company, and the conduct of
the Company's business as proposed, will not, to 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 employee is now obligated. The Company does not believe it is or will be
necessary to use any inventions, trade secrets or proprietary information of any
of its employees made prior to their employment by the Company, except for
inventions, trade secrets or proprietary information that have been assigned to
the Company.
2.9 COMPLIANCE WITH OTHER INSTRUMENTS
The Company is not in violation of any provision of its Articles of
Incorporation or Bylaws or in violation or default of any provision of any
instrument, judgment, order, writ, decree or contract to which it is a party or
by which it is bound, or in violation of any provision of federal or state
statute, rule or regulation applicable to the Company, which violation or
default would have a material adverse effect on its business, assets, financial
condition or operations. The execution, delivery, and performance of this
Agreement and the consummation of the transactions provided for herein will not
result in any such violation or default or require any consent under or be in
conflict with or constitute, with or without the passage of time and giving of
notice, either a violation or default under any such provision, instrument,
judgment, order, writ, decree or contract or an event which results in the
creation of any lien, charge or encumbrance upon any assets of the Company which
violation, default, lien, charge or encumbrance, individually or in the
aggregate with any other such violation, default, lien, charge or encumbrance
would have a material adverse effect on its business, assets, financial
condition or operations.
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2.10 AGREEMENTS; ACTION
(a) There are no agreements, understandings, instruments,
contracts or proposed transactions to which the Company is a party or by which
it is bound that involve obligations or payments to the Company in excess of
$50,000.
(b) The Company has not (i) declared or paid any
dividends, or authorized or made any distribution upon or with respect to any
class or series of its capital stock, (ii) made any loans or advances to any
person, other than in the ordinary course of business, (iii) sold, exchanged or
otherwise disposed of any of its assets or rights, other than in the ordinary
course of business, (iv) redeemed or obligated itself to redeem any of its
capital stock (other than the Series A Stock), or (v) incurred any indebtedness
for money borrowed or incurred any other liabilities in excess of $50,000.
(c) Except for agreements explicitly contemplated hereby,
there are no agreements, understandings or proposed transactions between the
Company and any of its officers, directors, affiliates or any affiliate thereof.
2.11 DISCLOSURE
The Company has fully provided the Investors and its attorneys and agents
with all the information in the Company's possession that they have requested
for deciding whether to purchase the Series B Stock. This Agreement, the
Exhibits hereto and all other documents delivered by the Company to the
Investors or its attorneys or agents in connection herewith or therewith or with
the transactions provided for herein or therein, do not contain any untrue
statement of a material fact nor omit to state a material fact necessary in
order to make the statements contained herein or therein, in fight of the
circumstances under which they were made, not misleading. There are no facts
which (individually or in the aggregate) materially adversely affect the
business, assets, financial condition or operations of the Company that have not
been set forth in this Agreement, the Exhibits hereto or other documents
delivered to the Investors or its attorneys or agents in connection herewith.
2.12 REGISTRATION RIGHTS
Except as provided in the Investor Rights Agreement as amended by the First
Amendment to Investor Rights Agreement, the Company has not granted or agreed to
grant any registration rights to any person or entity.
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2.13 CORPORATE DOCUMENTS
The Articles of Incorporation are, or at the Closing will be, in the form
attached hereto as EXHIBIT A hereto. The Bylaws of the Company are in the form
attached hereto as EXHIBIT C.
2.14 TITLE TO PROPERTY AND ASSETS; CONDITION OF ASSETS
The Company owns its property and assets free and clear of all mortgages,
liens, loans and encumbrances, except liens and encumbrances that arise in the
ordinary course of business and do not materially impair the Company's ownership
or use of such property or assets. With respect to the property and assets it
leases, the Company is in compliance with such leases in all material respects
and holds a valid leasehold interest free of any liens, claims or encumbrances.
