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As filed with the Securities and Exchange Commission on January 14, 1999.
Registration No. 333-
SECURITIES AND EXCHANGE COMMISSION
FORM S-3 REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933
ROCKY MOUNTAIN INTERNET, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE
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(State or other jurisdiction of incorporation or organization)
84-1322326
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(I.R.S. Employer Identification No.)
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<S><C>
1099 18TH STREET, SUITE 3000, DENVER, COLORADO 80202 (303) 672-0700
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(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
THE PRENTICE HALL CORPORATION SYSTEM, INC., 1013 CENTRE ROAD, WILMINGTON, DELAWARE 19805 (800) 927-9800
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(Name, address, including zip code, and telephone number, including area code, of agent for service)
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Copies to:
Peter J. Kushar Jeffrey Bartholomew
Rocky Mountain Internet, Inc. Hall & Evans, L.L.C.
1099 Eighteenth Street 1200 Seventeenth Street
30th Floor Suite 1700
Denver, CO 80202 Denver, CO 80202
Approximate date of commencement of proposed sale to the public: As soon as
practicable after this Registration Statement is declared effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box.__
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend
reinvestment plans, check the following box. X
----
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. __
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. ____
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. ____
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CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities to be Proposed Maximum Proposed Maximum Amount of
Registered Amount to be Offering Price Aggregate Offering Registration
Registered(1) per Unit(2) Price (2) Fee(1)
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<S> <C> <C> <C> <C>
Common Stock $0.001 par value 2,209,193 $15.875 $35,070,938.88 $9,749.72
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(1) Pursuant to Rule 416 under the Securities Act of 1933, there are
also being registered such indeterminate number of additional shares of
Common Stock as may be issuable upon the exercise of the Common Stock
purchase warrants described herein to prevent dilution resulting from stock
dividends, stock splits, or similar transactions.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c).
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933, OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE
REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS
EFFECTIVE. THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK
AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS
NOT PERMITTED.
PRELIMINARY PROSPECTUS, Subject to Completion, dated January 14, 1999
ROCKY MOUNTAIN INTERNET, INC.
2,209,193 SHARES OF COMMON STOCK
In this Prospectus, Advantage Fund II Ltd., Koch Industries, Inc.,
Wharton Capital Partners Ltd., Leslie Bines, Eugene L. Neidiger, Charles C.
Bruner, Anthony B. Petrelli, Regina L. Neidiger, Oppenheimer High Yield Fund,
Oppenheimer Champion Income Fund, and Oppenheimer Strategic Income Fund (the
"Selling Shareholders") are offering to sell shares of common stock of Rocky
Mountain Internet, Inc., a Delaware corporation. The Selling Shareholders
also include pledgees, donees, transferees, or other successors in interest
that receive such shares by gift, distribution, or other non-sale related
transfer. Rocky Mountain Internet, Inc. ("we" or the "Company") will not
receive any of the proceeds from the sale of the shares by the Selling
Shareholders. The Company has agreed to bear all expenses in connection with
the registration of the shares being offered by the Selling Shareholders.
The Selling Shareholders may offer to sell the shares to the public at
prices computed as follows:
* fixed prices;
* then-current market prices;
* prices computed with formulas based on then-current market prices; or
* negotiated prices.
The Selling Shareholders may engage a broker or dealer to sell the
shares, and such broker or dealer, or the Selling Shareholders, may be deemed
to be an underwriter and may receive commissions or other discounts for the
sale of the shares.
The Company's common stock is quoted on the Nasdaq SmallCap-TM- Market
under the symbol "RMII." On January 11, 1999 the closing sale price of the
stock was $15.875 per share.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF THE SECURITIES OR PASSED ON THE ADEQUACY OR ACCURACY
OF THE DISCLOSURES IN THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS _______________, 1999.
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PROSPECTIVE INVESTORS MAY RELY ONLY ON INFORMATION CONTAINED IN THIS
PROSPECTUS. NEITHER ROCKY MOUNTAIN INTERNET, INC. NOR THE SELLING SHAREHOLDERS
HAVE AUTHORIZED ANY PERSON TO PROVIDE PROSPECTIVE INVESTORS WITH INFORMATION
DIFFERENT FROM THAT CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS IS NOT AN
OFFERING IN ANY JURISDICTION WHERE SUCH OFFERING IS NOT PERMITTED. THE
INFORMATION CONTAINED IN THIS PROSPECTUS IS CORRECT ONLY AS OF THE DATE OF THE
PROSPECTUS, REGARDLESS OF THE TIME OF THE DELIVERY OF THIS PROSPECTUS OR ANY
SALE OF THE SHARES.
TABLE OF CONTENTS
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SECTION Page
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Where You Can Find More Information; Incorporation by Reference. . . . . . . 2
Forward Looking Statements . . . . . . . . . . . . . . . . . . . . . . . . . 3
Prospectus Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .20
Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
Regulation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .33
Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .37
Certain Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . .41
Selling Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . .43
Plan of Distribution . . . . . . . . . . . . . . . . . . . . . . . . . . . .44
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WHERE YOU CAN FIND MORE INFORMATION; INCORPORATION BY REFERENCE
This Prospectus is part of a Registration Statement on Form S-3 that we
filed with the Securities and Exchange Commission (the "SEC"). Certain
information in the Registration Statement has been omitted from this Prospectus
in accordance with the rules of the SEC. We file annual, quarterly and special
reports, proxy statements and other information with the SEC. You may read and
copy (upon the payment of fees prescribed by the SEC) the Registration Statement
and other documents that we have filed with the SEC at its public reference
rooms at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the following
Regional Offices of the SEC: 7 World Trade Center, Suite 1300, New York, New
York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661.
You may call the SEC at 1-800-SEC-0330 for further information on the public
reference rooms. Our filings are also available to the public on the Internet,
through the SEC's EDGAR database. You may access the EDGAR database at the
SEC's web site at http://www.sec.gov. Our common stock is traded on the Nasdaq
SmallCap-TM- Market under the symbol "RMII," and our publicly traded Warrants
are quoted on the Nasdaq SmallCap-TM- Market under the symbol "RMIIW." Reports,
proxy and information statements and other information concerning the Company
may be inspected at the Nasdaq Stock Market at 1735 K Street, N.W., Washington,
D.C. 20006.
The SEC allows us to "incorporate by reference" into this Prospectus the
information we file with it. This means that we can disclose important
business, financial and other information in our SEC filings by referring you to
the documents containing this information. All information incorporated by
reference is part of this Prospectus, unless and until that information is
updated and superseded by the information contained in this Prospectus or any
information incorporated later. Any information that we subsequently file with
the SEC that is incorporated by reference will automatically update and
supersede any previous information that is part of this Prospectus. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14, or 15(d) of the Securities
Exchange Act of 1934, as amended, until the termination of this offering:
(1) Our Annual Report on Form 10-KSB, filed March 31, 1998, for the fiscal
year ended December 31, 1997;
(2) Our Quarterly Reports on Form 10-QSB for the quarters ended March 31,
1998, filed May 15, 1998 (as
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amended by our Quarterly Report on Form 10-QSB/A-1 for the quarter ended March
31, 1998, filed June 1, 1998), June 30, 1998, filed August 19, 1998 and
September 30, 1998, filed November 16, 1998;
(3) Our Current Reports on Form 8-K dated:
June 5, 1998, filed June 11, 1998 (as amended by our Current Reports
on Form 8-K/A-1, filed August 19, 1998, and 8-K/A-2, filed August 24,
1998);
July 1, 1998, filed July 14, 1998;
November 20, 1998, filed December 7, 1998;
December 8, 1998, filed December 22, 1998 (as amended by our Current
Report on Form 8-K/A-1, filed January 8, 1999);
December 9, 1998, filed December 14, 1998; and
December 10, 1998, filed January 8, 1999.
(4) The description of our capital stock contained in our Registration
Statement on Form 8-A, filed with the SEC on August 14, 1996, as amended.
(4) The description of our capital stock contained in our Registration
Statement on Form 8-A, filed with the SEC on August 14, 1996 (File No.
000-28738), as amended.
You may obtain a copy of these filings, at no cost, other than exhibits
(unless such exhibits are specifically incorporated by reference into such
documents) by writing or telephoning us at the following address:
Rocky Mountain Internet, Inc.
1099 Eighteenth Street
30th Floor
Denver, CO 80202
Attn: Chief Financial Officer
Telephone: (303) 672-0700
You should rely only on the information provided in this Prospectus or
incorporated by reference. We have not authorized anyone else to provide you
with different information. We are not making an offer of these securities in
any state where the offer is not permitted. Information is accurate only as of
the date of the documents containing the information, unless the information
specifically indicates that another date applies.
This Prospectus is not an offer to sell and it is not soliciting an offer
to buy any securities other than those offered in this document; however, this
Prospectus is not an offer to sell and it is not soliciting an offer to buy any
securities offered in this document in any circumstances in which such offer or
solicitation is unlawful.
You should not assume that the information in this Prospectus or any
supplement to this Prospectus is accurate as of any date other than the date on
the front of those documents.
FORWARD-LOOKING STATEMENTS
This Prospectus and the documents incorporated herein by reference contain
forward-looking statements. The Company bases these statements on its current
expectations, estimates, assumptions and
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projections about its industry, its competitors, and economic conditions
generally. Either the beliefs of management, assumptions made by management
or information currently available to management form the basis for those
expectations, estimates, assumptions and projections. The safe harbor created
by Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 generally protects the Company and the
Selling Shareholders from liability for these statements. You can often
recognize such forward-looking statements by words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "estimates," or the
negative thereof, variations of such words and similar expressions.
These forward-looking statements do not guarantee future performance and
are subject to risks, uncertainties and assumptions that are difficult to
predict. The Risk Factors section of this Prospectus sets forth some of such
risks and uncertainties. These risks and uncertainties could cause actual
results to differ materially and adversely from those discussed in the
forward-looking statements. The Company undertakes no obligation to publicly
update any of these forward-looking statements to reflect new information or
future events.
PROSPECTUS SUMMARY
Because this is a summary, it does not contain all of the information that
may be important to you. You should read this entire Prospectus before deciding
whether to purchase any of the securities offered.
THE COMPANY
We are a full service communications solutions provider of switched and
Internet Protocol ("IP") based communications products and services for
small-and medium-sized business enterprises, as well as dial-up residential
customers. We operate 11 Internet points of presence ("POPs") in Colorado
and, through agreements with third-party providers, we can provide Internet
access in 90 of the 100 largest metropolitan statistical areas in the United
States. We monitor and control our network through our Network Operations
Center ("NOC") located in Denver, Colorado. Our intention is to provide to
our customers, on a nationwide basis, COMPREHENSIVE COMMUNICATIONS SERVICES,
including the following:
* dedicated Internet access;
* dial-up Internet access;
* IP telephony ("IP Telephony");
* point-to-point private line;
* frame relay; and
* local and long distance telephone service.
In addition, we offer our customers VALUE-ADDED WEB SERVICES, including the
following:
* web site hosting;
* web site production and marketing;
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* electronic commerce ("e-commerce"); and
* web training.
We had combined pro forma revenues for the year ended December 31, 1997 of
$9,052,000 and provided dedicated access and web services to over 1,300 business
customers and over 16,800 dial-up customers as of November 30, 1998.
We believe that the solutions offered by the over 4,000 Internet Service
Providers ("ISPs") fail to address certain elements required to ensure that
customers' mission-critical Internet operations are reliable, scalable and
high-performing. We also believe that these ISPs fail to provide a broad array
of efficient and low-cost communications products and services. We offer a
broad array of communications products and services tailored to meet our
customer needs and provide high quality customer support. We deliver our
products and services through two divisions: Communication Services and Web
Services. Furthermore, we believe that, based upon our experience, a growing
number of businesses will demand one point-of-contact for communications
solutions for the following reasons:
(i) to ensure proper system/network integration;
(ii) to obtain a single point of responsibility for products and services that
might have numerous providers; and
(iii) to continue to take advantage of evolving communications technologies.
We intend to increase the breadth of our products and services delivered to our
customers by adopting new technology, acquiring complementary businesses and
capitalizing on strategic relationships.
Our objective is to become a leading national provider of a broad array of
communications services, distinguished by a state-of-the-art network and high
quality customer service and support. KEY ELEMENTS OF OUR BUSINESS STRATEGY
INCLUDE:
(1) provide a broad array of communication solutions to our customers;
(2) provide superior customer service and technical support;
(3) maximize network utilization;
(4) selectively target key cities to expand nationwide; and
(5) take advantage of significant consolidation opportunities.
We cannot assure anyone, however, that we will be able to fully implement
our strategy or to implement our strategy to the extent that we can become
profitable.
Our principal executive offices are located at: 1099 18th Street, Suite
3000, Denver, Colorado 80202, telephone (303) 672-0700, and our web site is
www.rmi.net.
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RISK FACTORS
Our business is subject to varying risks, and the securities offered by
this Prospectus are speculative, involve a high degree of risk, and should
not be purchased by persons who cannot afford the loss of their investment.