AU facilities and all material machinery, equipment, fixtures, vehicles, and
other properties owned, leased or used by the Company are in good operating
condition and repair and are reasonably fit and usable for the purposes for
which they are being used.
2.15 LICENSES
The Company has all governmental licenses and permits (federal, state,
foreign, and local) the failure to obtain which would have a material adverse
effect on its business, assets, financial condition or operations, and such
licenses and permits are in full force and effect. No violations have been
communicated to the Company in respect of such licenses or permits and no
proceeding is pending or, to the Company's knowledge, threatened toward the
revocation of any of such licenses or permits.
2.16 FINANCIAL STATEMENTS
The Company has delivered to the Investors its unaudited balance sheet as
at June 30, 1999, and unaudited statements of income and cash flows for the six
months ended June 3 0, 1999, and its unaudited balance sheet as of December 31,
1998, and unaudited statements of income and cash flows for the year ended
December 31, 1998 (collectively, the "FINANCIAL STATEMENTS"). The Financial
Statements, together with the notes thereto, are complete and correct in all
material respects, have been prepared consistent with methods used in prior
years and present fairly the financial condition and position of the Company as
of the dates and for the periods indicated.
2.17 UNDISCLOSED LIABILITIES
Except as and to the "tent reflected or reserved against in the Financial
Statements, the Company did not have, as of the respective dates of the
Financial Statements, any material debts,
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liabilities or obligations of any nature, whether accrued, absolute, contingent
or otherwise, and whether due or to become due, including, without limitation,
liabilities or obligations on account of taxes or other governmental charges or
penalties, interest or fines thereon or in respect thereof required by generally
accounting principles to be shown or reflected thereon that were not so shown or
reflected. The Company does not know and does not have any reasonable grounds to
know of any basis for any assertion against the Company of any material debt,
liability or obligation of any nature or in any amount not fully reflected or
reserved against in the Financial Statements or disclosed in this Agreement.
2.18 CHANGES
Since June 30, 1999, there has not been:
(a) Any change in the business, assets, financial
condition or operations of the Company, except changes in the ordinary course of
business, none of which has been materially adverse, and all of which in the
aggregate have not been materially adverse, to the Company;
(b) Any damage, destruction or loss (whether or not
covered by insurance) materially and adversely affecting the business, assets,
financial condition or operations of the Company;
(c) Any material increase in the compensation or rate of
compensation or commissions payable or to become payable by the Company to any
of its directors, officers, salaried employees, sales persons or agents, or any
hiring of any employee at a salary in excess of $60,000 per annum, or any
payment in excess of $5,000 of any bonus, profit-sharing amount or other
extraordinary compensation to any employee, or any material change in any then
existing bonus, profit-sharing, retirement or other similar plan, agreement or
arrangement, or any adoption of or entry into of any new bonus, profit-sharing,
group life or health insurance, or other similar plan, agreement or arrangement;
(d) Any material change in the accounting methods or
practices followed by the Company;
(e) Any material debt, obligation or liability (whether
absolute or contingent) incurred by the Company (whether or not presently
outstanding) except (i) current liabilities incurred, and obligations under
agreements entered into, in the ordinary course of business and (ii) obligations
or liabilities entered into or incurred in connection with the execution of this
Agreement;
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(f) Any sale, lease, abandonment or other disposition by
the Company of any real property or, other than in the ordinary course of
business, of any equipment or other operating properties or any sale,
assignment, transfer, license or other disposition by the Company of any
Intellectual Property or other intangible asset;
(g) Any labor trouble, strike or any other occurrence,
event or condition of any similar character that materially and adversely
affects or may materially and adversely affect the business, assets, financial
condition or prospects of the Company;
(h) Any change, except in the ordinary course of
business, in the contingent obligations of the Company by way of guaranty,
endorsement, indemnity, warranty or otherwise;
(i) Any waiver by the Company of a valuable right or a
material debt owed to it except in the ordinary course of business;
(j) Any direct or indirect loans made by the Company to
any shareholder, employee, officer or director of the Company, other than
advances made in the ordinary course of business; or
(k) Any declaration or payment of any dividend or other
distribution of the assets of the Company.