Before you invest in our common stock offered by this Prospectus, you should
consider risks associated with the investment. We describe some of the
principal risks in this section.
MANAGEMENT OF GROWTH; NEED FOR ADDITIONAL CAPITAL. Our rapid growth has
placed, and in the future is expected to place, a significant strain on our
management, administrative, operational and financial resources and increased
demands on our systems and controls. We intend to expand our Internet
network and telecommunications services nationwide. We anticipate that our
continued growth will require us to recruit and hire new managerial,
technical, sales, administrative and marketing personnel. We anticipate that
the strain on existing personnel and the need for additional personnel will
be exacerbated to the extent we acquire additional businesses, as each such
business must then be integrated into our operations and systems. See
"--Risks Related to Our Acquisition Strategy." The inability to continue to
upgrade our networking systems and our operating and financial control
systems, the inability to recruit and hire necessary personnel, or the
emergence of unexpected expansion difficulties would adversely affect our
business, results of operations, financial condition and cash flow.
We require additional funds through equity, debt, or other external
financing in order to fund our current operations and to achieve our business
plan. We cannot assure that any additional capital resources will be
available to us, or, if available, will be on terms that will be acceptable to
us. Any additional equity financing will dilute the equity interests of
existing security holders. If adequate funds are not available or are not
available on acceptable terms, such unavailability would have a material adverse
effect on our ability to execute our business plans, and on our results of
operations, financial condition and cash flow.
HISTORY OF LOSSES; NEGATIVE CASH FLOW FROM OPERATIONS; NO ASSURANCE OF
PROFITABILITY. We have incurred net losses since our inception and management
expects that we will incur additional losses. For the years ended December
31, 1995, 1996 and 1997, we had net losses of $129,000, $2,343,000 and
$4,153,000, respectively, and for the nine-month periods ended September 30,
1997 and 1998, we had net losses of $3,214,700 and $7,328,000, respectively.
For the year ended December 31, 1997, we had negative operating cash flow of
$3,297,000, and for the nine-month period ended September 30, 1998, we had
negative operating cash flow of $336,275.
As a result of the terminated merger transaction with Internet
Communications Corporation ("ICC") and the related financing transactions
that were not completed, we recorded costs, expenses and related fees of
approximately $4.6 million. Of this amount, approximately $2.7 million
relates to a non-cash item in connection with warrants that we issued. We do
not currently have the ability to pay all of such costs, fees and expenses.
We believe that we will be able to agree on a schedule for the payment of
these costs, fees and expenses that is satisfactory to all parties; however,
we cannot assure that we will be able to reach an agreement with all parties
regarding the payment of such costs, fees and expenses.
We cannot assure that we will achieve or sustain positive operating cash
flow or generate net income in the future. To achieve profitability, we
must, among other things, increase our customer base and develop and market
products and services that are broadly accepted. We cannot assure that we
will ever achieve profitability. See "--Increasing Competition" and
"--Dependence on the Internet; Uncertain Adoption of Internet as a Medium of
Commerce and Communications."
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CURRENT LITIGATION; UNCERTAINTY OF OUTCOME. In June 1998, we announced
that we had entered into a merger agreement to acquire ICC. The closing of
the acquisition was subject to various closing conditions, and the merger
agreement contained certain rights of termination. On October 13, 1998, we
announced that we terminated the merger agreement due to, among other things,
ICC's failure to satisfy certain obligations under the merger agreement. On
October 14, 1998, ICC filed a complaint against us in Denver District Court
claiming $30 million in damages and alleging, among other things, that we had
breached the merger agreement and had made certain misrepresentations to ICC
with respect to the proposed merger transaction. On November 30, 1998, we
filed an answer to ICC's complaint denying its right to prevail on or to
receive compensation or damages with respect to any of its claims.
Additionally, we have filed several counterclaims against ICC alleging that
the failure of the merger was due to the actions and misrepresentations of
ICC and its agents, and we are seeking damages in excess of $175 million. We
believe ICC's claims to be without merit, and intend to vigorously defend
against its claims as well as to vigorously pursue our counterclaims against
ICC. We cannot provide any assurance, however, that we will prevail in our
defense or any counterclaims. We hope that we can resolve the dispute with
ICC without the necessity for a trial; however, we cannot make any assurances
or guarantees about our ability in this regard. If the dispute cannot be
resolved expeditiously, we expect that we would incur additional costs and
expenses as a result of the litigation and that the litigation may hamper our
ability to obtain additional financing.
POTENTIAL FLUCTUATIONS IN OPERATING RESULTS. Our operating results may
vary, depending upon factors such as the timing and installation of circuits
we ordered. In the past these installations have been, and we expect that
the future installations will be, delayed from time to time due to delays in
the installation of lines and equipment by our telecommunications suppliers.
In addition, any or all of the following may also contribute to variability
of our operating results:
- pricing and mix of services and products we sell;
- terminations of service by subscribers;
- introduction of new products and services by us and our competitors;
- market acceptance of new and enhanced versions of our services;
- changes in pricing policies by our competitors; and
- the timing of the expansion of our network infrastructure and entry
into new businesses.
Variations in the timing and amounts of revenues could have a material adverse
effect on our operating results.
RISKS RELATED TO OUR ACQUISITION STRATEGY. During 1998, we acquired the
stock or assets of six companies. As part of our long-term business
strategy, we intend to acquire additional companies. We cannot provide any
assurance, however, that we will be able to implement our acquisition plan.
We require additional funds through equity, debt, or other external financing
in order to implement our acquisition strategy. See "--Management of Growth;
Need for Additional Capital." Further, acquisitions may involve a number of
special risks, including the following:
- we may issue additional equity securities that may dilute your
ownership interest in the Company;
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- we may incur additional debt to pay for the businesses we acquire;
- the businesses we acquire may fail to achieve the revenues we
anticipated;
- it may be difficult or impossible to effectively integrate our
businesses, systems, and operations with those of the businesses that
we acquire;
- we may ultimately be liable for contingent and other liabilities, not
previously disclosed to us, of the companies that we acquire; and
- amortization of expenses related to goodwill and other intangible
assets, some or all of which could have a material adverse effect on
our business, financial condition, results of operations and cash
flow. All of our recent acquisitions have resulted in the allocation
of a large portion of the purchase price to intangible assets such as
customer lists and goodwill.
In addition, certain acquisitions may have certain negative effects upon our
business, such as one or more of the following:
- potential loss of customers due to perceived conflicts;
- duplication of work force; and
- incompatibility of accounting and other systems.
In addition, we cannot assure that acquired businesses, if any, will achieve
anticipated revenues and earnings. The potential inability to implement and
manage our acquisition strategy successfully may have an adverse effect on our
future prospects. See "BUSINESS - Business Strategy."
INCREASING COMPETITION. The markets in which we operate and intend to
operate are extremely competitive and can be significantly influenced by the
marketing and pricing decisions of the larger industry participants. We expect
competition in these markets to intensify in the future. See
"BUSINESS--Competition."
INTERNET ACCESS. Our current and prospective competitors in the
Internet access market include many large companies that have substantially
greater market presence and financial, technical, operational, marketing and
other resources and experience than we do. Our Internet access business
competes or expects to compete directly or indirectly with the following
categories of companies: (i) other national and regional commercial ISPs, such
as Verio Inc. or one or more of its affiliates and PSINet, Inc. ("PSINet");
(ii) established on-line services companies that currently offer Internet
access, such as America Online, Inc. ("AOL"), CompuServe and Prodigy Services
Company; (iii) computer hardware and software and other technology companies,
such as Microsoft Corporation ("Microsoft"); (iv) national long distance
telecommunications carriers, such as AT&T (AT&T WorldNet), Sprint (SprintNet)
and Qwest Communications International, Inc.; (v) regional Bell operating
companies ("RBOCs" or "I-LECs"); (vi) cable television system operators, such as
Comcast Corporation, Tele-Communications, Inc. ("TCI") and Time Warner Inc.;
(vii) nonprofit or educational ISPs; and (viii) newly licensed providers of
spectrum-based wireless data services.
TELECOMMUNICATION SERVICES. Our intention to provide traditional long
distance service will place us directly in competition with inter-exchange
carriers ("IXCs"), or long distance carriers, which
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engage in the provision of long distance access and other long distance
resellers and providers, including large carriers such as AT&T, MCI WorldCom
and Sprint and new entrants to the long distance market such as the RBOCs who
have entered or have announced plans to enter the U.S. intrastate and
interstate long distance market pursuant to recent legislation authorizing
such entry. See "REGULATION." On April 22, 1998, the Public Utilities
Commission of Colorado granted the request of Rocky Mountain Broadband, Inc.
("RMB"), our wholly owned subsidiary, to become a competitive local exchange
carrier ("C-LEC"). Likewise, our intention to provide IP Telephony services
and C-LEC services will place us directly in competition with other providers
(either resellers or facilities-based carriers) that provide the same
services. Some of our competitors are significantly larger and have
substantially greater market presence as well as financial, technical,
operational, marketing and other resources and experience than we do.
DEPENDENCE ON KEY PERSONNEL. Our success depends to a significant degree
upon the continued contributions of our senior operating management,
particularly Douglas H. Hanson, our Chief Executive Officer and Chairman of
the board of directors. The loss of Mr. Hanson's services or other senior
operating management could have a materially detrimental effect on us. We do
not maintain key person life insurance on any of our personnel. Our success
will also depend on our ability to attract and retain other qualified
management, marketing, technical and sales executives and personnel.
POSSIBLE ADVERSE EFFECTS OF ISSUANCE OF PREFERRED STOCK OR COMMON STOCK.
We have 25,000,000 shares of common stock and 750,000 shares of Preferred
Stock authorized, of which 9,385,794 shares of common stock and 8,000 shares
of Preferred Stock were outstanding as of December 15, 1998. We have reserved
another 1,600 shares of preferred stock for potential issuance as dividends
on the 8,000 shares of preferred stock outstanding. We have reserved another
810,364 shares of common stock for issuance pursuant to our stock option
plans and other stock options granted, 1,838,700 shares of common stock that
can be issued upon the conversion of the 8,000 shares of preferred stock
outstanding, and 7,347,315 shares of common stock for issuance upon exercise
of various warrants, including the Hanson Warrants, warrants issued to the
lenders in connection with the loan commitment for the acquisition of ICC
(which acquisition was subsequently terminated) and shares issuable pursuant
to various anti-dilution provisions contained in the warrants and options
described above. In connection with the shares of preferred stock referred to
above, the Company agreed to seek shareholder approval at the next annual
meeting of the potential issuance of additional shares of common stock.
Additional shares of common stock may be issuable under the terms of the
preferred stock, but such issuance is prohibited in the absence of
shareholder approval. Consequently, if shareholder approval is obtained, and
if the terms of the preferred stock require, the Company may be required to
issue in excess of the 1,838,700 shares of common stock referenced above.
In addition, we may be required to issue approximately 258,065 (assuming
a $9.6875 per share price at the date of calculation) additional shares of
common stock in connection with the acquisition of Application Methods and up
to 125,000 shares of common stock in connection with our acquisition of the
assets of DataXchange Network, Inc. Accordingly, after giving effect to the
shares of common stock issuable pursuant to the securities described above
and to additional shares of common stock that may be issued pursuant to
anti-dilution provisions of various outstanding warrants and options, there
are approximately 2,288,025 shares of common stock and 740,400 shares of
preferred stock that may be issued in the future at the discretion of our
board of directors.
Our board of directors may direct that we issue the preferred stock without
stockholder approval, with such designations, preferences, dividend rates,
conversion and other features as the board of directors may determine. The
rights of the holders of our common stock will be subject to and may be
adversely affected by the terms of any additional classes of preferred stock
that we may issue in the future. The issuance of such shares of undesignated
preferred stock, while potentially providing desirable flexibility in connection
with possible acquisitions and serving other corporate purposes, could have the
effect of making it more difficult for a third party to acquire, or may
discourage a third party from attempting to acquire, a majority of our
outstanding voting stock or may result in material dilution to holders of our
common stock depending on the terms of such preferred stock. The issuance of
preferred stock also could decrease the amount of earnings and assets available
for distribution to the holders of common stock. In addition, future issuances
of shares of common stock could materially and adversely affect the market price
of the common stock and could materially impair our future ability to
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raise capital through an offering of equity securities. We cannot make any
prediction as to the effect, if any, that market sales of such shares or the
availability of such shares for future sale will have on the market price of
the common stock prevailing from time to time.
In addition, our stockholders approved, at our 1998 annual meeting of
shareholders, an amendment to our Certificate of Incorporation to effect a
reverse exchange (a "Reverse Stock Split") of our common stock. The Reverse
Stock Split would be in a ratio of up to one-for-ten and would be effected in
the event that the board of directors determines that such a Reverse Stock Split
is desirable at any time within one year from the date of the 1998 Annual
Meeting, with the exact ratio of the Reverse Stock Split to be determined by the
board of directors in its discretion. Although the board of directors has no
present intention of doing so, the additional shares of authorized but unissued
common stock that may result from the proposed Reverse Stock Split could also be
used by the board of directors to defeat or delay a hostile takeover. Faced
with an actual or proposed hostile takeover, the directors could issue shares of
common stock, in a private transaction, to a friendly party that might align
itself with the board of directors in opposing a hostile takeover. Accordingly,
the Reverse Stock Split could be considered to have the effect of discouraging a
takeover of the Company. The board of directors is not aware, however, of any
current proposals by any party to acquire control of the Company and the Reverse
Stock Split is not intended to be an anti-takeover device.
DEPENDENCE UPON NETWORK INFRASTRUCTURE. Our success will partially depend
upon our ability to develop a reputation for reliability over the long term and
the security of our current and future network connections. We must continue to
expand and adapt our network infrastructure as the number of users and the
amount of information they wish to transfer increases and as the requirements of
our customers change. The expansion of our Internet network infrastructure will
require substantial financial, operational and management resources. We cannot
assure that we will be able to expand or adapt our network infrastructure to
meet additional demand or our customers' changing requirements on a timely
basis, at a commercially reasonable cost, or at all.
DEPENDENCE ON THE INTERNET; UNCERTAIN ADOPTION OF INTERNET AS A MEDIUM
OF COMMERCE AND COMMUNICATIONS. Many of our existing and proposed products
and services are targeted toward users of the Internet. As is typical in the
case of a new and rapidly evolving industry characterized by rapidly changing
technology, evolving industry standards and frequent new product and service
introductions, demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty. In addition,
critical issues concerning the commercial use of the Internet remain
unresolved and may impact the growth of Internet use, especially in the
business market targeted by us. Despite growing interest in the many
commercial uses of the Internet, many businesses have been deterred from
purchasing Internet access services for a number of reasons, including, among
others, the following:
- - inconsistent quality of service;
- - lack of availability of cost-effective, high-speed options;
- - a limited number of POPs for corporate users;
- - inability to integrate business applications on the Internet;
- - the need to deal with multiple and frequently incompatible vendors;
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- - inadequate protection of the confidentiality of stored data and information
moving across the Internet; and
- - a lack of tools to simplify Internet access and use.
The adoption of the Internet for commerce and communications, particularly
by those individuals and enterprises that have historically relied upon
alternative means of commerce and communication, generally requires the
understanding and acceptance of a new way of conducting business and exchanging
information. In particular, enterprises that have already invested substantial
resources in other means of conducting commerce and exchanging information may
be particularly reluctant or slow to adopt a new strategy that may make their
existing personnel and infrastructure obsolete.
We are at risk as a result of fundamental technological changes in the way
Internet solutions may be marketed and delivered. Integrating technological
advances may require substantial time and expense and we cannot assure that we
will succeed in adapting our network infrastructure. While we believe that our
plan of combining the scale and scope of a national operation with the local
presence of our ISP operations offers significant advantages for commerce and
communication over the Internet, we cannot assure that commerce and
communication over the Internet will become widespread or that our offered
Internet access and communications services will become widely adopted for these
purposes.
New technologies or industry standards have the potential to replace or
provide lower cost alternatives to our existing products and services. The
adoption of such new technologies or industry standards could render our
existing products and services obsolete and unmarketable. If the market for
Internet access services fails to develop, develops more slowly than expected,
or becomes saturated with competitors, or if the Internet access and services
offered by us are not broadly accepted, our business, operating results,
financial condition and cash flow may be materially adversely affected.
Although we intend to support emerging standards in the market for Internet
connectivity, we cannot assure that industry standards will emerge or if they
become established, that we will be able to conform to these new standards in a
timely fashion and maintain a competitive position in the market.
RISK OF TECHNOLOGICAL CHANGE AND EVOLVING INDUSTRY STANDARDS. To date we
have not been adversely affected by product or service obsolescence because
changes in the Internet service industry have been largely a matter of
improvements in hardware which have been readily available to us and our
competitors. Our future success depends, however, upon our ability to
develop new services that meet changing customer requirements. The market
for our service is characterized by rapidly changing technology, evolving
industry standards, emerging competition and frequent new service
introductions. We cannot assure that we can successfully identify new
opportunities and develop and bring new services to market in a timely manner
or that services or technologies developed by others will not render our
services noncompetitive or obsolete.
We believe that our ability to compete successfully is also dependent upon
the continued compatibility and interoperability of our services with products
and architectures offered by various vendors. Although we intend to support
emerging standards in the market for Internet access, we cannot assure that any
industry standards will be established or, if they become established, that we
will be able to conform to these new standards in a timely fashion or maintain a
competitive position in the market. We could be adversely affected by our
failure to anticipate the prevailing standards or the failure of common
standards to emerge.
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POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH NETWORK. The law
relating to the liability of ISPs and on-line service companies for information
carried on or disseminated through their networks has not yet been definitively
established. Internet access and content providers face potential liability of
uncertain scope for the actions of subscribers and others using their systems,
including liability for infringement of intellectual property rights, rights of
publicity, defamation, libel and criminal activity under the laws of the United
States and foreign jurisdictions.
We do not maintain errors and omissions insurance. Any liability that may
be imposed on us for alleged negligence, intentional torts, or other liability
could have a material adverse effect on us. In addition, recent legislative
enactments and pending legislative proposals aimed at limiting the use of the
Internet to transmit indecent or pornographic materials could, depending upon
their interpretation and application, result in significant potential liability
to Internet access and service providers including us. We also anticipate that
we would incur additional costs and face technological challenges in complying
with any statutory or regulatory requirements imposed by such legislation. For
example, the Communications Decency Act of 1996 (amending 47 U.S.C. Section
223), which is part of the Telecommunications Act of 1996 (the "1996
Telecommunications Act"), became effective on February 8, 1996. The 1996
Telecommunications Act imposes criminal liability on persons sending or
displaying in a manner available to minors indecent material on an interactive
computer service such as the Internet and on an entity knowingly permitting
facilities under its control to be used for such activities. While the
constitutionality of these provisions has been successfully challenged in the
U.S. Supreme Court, we cannot make any assurances or predictions as to the final
result regarding the constitutionality of the 1996 Telecommunications Act, or as
to the scope and content of any substitute legislation or other legislation in
the United States or foreign jurisdictions restricting the type of content being
provided over the Internet. If these provisions or related legislation are
upheld, the effect on the Internet industry could have a material adverse effect
on our business, financial condition, results of operation, or cash flow.
PRICING PRESSURES. We reduced the prices we charge our Internet
customers during 1995, 1997 and 1998 partly as a result of competitive
pricing pressures in the market for Internet services. We expect that
continued price pressures may cause us to reduce prices further in order to
remain competitive, and we expect that such further price reductions could
adversely effect our results of operations, unless we can lower our costs
commensurate with such price decreases. We may also face price pressures
from our competitors in the telecommunications services markets in which we
intend to compete.
SECURITY RISKS. A risk faced by all ISPs, including us, is the risk that,
despite our implementation of network security measures, our infrastructure
remains vulnerable to computer viruses, sabotage, break-ins and similar
disruptive problems caused by our subscribers or other Internet users.
Furthermore, inappropriate use of the Internet by third parties could
potentially jeopardize the security of confidential information stored in the
computer systems of our customers, which may deter potential subscribers and may
inhibit the growth of the Internet service industry in general. Security
problems continue to plague public and private data networks. We may incur
significant expenditures of capital and resources to alleviate or attempt to
avoid problems caused by computer viruses, break-ins, or other problems caused
by third parties, which could have a material adverse effect on us. Until more
comprehensive security technologies are developed, the security and privacy
concerns of existing and potential customers may inhibit the growth of the
Internet service industry in general and our customer base and revenues in
particular.
RISKS OF SYSTEM FAILURE. Our Internet operations are dependent upon our
ability to protect our network infrastructure against damage from acts of
nature, power failures, telecommunications failures
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and similar events. Physical protection of our network infrastructure is one
of our primary responsibilities. However, because we lease our lines from
long distance telecommunications companies, RBOCs and C-LECs, we are
dependent upon these companies for physical repair and maintenance of the
leased lines. We maintain multiple carrier agreements to reduce the risk of
loss of operations from damage, power failures, telecommunications failures
and similar events. Despite our precautions, the occurrence of a natural
disaster or other unanticipated problems at our NOC or any of our POPs may
cause interruptions in the services we provide. In addition, failure of our
telecommunications providers to provide the data communications capacity we
require as a result of a natural disaster, operational disruption or for any
other reason could cause interruptions in the services we provide. Any
damage or failure that causes interruptions in our operations could have a
material adverse effect on us.
DEPENDENCE ON TELECOMMUNICATIONS ACCESS. All Internet and most
telecommunications service providers, including us, depend on other companies to
provide communications capacity via leased facilities. If one or more of these
companies is unable or unwilling to provide or expand our current levels of
service in the future, our operations could be materially and adversely
affected. Although leased facilities are available from several alternative
suppliers, including AT&T and Sprint, we cannot assure that we could obtain
substitute services. In addition, we are dependent on local telephone companies
to provide local dial-up and leased, high-speed dedicated access phone lines for
access to each of our POPs. We are presently dependent on US West Inc. (an
RBOC), ICG Communications, Inc. and Teleport Communications Group, all of which
are competitors of ours, to provide timely installation of new circuits and to
maintain existing circuits. We have experienced delays in the installation of
circuits and inconsistencies in maintenance service, which have adversely
affected us.
DEPENDENCE ON SUPPLIERS. In order to provide Internet access and other
on-line services to our customers, we lease long distance fiber optic
telecommunications lines from multiple national telecommunications service
providers. We are dependent upon these providers of data communications
facilities. In addition, we have a wholesale usage agreement with PSINet,
which allows us to provide dial-up and "switched" network access to our
customers through PSINet's 235 POPs throughout the United States and have
other agreements with service providers on which we rely to deliver our
product and service offerings. Certain of our suppliers, including RBOCs and
C-LECs, currently are subject to various price constraints, including tariff
controls, which in the future may change. In addition, regulatory proposals
are pending that may affect the prices the RBOCs and C-LECs charge us. Such
regulatory changes could result in increased prices of products and services,
which could have a material adverse effect on us.
We rely on other companies to supply certain components of our computer
inventory as well as our network infrastructure (including telecommunications
services and networking equipment) which, in the quantities and quality we
require, is available only from sole or limited sources. We have in the past,
and may from time to time, experience delays in receiving telecommunications
services and shipments of merchandise purchased for resale. We cannot assure
that we will be able to obtain such telecommunication services and shipments of
merchandise on the scale and at the times we require at an affordable cost, or
at all. We also cannot assure that our suppliers will not enter into exclusive
arrangements with our competitors to stop selling us their products or
components at commercially reasonable prices, or at all, or that agreements with
our suppliers will not be terminated for other reasons. Any failure of our sole
or limited-source suppliers to provide products or components that comply with
our standards could have a material adverse effect on us.
DIFFICULTIES IN IMPLEMENTING LOCAL EXCHANGE AND LONG DISTANCE TELEPHONE
SERVICES. We are a
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recent entrant into the newly created competitive local telephony services
industry. The local exchange telephony services market in most states was
only recently opened to competition due to the passage of the 1996
Telecommunications Act and related regulatory rulings. There are numerous
operating complexities associated with providing these services. We will be
required to develop new products, services and systems and will need to
develop new marketing initiatives to sell these services. Our inability to
overcome any of these operating complexities could have a material adverse
effect on us.
We intend to resell local telephony services provided by I-LECs. Although
the 1996 Telecommunications Act requires all I-LECs to permit resale of their
telephony services without unreasonable restrictions or conditions and requires
I-LECs to offer their retail telecommunications services to other
telecommunications carriers for resale at discounted rates based on the costs
avoided by the I-LEC in such offering, we cannot assure that we will be
able to initiate or provide service in a timely manner or at competitive prices.
We also offer long distance services to our customers. The long distance
business is highly competitive. In addition, the long distance industry has
historically had a high average churn rate and customers continue to change long
distance providers frequently in response to the offering of lower rate or
promotional incentives by competitors. We rely on other carriers to provide
transmission and termination services for all of our long distance traffic
pursuant to resale agreements. Such agreements typically provide for the resale
of long distance services on a per-minute basis. Negotiation of these
agreements involves estimates of future supply and demand for transmission
capacity as well as estimates of the calling pattern and traffic levels of our
future customers. In the event we underestimate our need for transmission
capacity, we may be required to obtain capacity through more expensive means.
GOVERNMENT REGULATORY POLICY RISKS; POTENTIAL TAXES. The
telecommunications businesses in which we engage are subject to extensive
federal and state regulation. The provision of long distance telephone
service is subject to the provisions of the Communications Act of 1934, as
amended, including amendments effected by the 1996 Telecommunications Act and
the FCC regulations thereunder, as well as the applicable laws and
regulations of the various states, including regulation by Public Utility
Commissions ("PUCs") and other state agencies. Federal laws and FCC
regulations apply to interstate telecommunications (including international
telecommunications that originate or terminate in the United States), while
state regulatory authorities have jurisdiction over telecommunications both
originating and terminating within a state.