2.19 EMPLOYEE -BENEFIT PLANS
The Company does not have any "employee benefit plan" as defined in the
Employee Retirement Income Security Act of 1974, as amended.
2.20 TAXES
The Company has filed all tax returns (federal, state, foreign, and local)
required to be filed by it and all taxes shown to be due and payable on such
returns or on any assessments received by the Company and all other taxes
(federal, state, foreign, and -local) due and payable by the Company on or
before the date hereof have been paid. There are no agreements, waivers or other
arrangements providing for an extension of time with respect to the assessment
of any tax or deficiency against the Company, nor are there any actions, suits,
proceedings, investigations or claims now pending against the Company in respect
of any tax or assessment, or, to the Company's knowledge, any matters under
discussion within any federal, state, foreign or local authority relating to
any. taxes or assessments, or any claims for additional taxes or assessments
asserted by any such authority. The provisions made for taxes in the Financial
9
Statements are sufficient for the payment of all unpaid federal, state, foreign,
and local taxes of the Company for all periods prior to such date.
2.21 MINUTES
The minutes of the Company reflect all meetings of directors and
shareholders since the incorporation of the Company and reflect all transactions
referred to in such minutes accurately in all material respects.
2.22 BROKERS OR FINDERS
The Company has not incurred and will not incur, directly or indirectly,
any liability for brokers' or finders' fees, agents' commissions or other
similar charges in connection with this Agreement or the transactions
contemplated hereby.
2.23 EMPLOYEES
The Company has no collective bargaining agreements with any of its
employees. There is no labor union organizing activity ending or, to the
Company's knowledge, threatened with respect to the Company. No employee has any
agreement or contract, written or verbal, regarding his or her employment. To
the Company's knowledge, no employee of the Company, nor any consultant with
whom the Company has contracted, is in violation of any term of any employment
contract, proprietary information agreement, patent. disclosure agreement or any
other agreement relating to the right of any such individual to be employed by,
or to contract with, the Company because of the nature of the business to be
conducted by the Company and, to the Company's knowledge, the continued
employment by the Company of its present employees, and the performance of the
Company's contracts with its independent contractors, will not result in any
such violation. The Company has not received any notice alleging that any such
violation has occurred. No employee of the Company has been granted the right to
continued employment by the Company or to any material compensation following
termination of employment with the Company. The Company is not aware that any
officer or key employee, or that 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 officer, key employee or
group of key employees.
2.24 ENVIRONMENTAL AND SAFETY LAWS
To 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 its knowledge,
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no material expenditures are or will be required to comply with any such
existing statute, law or regulation.
2.25 OFFERING VALID
Assuming the accuracy of the representations and warranties of the
Investors contained in Section 3 hereof, the offer, sale, and issuance of the
Series B Stock and the Conversion Shares will be exempt- from the registration
requirements of the Securities Act of 1933, as amended (the "SECURITIES ACT"),
and will have been registered or qualified (or are exempt from registration and
qualification) under the registration, permit or qualification requirements of
all applicable state securities laws. Neither the Company nor any agent on its
behalf has solicited or will solicit any offers to sell or has offered to sell
or will offer to sell all or any part of the Series B Stock to any person or
persons so as to bring the sale of such Series B Stock by the Company within the
registration provisions of the Securities Act.
2.26 REAL PROPERTY HOLDING CORPORATION
The Company is not a real property holding corporation within the meaning
of Internal Revenue Code Section 897(c)(2) and any regulations promulgated
thereunder.
2.27 INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS
None of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇ ▇▇▇▇▇ or ▇▇▇ ▇▇▇▇▇ has been subject and
is not currently subject to any order, judgment or decree, not subsequently
revised, suspended or vacated, of any court or any governmental agency that
could materially adversely affect the business of the Company as presently
conducted or as proposed to be conducted.
3. REPRESENTATIONS AND WARRANTIES OF THE INVESTORS
Each Investor hereby represents and warrants that:
3.1 AUTHORIZATION
All acts and conditions necessary for the authorization, execution,
delivery, and consummation by the Investor of-this Agreement and the other
agreements and transactions contemplated herein have been, or will before the
Closing be, taken, performed, and obtained. This Agreement and the other
agreements contemplated herein constitute valid and legally binding obligations
of the Investor, enforceable in accordance with their terms, subject to (a) the
laws of bankruptcy and the laws affecting creditors' rights generally, (b) the
effect of public policy on the indemnification provisions of Section 2.9 of the
Investor Rights Agreement and (c)
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the availability of equitable remedies. The Investor has full power and
authority to execute, deliver, and perform its obligations under this Agreement
and the other agreements contemplated herein and to own the Series B Stock. The
execution, delivery, and performance of this Agreement and the other agreements
contemplated herein and the consummation of the transactions contemplated hereby
and thereby (including the ownership of Series B Stock) by the Investor does not
violate any provision of, or constitute a material breach of or default under,
any term, condition or provision of any agreement, indenture or other instrument
to which the Investor is a party, or by which it or its properties or assets are
bound, or of any order, judgment or decree against or binding upon the Investor.
3.2 PURCHASE ENTIRELY FOR OWN ACCOUNT
The Series B Stock to be received by the Investor and the Conversion Shares
(collectively, the "SECURITIES") will be acquired for investment for the
Investor's own account and not with a view to the distribution of any part
thereof as such term is used under Section 2(11) of the Securities Act. The
Investor has no present intention of selling, granting any participation in, or
otherwise distributing the Securities in a manner contrary to the Securities
Act, or applicable state securities laws.
3.3 INVESTMENT EXPERIENCE
Each Investor is an investor in securities of companies in the development
stage, qualifies as an "accredited investor" as defined in Rule 501 of
Regulation D promulgated by the SEC, and acknowledges that the Securities are a
speculative risk. Each Investor is able to fend for itself in the transactions
contemplated by this Agreement, can bear the economic risk of its investment
(including possible complete loss of such investment) for an indefinite period
of time, and has such knowledge and experience in financial or business matters
that it is capable of evaluating the merits and risks of the investment in the
Securities. Each Investor represents it has not been organized for the purpose
of acquiring the Securities. Each Investor understands that the Securities have
not been registered under the Securities Act, or under the securities laws of
any jurisdiction, by reason of reliance upon certain exemptions, and that the
reliance of the Company on such exemptions is predicated upon the accuracy of
-each Investor's representations and warranties in this Section 3.
3.4 RESTRICTED SECURITIES
Each Investor understands that the Securities are characterized as
"restricted securities" under the federal securities laws inasmuch as they are
being acquired from the Company in a transaction not involving a public offering
and that under such laws and applicable regulations, such -securities may be
transferred or resold without registration under the Securities Act only in
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certain limited circumstances and in accordance with the terms and conditions
set forth in the legend described in Section 3.5. In this connection, the
Investor represents that it is familiar with SEC Rule 144, as presently in
effect, and understands the resale limitations imposed thereby and by the
Securities Act.
3.5 LEGENDS
It is understood that the certificates evidencing the Securities may bear
one or all of the following legends:
THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR APPLICABLE STATE LAW, AND NO
INTEREST THEREIN MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR
OTHERWISE TRANSFERRED UNLESS (i) THERE IS AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION
INVOLVING SAID SECURITIES OR (ii) SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.