Regulation of the telecommunications industry is changing rapidly, and the
regulatory environment varies substantially from state to state. Moreover, as
deregulation at the federal level occurs, some states are reassessing the level
and scope of regulation that may apply to us. We cannot assure that future
regulatory, judicial, or legislative activities will not have a material adverse
effect on us.
A recent federal legislative change, the 1996 Telecommunications Act, may
have potentially significant effects on our operations. The 1996
Telecommunications Act, among other things, allows the RBOCs and other companies
to enter the long distance business and enables other entities, including
entities affiliated with power utilities and ventures between local exchange
carriers ("LECs") and cable television companies, to provide an expanded range
of telecommunications services. Entry of such companies into the long distance
business would result in substantial additional competition in one of the
markets into which we intend to expand and may have a material adverse effect on
us.
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On April 10, 1998, the FCC submitted a report to Congress in which it
stated that telephone-to-telephone IP Telephony bears the characteristics of
"telecommunications services" and that the providers of those services may be
"telecommunications carriers," as those terms are defined in the 1996
Telecommunications Act. The FCC deferred a more definitive resolution of this
issue until a more "fully-developed" record is available. However, the April
10, 1998 report states that, to the extent the FCC concludes that certain forms
of telephone-to-telephone IP Telephony service are "telecommunications
services," and to the extent the providers of those services obtain the same
circuit-switched access as obtained by other IXCs and therefore impose the same
burdens on the local exchange as do other IXCs, the FCC "may find it reasonable
that they" become subject to the same regulations, including the requirement to
pay access fees to LECs and to contribute to "universal service" subsidies. See
"BUSINESS - Business Strategy" and "REGULATION." In addition, a number of state
and local government officials have asserted the right or indicated a
willingness to impose taxes on Internet-related services and commerce, including
sales, use and access taxes. Recently enacted federal legislation placed a
moratorium on the imposition by state and local governments of new taxes on ISPs
or other businesses involved in Internet-related commerce. However, we cannot
assure that federal taxes will not be imposed upon such services in the future
or that stated and local governments will not be permitted, in the future, to
impose similar taxes. We cannot predict whether the imposition of any such
additional taxes would have a material adverse effect on us.
YEAR 2000 RISKS. Currently, many computer systems, hardware and software
products are coded to accept only two digit entries in the date code field and,
consequently, cannot distinguish 21st century dates from 20th century dates.
The interaction between various software and hardware platforms relies upon the
date coding system. As a result, many companies' software and computer systems
may need to be upgraded or replaced in order to function properly after the turn
of the century. Customers, suppliers, and we are reliant on computers and
related automated systems for daily business operations.
We have begun the process of identifying computer systems that could be
affected by the Year 2000 issue as it relates to our internal hardware and
software, as well as third parties that provide us goods or services. We have
identified three categories or general areas for review and analysis.
(1) Systems providing customer services. These include hardware and
software systems that are used to provide services to our
customers in the form of Internet connectivity, e-mail servers,
news servers, authentication servers, etc. Hardware in the form
of routers and switches are also included in this area.
(2) Third party vendors providing critical services including circuits,
hardware, long distance and related products. These include
telecommunications service providers, suppliers of routers, modems,
switches, etc.
(3) Critical internal systems that support our administrative systems
for billing and collecting, general accounting systems, computer
networks, and communication systems.
We are in the planning and initial study phase of Year 2000 compliance
review and testing. In regards to Item (1) listed above, our critical existing
systems are no more than two and one-half years old and we anticipate that many
of these systems will not have significant Year 2000 problems. Due to our
continued growth, we plan to relocate most systems providing customer services
to an expanded network operations center. Concurrently with the relocation, we
will move many of the critical systems to new hardware and software platforms to
increase reliability and capacities. We require all newly acquired hardware
systems, operating systems, and software to have vendor certification for Year
2000
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compliance. We are inventorying these systems and developing a systems
testing schedule for them.
In regards to Item (2) above - third party products and services - our
significant vendors are large public companies such as US West Communications,
ICG Telecommunications Group, Cisco Systems, Lucent Technologies, Ascend
Communications, etc., that are all under SEC mandates to report their compliance
in all publicly filed documents. We intend to initiate a compliance review
program with these vendors during the first quarter of 1999 and will continue to
track progress of all critical vendors for compliance.
Item (3) above relates to internal systems for our administrative and
communications requirements. We intend to implement new billing and billing
presentment systems during the first half of 1999. We require these system
vendors to certify Year 2000 compliance. Additionally, we intend to test these
systems for compliance during the implementation process. We expect to test
internal computer networks and communications systems in the first quarter of
1999 for compliance.
The costs to address the Year 2000 compliance issues have not been
determined at this time. Based on growth, we plan to implement new hardware
platforms and software systems that should be Year 2000 compliant and,
therefore, costs specifically allocated to Year 2000 compliance may not be
significant. However, we cannot assure that such costs will not be significant.
We will incur manpower and consultant costs in connection with systems testing
and compliance reviews with third party services providers.
The nature of our business makes it dependent on computer hardware,
software, and operating systems that are susceptible to Year 2000 issues.
Failure to attain at least minimum levels of Year 2000 compliance would have a
material adverse effect on our ability to deliver services and on our business,
operating results, financial condition and cash flow.
We have not developed a contingency plan for dealing with Year 2000 risks
at this time.
VOLATILITY OF STOCK PRICES AND PENNY STOCK RULES. Our common stock and
publicly traded Warrants are qualified for trading on Nasdaq. The prices at
which our common stock has been traded have varied considerably since the
common stock was qualified for trading on Nasdaq. We cannot assure that we
will continue to be able to satisfy certain specified financial tests and
market related criteria required for continued listing on Nasdaq. If our
common stock were no longer qualified for trading on Nasdaq, trading, if any,
would thereafter be conducted in the over-the-counter market, so called "pink
sheets" or the "Electronic Bulletin Board" of the National Association of
Securities Dealers, Inc. Consequently, an investor could find it more
difficult to dispose of, or to obtain accurate quotations as to the price
of, our common stock. In addition, we could become subject to rules adopted
by the SEC regulating broker-dealer practices in connection with transactions
in "penny stocks." Penny stocks generally are equity securities with a price
of less than $5.00 (other than securities registered on certain national
securities exchanges or quoted on Nasdaq, provided that the exchange or
Nasdaq system provides current price and volume information with respect to
transactions in such securities). Unless an exemption from the definition of
a "penny stock" were available, any broker engaging in a transaction in our
common stock would be required to provide any customer with a risk disclosure
document, disclosure of market conditions, if any, disclosure of the
compensation of the broker-dealer and its salesperson in the transaction and
monthly accounts showing the market values of our common stock held in the
customer's account. The broker would be required to provide bid and offer
quotation and compensation information prior to effecting the transaction,
and such information must be contained on the customer's confirmation. We
anticipate that many brokers will be unwilling to engage in transactions in
our
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common stock because of the need to comply with the "penny stock" rules,
thereby making it more difficult for purchasers of common stock to dispose of
their shares or for us to raise additional capital through equity financing.
LACK OF ESTABLISHED TRADING MARKET FOR COMMON STOCK AND PUBLICLY TRADED
WARRANTS. Trading in our common stock and Warrants issued in our initial public
offering (the "IPO Warrants") had been inactive until March 1998. We cannot
assure that an active market can or will be maintained for the trading of our
common stock. Purchasers of our common stock may, therefore, find it difficult
to dispose of these securities.
CONTROL BY MANAGEMENT. As the result of Mr. Hanson's investment in the
Company, we issued and sold to Mr. Hanson 1,225,000 shares of common stock for a
purchase price of $2,450,000, or $2.00 per share. Mr. Hanson also became our
President, Chief Executive Officer and Chairman of the board of directors. As a
result of these related transactions, Mr. Hanson obtained effective control of
the Company and, as of December 15, 1998, had the authority to vote
approximately 48% of our common stock after giving effect to the exercise of the
Warrants and stock options that the Company granted to him. Our officers and
directors as a group beneficially own as of December 15, 1998 approximately 49%
of our common stock after giving effect to the exercise of the Warrants and
stock options that the Company granted to Mr. Hanson. As a result, these
stockholders will be able to exercise significant influence over all matters
requiring stockholder approval, including the election of directors and approval
of significant corporate transactions. Such concentration of capital stock may
also have the effect of delaying or preventing a change of control.
SHARES ELIGIBLE FOR RESALE. As of December 15, 1998, there were
outstanding 2,149,646 shares of common stock that were issued in connection
with various transactions, all of which are deemed to be "restricted
securities," as defined in Rule 144 under the Securities Act. All but
246,821 of these restricted securities are currently eligible for resale by
the holders thereof in the public market pursuant to Rule 144. In general,
under Rule 144 as currently in effect, a person (or persons whose shares are
aggregated) who has beneficially owned restricted securities for at least one
year is entitled to sell, within any three-month period, a number of such
shares that does not exceed the greater of (i) one percent of the then
outstanding shares of common stock or (ii) the average weekly trading volume
in the common stock during the four calendar weeks preceding the date on
which notice of such sale is filed with the SEC. The right to sell this
number of shares is also subject to certain requirements concerning
availability of public information, manner of sale and notice of sale. In
addition, our affiliates must comply with the restrictions and requirements
of Rule 144, other than the one-year holding period requirement, in order to
sell shares of common stock that are not restricted securities. Also, under
Rule 144(k), a person who is not an affiliate and has not been an affiliate
for at least three months prior to the sale and who has beneficially owned
restricted securities for at least two years may resell such securities
without compliance with the foregoing requirements. Sales of substantial
amounts of the common stock in the public market, or the perception that such
sales might occur, could adversely affect the then prevailing market price
for the common stock and could materially impair our future ability to raise
capital through an offering of equity securities. We cannot predict the
effect, if any, that market sales of such shares or the availability of such
shares for future sale will have on the market price of the common stock
prevailing from time to time.
POTENTIAL ADVERSE IMPACT ON MARKET PRICE OF COMMON STOCK IN THE EVENT OF
REDEMPTION OF PUBLICLY TRADED WARRANTS. We have the ability to call the
remaining outstanding publicly traded Warrants issued in our initial public
offering (the "IPO Warrants") for redemption at a price of $0.25 per IPO
Warrant, subject to the approval by securities administrators of various
states in which the holders of the IPO
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Warrants reside. The exercise price of the Warrants is less than the market
price per share of common stock, and we believe that the current owners of
those IPO Warrants, may, therefore, have an incentive to exercise those
Warrants and to purchase shares of our common stock. We cannot assure,
however, that the securities administrators of all states in which holders of
the IPO Warrants reside will approve our offer of the common stock underlying
the IPO Warrants. In addition, we cannot assure that all or any portion of
such IPO Warrants will be exercised in the event that such approval is
obtained. In the event that we call the IPO Warrants for redemption, holders
of the IPO Warrants will have the choice of exercising their IPO Warrants or
selling them to a buyer who could be expected to exercise such IPO Warrants,
or of accepting the redemption price of $0.25 per IPO Warrant. In the event
that a significant number of holders of IPO Warrants exercise such Warrants,
we can expect that many of the shares of common stock purchased upon such
exercise will be sold shortly thereafter. We anticipate that the sale of a
significant number of shares of common stock would have an adverse impact on
the market price for our common stock.
NO DIVIDENDS. We have not paid any cash dividends and do not intend to pay
cash dividends on the common stock in the foreseeable future.
STATE LAW LIMITATIONS ON DIRECTOR LIABILITY FOR MONETARY DAMAGES. Our
Certificate of Incorporation, as amended, substantially limits the liability of
our directors to our stockholders for breach of fiduciary or other duties.
DELAWARE ANTI-TAKEOVER PROVISIONS. Section 203 of the Delaware General
Corporation Law (the "DGCL") prohibits certain transactions between a
Delaware corporation and an "interested stockholder," which is defined as a
person who, together with any affiliate and/or associates of such person,
beneficially owns, directly or indirectly, 15% or more of the outstanding
voting shares of a Delaware corporation. This statute prohibits certain
"business combinations" between an interested stockholder and a corporation
for a period of three years after the date the interested stockholder
acquired our stock, unless (i) the business combination is approved by the
corporation's board of directors prior to the date the interested stockholder
acquired shares, (ii) the interested stockholder acquired at least 85% of the
voting stock of the corporation in the transaction in which it became an
interested stockholder or (iii) the business combination is approved by a
majority of the board of directors and by the affirmative vote of two-thirds
of the outstanding voting stock not owned by the interested stockholder. A
"business combination" is defined broadly to include mergers, consolidations,
sales or other dispositions of assets having an aggregate value in excess of
10% of the consolidated assets of the corporation or the aggregate value of
all of the outstanding capital stock of the corporation and certain
transactions that would increase the interested stockholder's proportionate
share ownership in the corporation. The application of Section 203 of the
DGCL could have the effect of delaying or preventing a change of control of
the Company.
RISKS ASSOCIATED WITH FORWARD-LOOKING STATEMENTS. This Prospectus contains
certain forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended, and we intend that such forward-looking statements be
subject to the safe harbors for such statements under such sections. The
statements contained in this Prospectus that are not historical fact are
"forward-looking statements" (as such term is defined in the statutory sections
cited above), which you can be identify by our use of forward-looking
terminology such as "expects," "anticipates," "intends," "plans," "believes,"
"seeks," "estimates," "may," "will," "should," "could" or the negative thereof
or other variations thereon or comparable terminology, or by discussions of
strategy that involve risks and uncertainties. Our forward-
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looking statements include the plans and objectives of management for future
operations, including plans and objectives relating to our Internet
connection services, plans and objectives for other businesses that we may
enter and our future economic performance. The forward-looking statements
and associated risks set forth in this Prospectus include or relate to:
* our ability to obtain additional financing;
* our ability to successfully defend ourselves in the pending litigation with
ICC;
* our ability to attract and retain qualified technical, sales, marketing and
administrative personnel relating to the services we currently provide and
intend to provide;
* our ability to market our services at competitive prices;
* development of brand-name recognition and loyalty for our services;
* development of an effective sales staff;
* market acceptance of our services;
* success of our market initiatives;
* expansion of sales in the industries to which we provide our current and
intended services;
* our success in forecasting demand for our current and intended services;
* our success in diversifying our market to provide services to large and
small businesses, professionals and individuals;
* our success in diversifying the types of services we offer to customers;
* achievement of forecasted operating margins dependent upon price and
efficient provision of services;
* availability of suitable licenses or other intellectual property access and
protection for our services;
* our ability to implement our acquisition strategy and the success of that
strategy, if and to the extent it is implemented;
* our success in achieving increases in net sales to reduce the cost of
services sold and decrease general, administrative and development costs as
a percentage of net sales and;
* our ability and the ability of other ISPs to gain access to cable systems,
such as the system that may be operated in the future by AT&T and TCI.
The forward-looking statements are based on assumptions and judgments
with respect to, among other things, future economic, competitive and market
conditions and future business decisions, all of which are difficult or
impossible to predict accurately and many of which are beyond our control.
Accordingly, although we believe that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove to
be inaccurate. Therefore, we cannot assure that the results contemplated in
forward-looking statements will be realized. In addition, as disclosed
elsewhere in the "Risk Factors" section of this Prospectus, there are a
number of other risks presented by our
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business and operations that could cause our net revenues or net loss, or
growth in net revenues or net loss to vary markedly from prior results or the
results contemplated by the forward-looking statements. Management
decisions, including budgeting, are subjective in many respects and periodic
revisions must be made to reflect actual conditions and business
developments, the impact of which may cause us to alter our marketing,
capital investment and other expenditures, which may adversely affect our
results of operations and cash flows. In light of significant uncertainties
inherent in the forward-looking information included in this Prospectus, you
should not regard the inclusion of such information as a representation by us
or any other person that our objectives or plans will be achieved.
CAPITALIZATION
The following table sets forth as of September 30, 1998 (i) the actual
capitalization of the Company, and (ii) the pro forma capitalization of the
Company adjusted for the issuance of our Series B Convertible Preferred Stock
and for our acquisition of the assets of DataXchange Network, Inc. in
December, 1998.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1998
DATAEXCHANGE PREFERRED
PROFORMA PROFORMA
HISTORICAL ADJUSTMENTS ADJUSTMENTS PROFORMA
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 731 $ 7,490 $ 45 $ 8,259
--------- ------- ------- ---------
Current portion of debt $ 715 $ - $ 298 $ 1,013
--------- ------- ------- ---------
Debt 654 - - 654
--------- ------- ------- ---------
Preferred Stock - 8 - 8
Common Stock 8 - 8
APIC 17,803 7,482 5,002 30,287
Treasury Stock (83) - - (83)
Accumulated deficit (14,075) - - (14,075)
--------- ------- ------- ---------
Total Stockholders' Equity 3,853 7,490 5,002 16,145
--------- ------- ------- ---------
Total Capitalization $ 4,307 $ 7,490 $ 5,002 $ 16,790
--------- ------- ------- ---------
--------- ------- ------- ---------
- ------------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include options and warrants to purchase approximately 8,415,744
shares of RMI common stock outstanding at September 30, 1998.
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<PAGE>
BUSINESS
OVERVIEW
We are a full service communications solutions provider of switched and
IP-based communications products and services for small- and medium-sized
business enterprises, as well as dial-up residential customers. We operate 11
Internet POPs in Colorado, and through agreements with third-party providers, we
can provide Internet access in 90 of the 100 largest metropolitan statistical
areas in the United States. We monitor and control our network through our NOC
located in Denver, Colorado. We intend to provide to our customers on a
nationwide basis comprehensive communications services, including dedicated
Internet access, dial-up Internet access, IP Telephony, point-to-point private
line, frame relay and local and long distance telephone service. In addition, we
offer our customers value-added web services, including web site hosting, web
site production and marketing, e-commerce and web training. We had combined pro
forma revenues for the year ended December 31, 1997 of $9,052,000 and provided
dedicated access and web services to over 1,300 business customers and over
16,800 dial-up customers as of November 30, 1998.
INDUSTRY BACKGROUND
OVERVIEW. The telecommunications industry is rapidly transforming itself
from a segmented multi-technology marketplace to an industry that is
characterized by the convergence of technologies and companies capable of
providing a full array of communication services. Three of the main factors
driving this significant transformation of the industry include (i) the
convergence of voice and data transmission, (ii) the need for broadband
transmission technologies and infrastructure, and (iii) the convergence of
technologies and companies providing what were formerly independent products and
services into one industry. As data and voice transmission converge, operators
continually need higher bandwidth capacity networks. Today the communications
services market can be divided into two basic categories: (i) traditional,
circuit switched and dedicated voice oriented services; and (ii) packet switched
services compatible with Internet standards. Traditional, circuit switched and
dedicated voice oriented services in the United States can be further divided
into long distance services and local exchange services.
TRADITIONAL TELECOMMUNICATIONS SERVICE MARKET. The present structure of
the U.S. telecommunications market resulted largely from the divestiture of
the "Bell System" in 1984 (the "Divestiture"). As a result of the
Divestiture, seven RBOCs were created to offer services in geographically
defined areas called local access transport areas. The RBOCs were separated
from the long distance provider, AT&T, resulting in the creation of two
distinct industries--local phone service and long distance (also known as
interexchange) phone services. The Divestiture, in and of itself, did not
result in competition in the local exchange market, but it did provide for
direct open competition for long distance. Since the Divestiture, several
factors have served to promote competition in the local exchange market,
including: (i) customer desire for an alternative to the RBOCs (also referred
to as the I-LECs); (ii) technological advances in the transmission of data
and video requiring greater capacity and reliability than I-LEC networks were
able to accommodate; (iii) a monopoly position and regulated pricing
structure, which provided little incentive for the I-LECs to reduce prices,
improve service or upgrade their networks; and (iv) the significant fees,
called "access charges," long distance carriers were required to pay to the
I-LECs to access the I-LECs' networks.
The first competitors in the local exchange market, designated as
"competitive access providers" or "CAPs" by the FCC, were established in the
mid-1980s. Most of the early CAPs were entrepreneurial enterprises that operated
limited networks in the central business districts of major cities in the United
States where the highest concentration of voice and data traffic is found. Since
most states prohibited
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competition for local switched services, early CAP services primarily
consisted of providing dedicated, unswitched connections to long distance
carriers and large businesses. These connections allowed high-volume users to
avoid the relatively high prices charged by I-LECs for dedicated, unswitched
connections or for switched access.
As CAPs proliferated during the latter part of the 1980s, certain
regulators issued rulings that favored competition and promised to open local
markets to new entrants. These rulings allowed CAPs to offer a number of new
services, including, in certain states, a broad range of local exchange
services, including switched services. Companies providing a combination of CAP
and switched local services are sometimes referred to as C-LECs. This
pro-competitive trend continued with the passage of the 1996 Telecommunications
Act, which provided a legal framework for introducing competition to local
telecommunications services throughout the United States. As a result, the
RBOCs, which previously had an oligopoly in the $92 billion (1997 estimate)
local service market, are now facing increased competition from C-LECs.
Conversely, local carriers are being allowed to compete in the $104 billion long
distance market (1997 estimate) only after they have "opened" their local
markets to competition.
Over the last three years, several significant transactions have been
announced representing consolidation of the U.S. telecommunications industry
driven by both competitive pressures and the convergence of voice and data
networks. Among the I-LECs, Bell Atlantic Corporation and NYNEX Corporation
merged in August of 1997 and Pacific Telesis Group and SBC Communications Inc.
merged in April 1997. Major long distance providers have sought to enhance their
positions in local markets, through transactions such as AT&T's acquisition of
Teleport Communications Group and WorldCom's mergers with MFS and Brooks Fiber
Properties and to otherwise improve their competitive positions, through
transactions such as WorldCom's merger with MCI. In addition, AT&T, in order to
capitalize on the trends of convergence and consolidation and gain access to the
local markets, has announced plans to merge with the cable company, TCI.
THE INTERNET SERVICES MARKET. The Internet is a global collection of
interconnected computer networks that allows commercial organizations,
educational institutions, government agencies and individuals to communicate
electronically, access and share information and conduct business. The Internet
originated with the ARPAnet, a restricted network that was created in 1969 by
the United States Department of Defense Advanced Research Projects Agency
("DARPA") to provide efficient and reliable long distance and data
communications among the disparate computer systems used by government-funded
researchers and academic organizations. The networks that comprise the Internet
are connected in a variety of ways, including by public switched telephone
network and by high speed, dedicated leased lines. Communications on the
Internet are enabled by IP, an inter-networking standard that enables
communication across the Internet regardless of the hardware and software used.
Over time, as businesses have begun to utilize e-mail, file transfer and,
more recently, intranet and extranet services, commercial usage has become a
major component of Internet traffic. In 1989, the U.S. government effectively
ceased directly funding any part of the Internet backbone. In the mid-1990s,
contemporaneous with the increase in commercial usage of the Internet, a new
type of provider called an ISP became more prevalent. ISPs offer access, e-mail,
customized content and other specialized services and products aimed at allowing
both commercial and residential customers to obtain information from, transmit
information to and utilize resources available on the Internet.
ISPs generally operate networks comprised of dedicated lines leased from
Internet backbone providers using IP-based switching and routing equipment and
server-based applications and databases. Customers are connected to the ISP's
POP by facilities obtained by the customer or the ISP from either I-
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LECs or C-LECs through a dedicated access line or the placement of a
circuit-switched local telephone to call the ISP. The rapidly growing need
for Internet access and technology has resulted in a highly fragmented
industry with the proliferation of over 4,000 ISPs operating within the
United States. These ISPs are primarily made up of a few large national
providers focused on high bandwidth access and a large number of small
providers with limited resources focused on serving local markets. Often the
solutions offered by these companies fail to address certain elements
required to ensure that customers' mission-critical Internet operations are
reliable, scalable and high-performing and that these companies fail to
provide a broad array of efficient, low-cost communications products and
services. The Company believes that customer service has emerged as an
increasingly important element of providing Internet services and that often
the large, national ISPs do not offer individual customers the level of
support desired and that many of the small, regional ISPs do not have the
resources necessary to offer adequate customer support.
According to industry estimates, the number of Internet users in the United
States who access the World Wide Web reached approximately 29.2 million in 1997
and is forecasted to grow to approximately 72.1 million by the year 2000. In
addition, International Data Corporation ("IDC") estimates that total ISP
revenues in the United States are projected to grow from $4.6 billion in 1997 to
over $18 billion in 2000. In the past, much of the growth in ISP revenues has
been driven by the dial-up or retail sector of the Internet. However, businesses
today represent the largest and fastest growing segment of the Internet market.
IDC predicts that U.S. corporate Internet access revenues will grow from
approximately $1.9 billion in 1996 to over $6.6 billion in 2000. In addition,
IDC predicts that enhanced Internet services, such as web hosting, security,
e-commerce, virtual private networks and advanced Internet applications are
expected to grow from approximately $352 million in 1997 to over $7 billion in
2000. Internet access and enhanced Internet services represent two of the
fastest growing segments of the telecommunications services marketplace.
IP COMMUNICATIONS TECHNOLOGY. The most significant trend in the Internet
and indeed in the broader telecommunications industry, is the convergence of
voice and data communications to a singular mode of transmission. From the
turn of the century, when Alexander Graham Bell made his historic first
telephone call, traditional copper phone wires carried only voice
information. Typically, circuit-switch based communications systems establish
a dedicated channel for each communication (such as a telephone call for
voice and fax), maintain the channel for the duration of the call and
disconnect the channel at the conclusion of the call. With the inception of
faxes and computer data in the late seventies and early eighties, the
resources of such circuit-switch based networks became taxed. Various
technologies have come to exist to address the need for greater bandwidth.
Today there is a convergence of voice, data and video transmission to
one high-speed data packaging network. The most widely used solution has been
the advent and rapid adoption of TCP/IP data transmission standard.