AFTER OCTOBER 2001, THIS LEGEND WILL BE CANCELED, AND A CERTIFICATE FREE FROM
SUCH LEGEND ISSUED TO THE HOLDER HEREOF UPON COMPLIANCE WITH THE FOLLOWING
CONDITIONS: (a) SURRENDER OF THIS CERTIFICATE TO THIS CORPORATION IN THE MANNER
AND AT THE PLACE DESIGNATED FOR CANCELLATION, (b) A REPRESENTATION BY THE HOLDER
THAT IT HAS BENEFICIALLY HELD THE SECURITIES EVIDENCED BY THIS CERTIFICATE FOR
NOT LESS THAN TWO YEARS, AND THAT IT IS NOT, AND HAS NOT WITHIN THE PRECEDING 90
DAYS BEEN, AN AFFILIATE (AS THAT TERM IS DEFINED FOR PURPOSES OF RULE 144, UNDER
THE ACT OR ANY SUCCESSOR RULE) OF THIS CORPORATION, AND (c) AN UNDERTAKING THAT
IF AT ANY TIME THE HOLDER SHALL AGAIN BECOME AN AFFILIATE OR OTHERWISE CEASE TO
ENJOY FREE TRANSFERABILITY OF SUCH SECURITIES UNDER RULE 144 EITHER BY REASON OR
CHANGE OF CIRCUMSTANCE OR AMENDMENT OF RULE 144, IT SHALL FORTHWITH SURRENDER
ANY UNLEGENDED CERTIFICATES(S) RECEIVED BY IT IN RESPECT OF THE SECURITIES
EVIDENCED BY THIS CERTIFICATE FOR IMPOSITION OF ANY APPROPRIATE LEGEND.
THE COMPANY HAS COMMON STOCK AND PREFERRED STOCK AUTHORIZED. THE FULL STATEMENT
OF THE POWERS, DESIGNATIONS, PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL
OR OTHER SPECIAL RIGHTS AND THE QUALIFICATIONS, LIMITATIONS OR RESTRICTIONS
THEREOF (THE "STATEMENT OF RIGHTS AND PREFERENCES") OF THE SHARES OF EACH SUCH
SERIES OR CLASS OF STOCK IS SET FORTH IN THE ARTICLES OF INCORPORATION OF THE
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COMPANY, AS AT ANY TIME AMENDED, AND ANY EFFECTIVE STATEMENT OF RELATIVE RIGHTS
AND PREFERENCES OF PREFERRED STOCK, ON FILE IN THE OFFICE OF THE SECRETARY OF
STATE OF THE STATE OF WASHINGTON, THE COMPANY WILL FURNISH COPIES OF THE
STATEMENT OF RIGHTS AND PREFERENCES TO THE RECORD HOLDER OF THIS CERTIFICATE
WITHOUT CHARGE UPON WRITTEN REQUEST TO THE COMPANY AT ITS PRINCIPAL PLACE OF
BUSINESS OR REGISTERED OFFICE.
3.6 RESIDENCY
For purposes of the application of state securities laws, each Investor
represents that it is a resident of the state indicated on Schedule I hereto.
3.7 ACCESS TO INFORMATION
Each Investor has received and reviewed information about the Company,
including the Private Placement Memorandum, and has had an opportunity to
discuss the Company's business, management, and financial affairs with its
management and to review the Company's facilities. Each Investor understands
that these discussions, as well as any written information issued by the
Company, were intended to describe the aspects of the Company's business and
prospects that the Company considers material, but were not necessarily
exhaustive. The foregoing, however, does not limit or modify the representations
and warranties of the Company in Section 2 of this Agreement or the right of the
Investors to rely thereon.
4. CONDITIONS OF INVESTORS' OBLIGATIONS AT THE CLOSING
The obligations of the Investors under subsection 1.1(b) are subject to the
fulfillment at or before the Closing (unless otherwise specified) of each of the
following conditions, unless waived by the Investors:
4.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Company contained in Section 2
shall be true in all material respects on and as of the Closing with the same
effect as though such representations and warranties had been made as of the
date of the Closing.
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4.2 PERFORMANCE
The Company shall have performed and complied with all agreements,
obligations and conditions contained in this Agreement that are required to be
performed or complied with by it on or before the Closing.