Originally constructed as a network of computer networks, the Internet
revolves around the TCP/IP, which moves data in a series of packets. These
packets are disassembled at the point of transmission and routed over the
Internet backbone in the most efficient manner and reassembled at the point
of receipt. The disadvantage of these packets is that they are cumbersome and
occupy large amounts of space on telephone wires and as a result data is slow
to arrive at its destination. Various solutions have been created to address
this problem, yet to date the most common and effective is to access a high
bandwidth network for transmission.
Packet-switch based systems offer several advantages over circuit-switch
based systems, particularly the ability to commingle packets from several
communication sources together simultaneously onto a single channel. For most
communications, particularly those with bursts of information followed by
periods of "silence," the ability to commingle packets provides for superior
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network utilization and efficiency, resulting in more information being
transmitted through a given communication channel. There are, however, certain
disadvantages to packet-switch based systems as currently implemented. Rapidly
increasing demands for data, in part driven by Internet traffic volumes, are
straining capacity and contributing to latency (delays) and interruptions in
communications transmissions. In addition, there are concerns about the adequacy
of the security and reliability of packet-switch based systems as currently
implemented.
Many initiatives are under way to develop technology to address these
disadvantages of packet-switched based systems. The Company believes that the
IP standard, which is an "open networking standard," broadly adopted in the
Internet and elsewhere, should remain a primary focus of these development
efforts. The Company expects the benefits of these efforts to be improved
communications throughout, reduced latency and declining networking hardware
costs. As IP technology improves, the Company believes that such
packet-switch based networks will become the standard for providing
telecommunication services. Already, IP Telephony, or transmission of voice
calls from a telephone to a telephone using the Internet backbone to haul the
data, is being offered to consumers.
POSITIONING OF THE COMPANY
We offer a broad array of communications products and services tailored to
meet customer needs and provide high quality customer support. We deliver our
products and services through two divisions: Communications Services and Web
Services. We believe that, based upon our experience, a growing number of
businesses will demand one point-of-contact for communications solutions for the
following reasons: (i) to ensure proper system/network integration; (ii) to
obtain a single point of responsibility for products and services that might
have numerous providers; and (iii) to continue to take advantage of evolving
communications technologies. We intend to increase the breadth of our products
and services delivered to our customers by adopting new technology, acquiring
complementary businesses and capitalizing on strategic relationships.
BUSINESS STRATEGY
Our objective is to become a leading national provider of a broad array of
communications services distinguished by a state-of-the-art network and high
quality customer service and support. Key elements to our business strategy
include the following.
PROVIDE A BROAD ARRAY OF COMMUNICATIONS SOLUTIONS TO ITS CUSTOMERS. We
have built a portfolio of products, services and skill sets to develop and
deliver comprehensive internetworking communications solutions to both
business and residential customers. These products and services are organized
under two divisions: Communication Services and Web Services. We plan to
continue to add products and services to its portfolio and believes that a
growing number of businesses and consumers will demand that one company
provide all of their communications needs. We believe that this one
point-of-contact service delivery model ensures: (i) high-performance,
cost-effective network planning, design and implementation; (ii) maintenance
of a single point of responsibility; and (iii) an ongoing customer
relationship as a technology partner for communications applications.
PROVIDE SUPERIOR CUSTOMER SERVICE AND TECHNICAL SUPPORT. We believe that
highly differentiated customer service and technical support is a key
competitive asset in the communications industry, and the ISP sector in
particular. Because the Internet is an evolving and complex medium, customers
require significant technical support. Consequently, we have developed a
comprehensive strategy to attain maximum customer satisfaction. This strategy
consists of the following elements: (i) maintaining a
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sufficient number of qualified service and technical support personnel
through proactive recruitment, retention and training programs; (ii)
utilizing our extranet to provide real-time, interactive customer service;
(iii) developing an on-line billing system enabling customer-controlled
account customization and analysis; and (iv) further deploying and
maintaining our service delivery standards and guarantees. We believe that
due to our high quality customer service, we experience low turnover rates
and achieve a significant percentage of our subscriber growth from customer
referrals.
MAXIMIZE NETWORK UTILIZATION. Through our network and agreements with
third-party providers, we provide Internet access in 90 of the 100 largest
metropolitan statistical areas in the United States. We plan to continue to
selectively add POPs where we can add value to its customers. We believe that
the ISP industry has historically been divided between ISPs focused on business
customers and ISPs focused on residential dial-up customers. Our business
strategy is to maximize network utilization 24 hours a day by targeting both
daytime business and evening-intensive consumer users.
SELECTIVELY TARGET KEY CITIES TO EXPAND NATIONWIDE. We plan to expand our
sales efforts nationally by focusing on targeted areas where there is a large
concentration of businesses and favorable demographics. We will initially target
markets where we have existing facilities. In these locations we will actively
pursue both business and residential customers. In markets where we are using
third-party provider networks, we will initially target dial-up customers
through advertising, promotions, public relations, telemarketing and customer
referrals. Once we attain critical mass in these locations, we will establish
our own POPs and begin targeting business and residential customers with our
broad array of communications products and services.
TAKE ADVANTAGE OF SIGNIFICANT CONSOLIDATION OPPORTUNITIES. We believe
that the Internet industry is undergoing structural changes with an
increasing use of the Internet for mission-critical applications, which is
creating demand for high quality network operations, customer service and
technical support. We also believe that there is a market opportunity to
consolidate ISPs, Internet-based service companies and Internet technologies.
Evidence of this strategy includes our recent acquisitions of Infohiway, Inc.
("Infohiway"), Application Methods, Incorporated ("Application Methods"),
Internet Now, certain assets of Unicom Communications, Inc. ("Unicom"),
Stonehenge Business Systems, Inc. ("Stonehenge") and DataXchange Network,
Inc. ("DataXchange"). Infohiway is a company that developed a search engine
that gives us on-line advertising opportunities for our customers.
Application Methods' e-commerce solution, e-SELL, enables us to provide
business customers with browser-based software to conduct business over the
Internet. Internet Now, Unicom, and Stonehenge are all local ISPs. We
acquired from DataXchange a nationwide Internet backbone, rated by Boardwatch
magazine as the 11th largest overall among the 36 national backbones. We
believe these acquisitions enhance our position as a full service provider of
communications solutions. We will continue to evaluate opportunities to
acquire companies that we believe will enhance our product and service
offerings. In addition, we intend to supplement our organic national growth
efforts by acquiring additional local ISPs in strategic locations to maximize
economies of scale.
DIVISIONS AND SERVICES
<TABLE>
<CAPTION>
DIVISIONS SERVICES DESCRIPTION
- ---------- ----------- ------------
<S> <C> <C>
COMMUNICATION SERVICES INTERNET ACCESS
CO-LOCATION T-1 or greater Internet
access provided to
customer's server located
at the Company's POP
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DEDICATED ACCESS Fractional T-1, T-1 or
greater Internet access
provided to a customer's
office
DIAL-UP SERVICE Nationwide Internet access
for consumer and small
business customers using
modems to dial into the
Company's network
WIRELESS ACCESS Evolving technology
allowing up to 750 kbps
wireless Internet access
currently available in the
Denver metro area
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TELEPHONY SERVICES
E-PHONE Long distance calling using
IP Telephony technology
LONG DISTANCE Traditional long distance
services
LOCAL (C-LEC) Traditional local exchange
telephone service on a
resale or facilities-owned
basis throughout Colorado
DEDICATED
LINE SERVICES Dedicated and frame relay
networks to carry voice and
data for business customers
WEB SERVICES WEB SITE HOSTING A customer's web site is
"hosted" on the Company's
servers and connected to
the Internet via a
high-speed connection
WEB SITE PRODUCTION Design, development and
implementation of customer
web sites
WEB SITE MARKETING
TRAFFIC BUILDER PLUS Unique web site marketing
program whereby customer
web sites are marketed
exclusively to Internet
users
INFOHIWAY Search engine that contains
a large and rapidly growing
database of reference
information on the World
Wide Web
ELECTRONIC COMMERCE
E-SELL Turnkey solution for
setting up an Internet
store
WEB TRAINING Various levels of Internet
training for customers from
basic access training
</TABLE>
COMMUNICATION SERVICES
INTERNET ACCESS
We provide Internet services through our 11 Internet POPs in the state of
Colorado and, through agreements with third party providers, in 90 of the 100
largest metropolitan statistical areas in the United States.
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CO-LOCATION. As more people use the Internet to shop for products and
services, the demands on shared server resources are increasing. We offer
businesses the alternative of co-locating their servers in the Company's data
center, thereby taking cost-effective advantage of our centralized Internet
resources. For example, a web developer who co-locates a server with us can save
up to 40% to 60% of the monthly cost of maintaining that server in-house.
DEDICATED ACCESS SERVICE. Dedicated access services are primarily provided
to commercial customers and include a wide range of connectivity options
tailored to the requirements of the customer. These services include private
port (dedicated modem), ISDN connections, 56 kbps frame relay connections, T-1
(1.54 Mbps) connections, and T-3 (45 Mbps) or fractional T-3 connections. This
type of connectivity is generally used to connect local area networks, wide area
networks or server applications to the Internet, ensuring a dedicated
connection. This connection requires a dedicated telecommunications facility,
ranging from an analog phone line, ISDN, frame relay, leased line T-1 or leased
line T-3 and a router and a device to convert digital signal to serial
interface, usually referred to as a CSU/DSU. Dedicated services range in price
from $199 per month to over $15,000 per month depending on the connection type.
Installation fees generally range from $300 to $5,000.
DIAL-UP SERVICE. We offer nationwide dial-up service for unlimited usage,
which is available for $19.95 per month plus a one-time $15 set-up fee. This
offering includes high-speed modem access using v.90 technology and a high
quality connection due to the redundancy that has been built into the network.
Through our arrangement with PSINet, we are able to provide dial-up access to
customers in over 230 locations nationwide.
WIRELESS SERVICE. We have recently signed an agreement with American
Telecasting, Inc., to offer high-speed megabit Internet access technology to 80%
of the homes and businesses in the Denver metro area. The service includes
download speeds of about 750 kbps, a microwave receiver, an external modem, a
cable modem and an Ethernet card. Costs include an installation fee and an
approximate $50 per month service charge. We intend to enter into similar
agreements with other providers as we expand our geographic presence.
BACKBONE ACQUISITION. With our acquisition of the assets of DataXchange
Network, Inc. in December, 1998, we now operate a national Internet backbone,
linking 8 U.S. cities. Each city is linked directly to each of the others. Our
backbone utilizes fully redundant hub and spoke architecture.
TELEPHONY SERVICES
We have been certified as a C-LEC in the states of Colorado, California
and West Virginia and provide traditional long distance service nationwide,
subject to tariff approvals.
IP TELEPHONY. IP Telephony is new technology that enables long distance
calling using Internet technology. Rather than using traditional switched voice
technology, the caller dials into a server that converts the voice signal into
IP packets and routes the call to a long distance carrier. This technology
enables the caller to bypass the LEC, thereby removing the local exchange fees
at this time. We are now able to deliver "toll quality" long distance calls that
originate in Colorado to anywhere in the contiguous United States using IP
Telephony. IP Telephony service is priced at $.07 per minute to anywhere in the
contiguous United States, 24 hours per day.
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TRADITIONAL LONG DISTANCE SERVICE. Our recent agreement with Frontier
Communications of the West, Inc. will permit us to offer a full line of
traditional long distance services. We will be offering the following services:
* 1+ long distance dialing;
* Dedicated long distance;
* 1-800 service;
* Calling card; and
* Conference calling.
LOCAL (C-LEC). We have been certified as a C-LEC in the states of Colorado,
California and West Virginia.
DEDICATED LINE SERVICES. We operate extensive dedicated and frame relay
networks to carry voice and data traffic across the country and across town for
its business customers.
WEB SERVICES
WEB SITE HOSTING
Web site hosting provides ongoing revenue from customers for whom we host a
web site on web servers located in our data center. All access made to these web
sites by the customer and the Internet community as a whole is processed on our
servers. The advantage to customers is high-speed access to sites by their
targeted audiences. Prices for web site hosting generally consist of $99 per
month for virtual hosting service and $49 per month for static hosting services.
There is also a one-time set-up fee of approximately $99 for virtual hosting and
$49 for static hosting.
WEB SITE PRODUCTION
Web site production encompasses the design, development and implementation
of customer web sites. These sites may be public domain sites or private sites
(extranets or intranets). The functionality of these sites will continue to
evolve and require a great deal of graphic design talent as well as high end
programming skills.
WEB SITE MARKETING
TRAFFIC BUILDER PLUS. This is a web site marketing program whereby customer
web sites are marketed exclusively to Internet users. This service includes
sophisticated search engine submission and management techniques, cross-linking
related web sites, posting to relevant news groups and customizing banner ad
campaigns. The pricing for this service varies dramatically based on a
customer's budget and desired results.