4.3 COMPLIANCE CERTIFICATE
The President and Chief Executive Officer of the Company, on behalf of the
Company, shall deliver to the Investors at the Closing a certificate that the
conditions specified in Sections 4.1 and 4.2 have been fulfilled and stating
that there has been no material adverse change in the business, assets,
financial condition or operations of the Company from the date of this Agreement
to the time of the Closing.
4.4 QUALIFICATIONS
The offer and sale of the Securities to the Investors pursuant to this
Agreement shall be qualified or exempt from qualification under all applicable
federal and state securities laws.
4.5 PROCEEDINGS AND DOCUMENTS
All corporate and other proceedings in connection with the transactions
contemplated at the Closing and all documents incident thereto, including
evidence of filing the Articles of Incorporation with the Secretary of State of
the State of Washington, shall be reasonably satisfactory in form and substance
to the Investors or their counsel, and the Investors or their counsel shall have
received all counterpart original and certified or other copies of such
documents as they may reasonably request.
4.6 INVESTOR RIGHTS AGREEMENT
The Company, the holders of Series A Stock and the Investors shall have
entered into a First Amendment to Investor Rights Agreement in the form attached
hereto as EXHIBIT D (the "INVESTOR RIGHTS AGREEMENT").
4.7 OPINION OF COMPANY COUNSEL
The Investors shall have received from ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇ & ▇▇▇▇▇, PLLC,
council for the Company, an opinion, dated as of the Closing, in form and
substance satisfactory to the Investors, to the effect that:
15
(a) The Company is a corporation, validly existing under
the laws of the State of Washington, and the Company has the requisite corporate
power and corporate authority to conduct its business as now being conducted.
(b) The Company is qualified to do business in any state
or jurisdiction of the United States in which the failure to so qualify would
have a material adverse effect on its business or properties.
(c) The Company has the requisite corporate power and
corporate authority to execute, deliver, and perform this Agreement and the
Investor Rights Agreement. All corporate action necessary for the authorization,
execution and delivery by the Company of this Agreement and the Investor Rights
Agreement and the authorization, issuance, and delivery of the Series B Stock
being sold hereunder and the Conversion Shares has been taken, and this
Agreement and the Investor Rights Agreement have been duly and validly
authorized, executed, and delivered BY the Company and constitute valid and
legally binding obligations of the Company, enforceable against the Company in
accordance with their terms, except as enforceability may be limited or affected
by applicable laws relating to or affecting the enforcement of creditors' rights
and BY equitable principles.
(d) The Series B Stock, when issued, sold, and delivered
in accordance with the terms hereof for the consideration expressed herein, will
be duly and validly issued, fully paid, and nonassessable. The Conversion Shares
have been duly and validly reserved for issuance and, upon issuance in
accordance with the terms of the Articles of Incorporation, will be duly and
validly issued, fully paid, and nonassessable.
(e) The authorized capital stock of the Company consists
of the preferred stock, common stock and rights described in paragraphs (i),
(ii) and (iii) below:
(i) Preferred Stock
There are 10,000,000 shares of preferred stock authorized,. 4,812,074 of
which have been designated as Series A Stock and all of which is outstanding;
1,552,655 of which have been designated as Series B Stock, none of which is
outstanding. The' rights, privileges, and preferences of the preferred stock
generally and of the Series B Stock are as stated in the Articles of
Incorporation.
(ii) Common Stock
There are 50,000,000 shares of Common Stock authorized, 13,439,500 shares
of which are currently outstanding. Of the authorized but unissued Common Stock,
4,812,074 shares are
16
reserved for issuance upon the conversion of the Series A Stock, 1,552,655
shares are reserved for issuance upon the conversion of the Series B Stock,
4,210,564 shares are reserved for issuance upon the exercise of stock options
granted or to be granted under the Option Plan; 1,439,500 shares are reserved by
board action for issuance upon the exercise of warrants granted to the First
Round Investors; 165,775 shares are reserved by board action for issuance upon
the exercise of warrants granted to Lucent; and 153,987 shares are reserved by
board action for issuance upon the exercise of warrants granted to Pacific Crest
Securities Inc. pursuant to an engagement letter executed March 16, 1999.