INFOHIWAY. This is a search engine that contains a large and rapidly
growing database of reference information on the World Wide Web. The search
engine also contains certain features, including: PREVIEW buttons, which permit
users to see a site's content without waiting for a full
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<PAGE>
download of all the site's graphics; FUZZY LINKS, which provide visitors with a
handy way to search for related but perhaps not specifically targeted
information; and SITE MAPPING, which provides a simple and visual way to see a
site's structure. The site also contains banner advertisements, which we may
sell to our customers as part of a web marketing package.
ELECTRONIC COMMERCE
E-SELL. We provide small- to medium-sized businesses with turnkey
software package solutions for e-commerce that they can use themselves.
Rather than simply offering a web site, we act as a true Internet store,
enabling a dynamic, interactive shopping experience for the customer, using
secure credit card transactions and "behind the scenes" functionality, such
as inventory management and custom reporting. Through e-SELL, we will be able
to offer a low-cost, fast implementation of a true, database-driven Internet
store. Competing packages require the involvement of technical experts,
consultants or developers to set up and configure a store. Because of these
extra "soft costs", implementation costs usually reach several times the
basic cost of the package and implementation time can be weeks or months. By
contrast, an e-SELL store can be up and running in hours. e-SELL is scalable
and extensible as a business grows, because it is based on an open
architecture--Microsoft Windows NT and BackOffice. While competing packages
often utilize proprietary programming languages or tools (and many started
out as Macintosh or Unix products), e-SELL is an extension to the
industry-standard BackOffice platform, enabling easy customization. In
addition, any industry-standard database can be connected, furthering the
ease of integration with merchants' existing information systems.
WEB TRAINING
Our headquarters include a training center with multiple workstations.
Customers can schedule their employees for various levels of Internet
training, ranging from basic access training to HTML programming. Customized,
one-on-one training is also available, either at our headquarters or at the
customer's site.
NETWORK OPERATIONS
We operate 11 Internet POPs in Colorado and, through agreements with
third-party providers, we can provide Internet access in 90 of the 100 largest
metropolitan statistical areas in the United States. In addition, we operate a
national fully meshed Internet backbone, linking 8 U.S. cities--Atlanta,
Chicago, Dallas, Los Angeles, McLean (Virginia), New York, San Francisco, and
Washington, D.C.
TECHNICAL AND CUSTOMER SUPPORT
Our customer service philosophy is to thoroughly understand the customer's
needs so that we may deliver a very high level of value-added services and
after-sales support. We believe that highly differentiated customer support is a
key competitive asset in the communications industry, and the ISP sector in
particular. Because the Internet is an evolving and complex medium, customers
require significant technical support. Consequently, we have developed a
comprehensive strategy to attain maximum customer satisfaction. As a result, we
experience low turnover rates and achieve subscriber growth from customer
referrals. This strategy consists of the following elements: (i) maintaining a
sufficient number of qualified service and technical support personnel through
proactive recruitment, retention and training programs; (ii) utilizing our
extranet to provide real-time, interactive customer service; (iii) developing an
on-line billing system enabling customer-controlled account customization; and
(iv) further deploying and maintaining our service delivery standards and
guarantees. We continually
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monitor our customer service strategy through customer satisfaction surveys,
which are monitored by a third-party consulting firm. Over 75 employees,
consisting of engineers, technicians, project managers, account managers and
customer service representatives, are responsible for supporting our customers.
MANAGEMENT INFORMATION SYSTEMS. We are focusing on management information
systems to achieve a competitive advantage in the marketplace through the
implementation of enabling technologies to deliver and support IP- based
services.
Currently, our administrative office functions are standardized on
Microsoft Office products operating on Microsoft NT Server Networks. Finance and
accounting utilize Great Plains accounting software products for general ledger,
payables processing and receivables collection and management. Billing and
customer management software products are a combination of custom written
software and third party products. The billing systems are currently under
review to determine the optimal billing platform to handle new product offerings
and support expansion.
One goal of implementing automated systems is to move customer support
functions to a web interface which would allow customers to change service
types, review invoicing details, troubleshoot through on-line information and
communicate with our technical support staff. These systems are expected to
provide enhanced customer support and reduce the cost of the technical support
function on a per customer basis. Enhanced billing systems are expected to
permit us to offer promotions and marketing programs to attract new customers.
The new billing systems are expected to provide greater flexibility in offering
discounts for selecting a wide range of the product offerings.
SALES AND MARKETING
COMMERCIAL. Our ability to deliver an Internet solution, coupled with an
excellent technical knowledge base and an attention to providing high quality
service, will be our key selling point. We believe we will be capable of
designing, implementing and maintaining a complete enterprise network solution
encompassing integrated voice, data, video and Internet services addressing all
facets of internal and external communications for a business. A number of
providers represent themselves as "one-stop shops" or "turnkey providers" of
these services, but rarely do they have the ability to deliver, manage and
support all services "in-house." Therefore, we believe our competitive advantage
will be our ability to effectively package, price, brand and then implement our
wide range of communications services. We expect this competitive advantage to
cultivate financial growth as we focus our sales and marketing efforts on
expanding nationally, focusing on the small- to medium-sized business market and
efficiently delivering a comprehensive set of products and services.
Our sales and marketing efforts focus on the direct sales approach of our
field sales representatives. Although each representative has a specific
product or service focus, each is assigned to an account team headed up by an
account manager. We believe that this account team approach allows us to
effectively cross-sell, package, and blend all of our products and services to
best meet the needs of the customers. Marketing elements that will be used to
support the sales team include strategic direct mail campaigns, public relations
efforts and targeted industry advertising. Each marketing activity is designed
to generate Company and brand recognition, provide product/service information
and stimulate referral business from a consumer as well as a commercial
standpoint.
CONSUMER. We believe that our commercial competitive advantage of
packaging, pricing, branding and promoting our wide range of communications
services will also serve as a competitive advantage in the consumer marketplace
as we extends our sales and marketing reach across the nation.
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Our sales efforts will focus on our "outbound/inbound" telemarketing unit. In
addition, we plan to build an extensive vendor network capable of distributing
all of our communication services to the public through co-branding programs,
affinity marketing agreements and cause-related marketing initiatives. We also
plan to employ extensive radio and print advertising campaigns, event marketing
opportunities, in-market retail promotions and a nationwide public relations
effort. As of January 8, 1999, we had 16 sales representatives targeting
dial-up customers.
CUSTOMERS
DEDICATED COMMUNICATIONS SERVICE CUSTOMERS. Our primary commercial target
market is small- to medium-sized businesses with 25-5,000 work-stations,
multiple office locations, a dependence on communications technology and with
headquarters located in tier one or tier two cities ranked in the top thirty
high-tech BPI index. The secondary target markets will be small- and
medium-sized businesses with 25-5,000 work-stations, multiple office locations,
a dependence on communications technology and with headquarters located in tier
two and three cities that are close to our headquarters, or in the top thirty
high-tech BPI index.
DIAL-UP INTERNET ACCESS CUSTOMERS. Our dial-up customer base consists
mainly of residential consumers and small businesses throughout Colorado.
Through the use of demographic market research data, we are targeting our
marketing and sales efforts towards new and current Internet households and
small businesses nationwide. Because we have experienced a significant amount of
dial-up sales through word-of-mouth advertising, we operate an in-bound calling
center and an out-bound telemarketing sales unit.
We provided dedicated access and web services to over 1,300 business
customers and over 16,800 dial-up customers as of November 30, 1998.
COMPETITION
The markets in which we operate and intend to operate are extremely
competitive and can be significantly influenced by marketing and pricing
decisions of the larger industry principals. We believe that competition will
intensify in the future and our ability to successfully compete depends on a
number of factors including market presence, the capacity, reliability and
security of our network infrastructure, our packaging and pricing of products
and services compared to our competitors, the timing of new product and service
roll-outs, our ability to react to changes in the market and industry and
economic trends.
INTERNET ACCESS. We expect competition in these markets to intensify in the
future. There are no substantial barriers to entry in the Internet access
markets in which we compete. Our current and prospective competitors in the
Internet access market include many large companies that have substantially
greater market presence and financial, technical, operational, marketing and
other resources and experience than we do. Our Internet access business competes
or expects to compete directly or indirectly with the following categories of
companies: (i) other national and regional commercial ISPs, such as Verio Inc.
or one or more of its affiliates and PSINet; (ii) established on-line services
companies that currently offer Internet access, such as AOL, CompuServe and
Prodigy Services Company; (iii) computer hardware and software and other
technology companies, such as Microsoft; (iv) national long distance
telecommunications carriers, such as AT&T (with AT&T WorldNet), Sprint
(SprintNet) and Qwest Communications International, Inc.; (v) RBOCs; (vi) cable
television system operators, such as Comcast Corporation, TCI and Time Warner
Inc.; (vii) nonprofit or educational ISPs; and (viii) newly
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licensed providers of spectrum-based wireless data services. Modems offered by
cable television companies can transmit information at speeds of up to 10
megabits per second, as opposed to the Company's v.90 (enhanced speed modem)
service, which can transmit information at speeds of up to only 56 kilobits per
second. In addition, TCI has recently announced it had reached separate
agreements with Sun Microsystems, Inc. and Microsoft to produce the software
necessary to permit access to the Internet through television set-top boxes
beginning in 1999.
TELECOMMUNICATION SERVICES. Our intention to provide traditional long
distance service will place us directly in competition with IXCs, which engage
in the provision of long distance access and other long distance resellers and
providers, including large carriers such as AT&T, MCI WorldCom and Sprint and
new entrants to the long distance market such as the RBOCs who have entered or
have announced plans to enter the U.S. intrastate and interstate long distance
market pursuant to recent legislation authorizing such entry. See "REGULATION."
On April 22, 1998, the Public Utilities Commission of Colorado granted the
request of RMB, a wholly-owned subsidiary of the Company, to become a C-LEC.
Likewise, our intention to provide IP Telephony services and C-LEC services will
place us directly in competition with other providers (either resellers or
facilities-based carriers) that provide the same services. Most of our
competitors are significantly larger and have substantially greater market
presence as well as substantially greater financial, technical, operational,
marketing and other resources and experience than we do.
REGULATION
GENERAL REGULATORY ENVIRONMENT
The telecommunications businesses in which we operate or intend to
operate, namely, providing traditional long distance service, providing long
distance service by means of IP Telephony and activities as a C-LEC, are
subject to extensive federal and state regulation. In particular, these
services are subject to the provisions of the Communications Act of 1934, as
amended, including amendments effected by the 1996 Telecommunications Act and
the FCC regulations thereunder, as well as the applicable laws and
regulations of the various states, including regulation by PUCs and other
state agencies. Federal laws and FCC regulations apply to the facilities of
and services offered by, telecommunications common carriers including
regulating the prices charged, to the extent that those facilities are used
to provide, originate, or terminate interstate communications. State
regulatory authorities retain jurisdiction over telecommunications both
originating and terminating within the state. The regulation of the
telecommunications industry is changing rapidly and the regulatory
environment varies substantially from state to state. Moreover, as
deregulation at the federal level occurs, some states are reassessing the
level and scope of regulation that may be applicable to the Company. All of
our operations are also subject to a variety of environmental, safety, health
and other governmental regulations. We cannot assure that future regulatory,
judicial, or legislative activities will not have a adversely affect us, or
that regulators, competitors, or third parties will not raise material issues
with regard to our compliance or noncompliance with applicable regulations.
The 1996 Telecommunications Act effected plenary changes in regulation at
both the federal and state levels that affect virtually every segment of the
communications industry. The stated purpose of the 1996 Telecommunications Act
is to promote competition in all areas of communications and to reduce
unnecessary regulation to the greatest extent possible. While it will take years
for the industry to feel the full impact of the 1996 Telecommunications Act, it
is already clear the legislation provides us with both opportunities and
challenges. The 1996 Telecommunications Act, among other things, allows the
RBOCs to enter the long distance business and enables other entities, including
entities affiliated with power
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utilities and ventures between LECs and cable television companies, to provide
an expanded range of telecommunications services. Entry of such companies into
the long distance business would result in substantial competition to our
intended telecommunications services (i.e., traditional long distance, IP
Telephony and LEC services) and may have a material adverse effect on our
business, financial condition and results of operations and cash flow.
Under the 1996 Telecommunications Act, the RBOCs may immediately provide
long distance service outside those states in which they provide local exchange
service ("out-of-region" service) and long distance service within the regions
in which they provide local exchange service ("in-region" service) upon meeting
certain conditions. The 1996 Telecommunications Act does, however, impose
certain restrictions on, among others, the RBOCs in connection with their
provision of long distance services. Out-of-region services by RBOCs are subject
to receipt of any necessary state and/or federal regulatory approvals that are
otherwise applicable to the provision of intrastate and/or interstate long
distance service. In-region services by RBOCs are subject to specific FCC
approval and satisfaction of other conditions, including a checklist of
pro-competitive requirements. The RBOCs may provide in-region long distance
services only through separate subsidiaries with separate books and records,
financing, management and employees and all affiliate transactions must be
conducted on an arm's length and nondiscriminatory basis. The RBOCs are also
prohibited from jointly marketing local and long distance services, equipment
and certain information services unless competitors are permitted to offer
similar packages of local and long distance services in their market. Further,
the RBOCs must obtain in-region long distance authority before jointly marketing
local and long distance services in a particular state. Additionally, AT&T and
other major carriers serving more than 5% of presubscribed long distance access
lines in the United States are also restricted from packaging other long
distance services and local services provided over RBOC facilities.