(iii) Rights
Except for the conversion privileges and right of first refusal of the
Series A Stock, Series B Stock and other rights, privileges and agreements
contemplated pursuant to this Agreement or as enumerated in subparagraph
(e)(ii), there are not outstanding any options, warrants, subscriptions, rights
(including conversion or preemptive rights or first refusal rights) agreements
for the purchase or acquisition from the Company or by the Company of any shares
of the Company's capital stock or securities convertible into its capital stock,
or, to such counsel's knowledge, any voting agreements with respect to the
Company's securities.
(f) The respective rights, privileges, and preferences of
the Series B Stock are as stated in the Articles of Incorporation. The
certificates representing shares of the Series B Stock are in due and proper
form and have been duly and validly executed by the officers of the Company
named thereon.
(g) Based in part upon the representations of the
Investors and on the facts and circumstances contemplated by this Agreement, and
except that such counsel need give no opinion as to whether information provided
to the Investors was sufficient and assuming that the offer and sale of the
Series B Stock is a discrete transaction and not integrated with any other
offering or sale of securities by the Company, the offer and sale of the Series
B Stock to the Investors pursuant to the terms of this Agreement are exempt from
the registration requirements of Section 5 of the Securities Act.
4.8 BOARD OF DIRECTORS
Effective upon the Closing, the authorized number of directors shall be up
to five, and ▇▇▇ ▇▇▇▇▇▇▇▇▇▇ and ▇▇▇▇ ▇▇▇▇▇▇▇ shall be directors of the Company.
17
5. CONDITIONS OF THE COMPANY'S OBLIGATIONS AT THE CLOSING
The obligations of the Company to the Investors under this Agreement are
subject to the fulfillment on or before the Closing of the following conditions:
5.1 REPRESENTATIONS AND WARRANTIES
The representations and warranties of the Investors contained in Section 3
shall be true in all material respects on and as of the Closing with the same
effect as though such representations and warranties had been made as of the
Closing.
5.2 PAYMENT OF PURCHASE PRICE
The Investors shall have delivered the purchase price specified in
subsection 1. 1 (b) to be delivered at the Closing, in the form of a bank check
payable to the Company's order or bank wire transfer to the Company's designated
account.
5.3 SECURITIES LAWS QUALIFICATION
The offer and sale to the Investors of the Securities shall be qualified or
exempt from qualification under all applicable federal and state securities
laws.
5.4 PERFORMANCE
The Investors 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.
6. MISCELLANEOUS
6.1 USE OF PROCEEDS
The Company s hall use the proceeds of the sale of the Series B Stock under
this Agreement as working capital to be used for the development of the Company
pursuant to a formal budget prepared by the Company and approved by the
Investors.
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6.2 SURVIVAL OF WARRANTIES
The warranties and representations contained in or made pursuant to this
Agreement shall survive the execution and delivery of this Agreement and the
Closing for a period of two years after Closing.
6.3 SUCCESSORS AND ASSIGNS
The terms and conditions of this Agreement shall inure to the benefit of
and be binding upon the respective successors and assigns of the parties.
Nothing in this Agreement express or implied, is intended to confer upon any
party other than the parties hereto or their respective successors and assigns
any rights, remedies, obligations or liabilities under or by reason of this
Agreement, except as expressly provided in this Agreement.
6.4 GOVERNING LAW
This Agreement shall be governed by and construed under the laws of the
State of Washington as applied to agreements among Washington residents entered
into and to be performed entirely within the State of Washington.
6.5 COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument
6.6 TITLES AND SUBTITLES
The titles and subtitles used in this Agreement are for convenience only
and are not to be considered in construing or interpreting this Agreement.
6.7 NOTICES
Unless otherwise provided, any notice required or permitted under this
Agreement shall be given in writing and shall be deemed effectively given upon
personal delivery to the party to be notified (including via facsimile
transmission or overnight express delivery) or upon deposit with the United
States Post Office, postage prepaid, registered or certified with return receipt
requested and addressed to the party to be notified at the address indicated for
such party on the signature page hereof, Schedule I or at such other address as
such party may designate by ten days' advance written notice to the other
parties given in the foregoing manner.
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6.8 DUE DILIGENCE EXPENSES; ATTORNEYS' AND ACCOUNTANTS' FEES
The Company shall reimburse at the Closing the reasonable due diligence
costs, including legal and accounting fees and expenses, incurred by the
Investors in an amount not to exceed $20,000. If the parties fail to close the
transactions contemplated by this Agreement, each party shall be responsible for
its own expenses.
6.9 FINDER'S FEES
Each party represents that it neither is, nor will be, obligated for a
finder's fee or commission in connection with this transaction, except as
described in Section 6.1 of the Schedule of Exceptions to this Agreement. Each
Investor agrees, severally, but not jointly, to indemnify and hold the Company
harmless 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 such Investor or any of its officers, partners,
employees or representatives is responsible. The Company agrees to indemnify and
hold the Investors harmless from any liability for any commission or
compensation in the nature of a finder's fee (and the costs and expenses of
defending against such liability or asserted liability) for which the Company or
any of its officers, employees or representatives is responsible.
6.10 AMENDMENTS AND WAIVERS
After the Closing, any term of this Agreement may be amended and the
observance of any term may be waived (either generally or in a particular
instance and either retroactively or prospectively) only with the written
consent of the Company and the holders of a majority of the aggregate shares of
Series B Stock and/or the Conversion Shares (excluding shares of Common Stock
that are no longer "restricted securities" under the Securities Act). Any
amendment or waiver effected in accordance with this Section 6. 10 shall be
binding upon each holder of any securities purchased- under this Agreement at
the time outstanding (including securities into which such securities are
convertible), each future holder of any such securities, and the Company.
6.11 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' balance of this AGREEMENT SHALL be interpreted as if such provision were so
excluded and shall be enforceable in accordance with its terms.
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6.12 Entire Agreement
This Agreement, including the Exhibits attached hereto, and the other
documents delivered at the Closing constitute the full and entire understanding
and agreement between the parties with respect to the subject matter hereof and
supersede all prior agreements with respect to the subject matter hereof The
following Exhibits are attached hereto:
Exhibit A - Articles of Incorporation
Exhibit B - Schedule of Exceptions
Exhibit C - Bylaws
Exhibit D - Form of Investor Rights Agreement
Schedule I
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the date
first above written.
COMPANY:
FREEI NETWORKS, INC.
By: /s/ ▇▇▇ ▇▇▇▇▇▇▇▇▇▇
-------------------------------------
▇▇▇ ▇▇▇▇▇▇▇▇▇▇
President and Chief Executive Officer
▇▇▇ ▇. ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
Fax (▇▇▇) ▇▇▇-▇▇▇▇
INVESTOR
MP3 com, Inc.:
By: /s/ [illegible]
-------------------------------------
Its: President
-------------------------------------
INVESTOR:
AXP VARIABLE PORTFOLIO-STRATEGY
AGGRESSIVE FUND
By: /s/ [illegible]
-------------------------------------
Its: Vice President
-------------------------------------
INVESTOR:
AXP STRATEGY AGGRESSIVE FUND
By: /s/ [illegible]
-------------------------------------
Its: Vice President
-------------------------------------
INVESTOR:
IDS LIFE SERIES FUND, INC. - EQUITY
PORTFOLIO
By: /s/ [illegible]
-------------------------------------
Its: Vice President
-------------------------------------