FEDERAL REGULATION
The FCC has established different levels of regulation for dominant and
non-dominant carriers. Of domestic common carrier service providers, only GTE,
the RBOCs and other I-LECs are classified as dominant carriers and all other
providers of domestic common carrier services, including the Company, are
classified as non-dominant carriers. The 1996 Telecommunications Act provides
the FCC with the authority to forebear from imposing any regulations it deems
unnecessary, including requiring non-dominant carriers to file tariffs. On
November 1, 1996, in its first major exercise of regulatory forbearance
authority granted by the 1996 Telecommunications Act, the FCC issued an order
detariffing domestic interexchange services. The order required mandatory
detariffing and gave carriers nine months to withdraw federal tariffs and move
to contractual relationships with their customers. A federal appeals court
subsequently stayed this order.
Although the FCC does not directly regulate local exchange service, which
is within the jurisdiction of state regulatory authorities, its actions may
impact directly on such service. The 1996 Telecommunications Act greatly expands
the FCC's interconnection requirements on the I-LEC. The 1996 Telecommunications
Act requires the I-LEC to: (i) provide physical co-location, which would allow
RMB and other interconnectors to install and maintain their own network
termination equipment in I-LEC central offices, i.e., offices of US West Inc.
and virtual co-location only if requested or if physical co-location is
demonstrated to be technically unfeasible, (ii) unbundle components of their
local service networks so other providers of local service can compete for a
wider range of local services customers, (iii) establish "wholesale" rates for
their services to promote resale by C-LECs and other competitors, (iv) establish
number portability, which will allow a customer to retain its existing phone
number if it switches from the I-LEC to a competitive local service provider,
(v) establish dialing parity, which
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ensures customers will not detect a quality difference in dialing telephone
numbers or accessing operators or emergency services and (vi) provide
nondiscriminatory access to telephone poles, ducts, conduits and rights-of-way.
In addition, the 1996 Telecommunications Act requires I-LECs to compensate
competitive carriers for traffic originated by the I-LEC and terminated on the
competitive carrier's networks. The FCC is charged with establishing national
guidelines to implement the 1996 Telecommunications Act. The FCC issued its
Interconnection Order on August 8, 1996, which established detailed rules
regarding rates, terms and conditions for interconnection between C-LECs and
I-LECs. The Interconnection Order was appealed to the U.S. Court of Appeals for
the Eighth Circuit. On July 18, 1997, the Court issued a final decision vacating
the interconnection pricing rules and "most favored nation" rules as well as
certain other interconnection rules. The FCC's and other parties' petitions to
the Supreme Court requesting review of these decisions have been granted. It is
not possible at this time to determine how the Supreme Court will respond to
these appeals.
On April 18, 1997, the FCC ordered that the RBOCs and I-LECs offering
domestic interstate inter-LATA (local access and transport areas) services,
in-region or out-of-region, be regulated as non-dominant carriers. However,
such services offered in-region must be offered in compliance with the
structural separation requirements mentioned above. AT&T was classified as a
dominant carrier, but AT&T successfully petitioned the FCC for non-dominant
status in the domestic interstate interexchange market in October 1995 and in
the international market in May 1996. Therefore, certain pricing restrictions
that once applied to AT&T have been eliminated. A number of parties have,
however, sought the FCC's reconsideration of AT&T's status. The Company is
unable to predict the outcome of these proceedings on its operations.
On May 8, 1997, the FCC released an order intended to reform its system of
interstate access charges to make that regime compatible with the
pro-competitive deregulatory framework of the 1996 Telecommunications Act.
Access service is the use of local exchange facilities for the origination and
termination of interexchange communications. The FCC's historic access charge
rules were formulated largely in anticipation of the 1984 divestiture of AT&T
and the emergence of long distance competition and were designated to replace
piecemeal arrangements for compensating LECs for use of their networks for
access, to ensure that all long distance companies would be able to originate
and terminate long distance traffic at just, reasonable and non-discriminatory
rates and to ensure that access charge revenues would be sufficient to provide
certain levels of subsidy to local exchange service. While there has been
pressure on the FCC historically to revisit its access pricing rules, the 1996
Telecommunications Act has made access reform timely. The FCC's recent access
reform order adopts various changes to its rules and policies governing
interstate access service pricing designed to move access charges, over time, to
more economically efficient levels and rate structures. Among other things, the
FCC modified rate structures for certain non-traffic sensitive access rate
elements, moving some costs from a per-minute-of-use basis to flat-rate
recovery, including one new flat rate element; changed its structure for
interstate transport services; and affirmed that ISPs may not be assessed
interstate access charges. In response to claims that existing access charge
levels are excessive, the FCC stated that it would rely on market forces first
to drive prices for interstate access to levels that would be achieved through
competition but that a "prescriptive" approach, specifying the nature and timing
of changes to existing access rate levels, might be adopted in the absence of
competition. The FCC intends to address these and other related matters in
subsequent proceedings.
Though the Company believes that access reform through lowering and/or
eliminating excessive access service charges will have a positive effect on its
service offerings and operations, it cannot predict how or when such benefits
may present themselves, or the outcome of any possible judicial appeal or
petition for FCC reconsideration.
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The FCC also released a companion order on universal service reform on May
8, 1997. The universal availability of basic telecommunications service at
affordable prices has been a fundamental element of U.S. telecommunications
policy since enactment of the Communications Act of 1934. The current system of
universal service is based on the indirect subsidization of LEC pricing, funded
as part of a system of direct charges on some LEC customers, including IXCs and
above-cost charges for certain LEC services such as local business rates and
access charges. In accordance with the 1996 Telecommunications Act, the FCC
adopted plans to implement the recommendations of a Federal-State Joint Board to
preserve universal service, including a definition of services to be supported
and defining carriers eligible for contributing to and receiving from universal
service subsidies. The FCC ruled, among other things, that: contributions to
universal service funding be based on all IXCs' gross revenues from both
interstate and international telecommunications services; only common carriers
providing a full complement of defined local services be eligible for support;
and up to $2.25 billion in new annual subsidies for discounted
telecommunications services used by schools, libraries and rural health care
providers be funded by an assessment on total interstate and intrastate revenues
of all IXCs. The FCC stated that it intends to study the mechanism for continued
support of universal service in high cost areas in a subsequent proceeding. The
Company is unable to predict the outcome of these proceedings or of any judicial
appeal or petition for FCC reconsideration on its operations.
On April 10, 1998, the FCC submitted a report to Congress in which it
stated that telephone-to-telephone IP Telephony bears the characteristics of
"telecommunications services" and that the providers of those services may be
"telecommunications carriers," as those terms are defined in the 1996
Telecommunications Act. The FCC deferred a more definitive resolution of this
issue until a more "fully-developed" record is available. However, the April 10,
1998 report states that, to the extent the FCC concludes that certain forms of
telephone-to-telephone IP Telephony service are "telecommunications services,"
and to the extent the providers of those services obtain the same
circuit-switched access as obtained by other IXCs and therefore impose the same
burdens on the local exchange as do other IXCs, the FCC "may find it reasonable
that they" become subject to the same regulations, including the requirement to
pay access fees to LECs and to contribute to universal service subsidies.
STATE REGULATION
Companies conducting intrastate long distance telecommunications operations
are subject to various state laws and regulations including, in many
jurisdictions, certification and tariff filing requirements. Generally, these
providers must obtain and maintain certificates of authority from regulatory
bodies in most states in which it offers intrastate services. In April 1998, RMB
obtained a certificate of authority from the Colorado PUC to provide local
exchange services as a C-LEC. We also are certified as a C-LEC in California and
West Virginia. Certificates of authority can generally be conditioned, modified,
canceled, terminated, or revoked by state regulatory authorities for failure to
comply with state law and/or the rules, regulations and policies of the state
regulatory authorities. Fines and other penalties also may be imposed for such
violations.
Those states that permit the offering of intrastate/intra-LATA service by
IXCs generally require that end users desiring to use such services dial special
access codes. This may put us at a competitive disadvantage compared with LECs
whose customers can make intrastate/intra-LATA calls simply by dialing 1 plus
the desired number. If a long distance carrier's customer attempts to make an
intra-LATA call by simply dialing 1 plus the desired number, the call will be
routed to and completed by the LEC. Regulatory agencies in a number of states
have issued decisions that would permit IXCs to provide intra-LATA calling on a
1 + basis. Further, the 1996 Telecommunications Act requires in most cases that
the RBOCs provide such dialing parity coincident to their providing in-region
inter-LATA services. The
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Company expects to benefit from the ability to offer 1 + intra-LATA services in
states that allow this type of dialing parity.
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our directors and executive officers as of the date of this Prospectus are
as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------- --- --------------------------------------------------
<S> <C> <C>
Douglas H. Hanson 54 Chief Executive Officer and Chairman of the Board
of Directors
Mary Beth Vitale 44 President, Chief Operating Officer, and Director
D. D. Hock 63 Director
Robert W. Grabowski 57 Director
Lewis H. Silverberg 63 Director
Peter J. Kushar 43 Chief Financial Officer, Secretary and Treasurer
Robert Laughlin 53 Chief Technological Officer
Christopher J. Melcher 39 General Counsel and Vice President--Law
Jeremy J. Black 46 Vice President--Infohiway/Web Services
James H. Comstock 46 Vice President--Engineering and Operations
Kevin R. Loud 45 Vice President--Communication Services
Michael R. Mara 37 Vice President--Internet Services
Michael D. Schaefer 31 Vice President--Marketing
</TABLE>
DOUGLAS H. HANSON has been the Chief Executive Officer and Chairman of the
board of directors of the Company since October 1, 1997. Mr. Hanson also served
as the Company's President from October 1, 1997 until January 9, 1999. Prior
to assuming his positions with the Company, Mr. Hanson was the President and
Chief Executive Officer and a director of Qwest Communications, Inc., a
Colorado-based telecommunications company, as well as the founder of Qwest's
predecessor, SP Telecom. Mr. Hanson formed SP Telecom in 1987 as a subsidiary of
SP Railroad to install fiber optic cable along the railroad's right-of-way.
Before founding SP Telecom, Mr. Hanson was vice president of FiberTrak, a
telecommunications joint venture among Santa Fe, Norfolk and SP railroads. He
also held various positions at Southern Pacific Transportation Co. Mr. Hanson
currently sits on the board of directors of the Competitive Telecommunications
Association, The Metropolitan State College Foundation Board, and the Board of
Trustees of the Salvation Army, Intermountain Division, and is engaged in other
civic activities.
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MARY BETH VITALE has been a director of the Company since January 10,
1998. Effective January 9, 1999, Ms. Vitale accepted an offer to become the
President and Chief Operating Officer of the Company. From 1994 to October
1997, she was an executive of AT&T Corporation (Vice President of In-State
Services from 1994 to 1996; Vice President and Corporate Officer, Local
Service Organization, Western Region, from 1994 to 1996; and
President--Western States from January to October 1997) in Denver, Colorado.
Prior to joining AT&T, Ms. Vitale was Vice President of Marketing for U S
WEST Communications, Inc. (1994), Region Executive Director for U S West
Cellular (1991 to 1993) and Region General Manager for U S WEST Cellular
(1989 to 1991). She holds a Bachelor of Arts degree from Hillsdale College, a
Master of Science degree from the University of Colorado and an Advanced
Management degree from the Wharton School of Business.
D. D. HOCK has been a director of the Company since October 1, 1997. Prior
to becoming a director of the Company, Mr. Hock was the President, Chief
Executive Officer and Chairman of the board of directors (from February 1989 to
July 1994; Chairman and Chief Executive Officer from July 1994 to January 1996;
Chairman from January 1996 to February 1997, when he retired) of Public Service
Company of Colorado.
ROBERT W. GRABOWSKI has been a director of the Company since January 10,
1998. He has been the Vice President, Finance and Administration, Sunny Side,
Inc./Temp Side, a private employment service, since 1988. He has been a
certified public accountant since 1968 and holds a Bachelor of Science degree
from De Paul University.
LEWIS H. SILVERBERG has been a director of the Company since January 10,
1998. Mr. Silverberg has been a business consultant since January 1994, advising
privately held businesses on their formation, sale and financing. In September
1990, Mr. Silverberg joined Liquor Barn, Inc., which operated a chain of retail
stores and was in a bankruptcy reorganization proceeding at that time. Mr.
Silverberg was the Executive Vice President and a director of Liquor Barn, Inc.
until December 1993. The business was liquidated after Mr. Silverberg's
departure in 1993. Mr. Silverberg is an attorney and has been a member of the
California bar since 1959.
PETER J. KUSHAR has served as Chief Financial Officer, Secretary and
Treasurer since joining the Company in April 1998. From June 1997 to April 1998
he operated his own consulting practice advising customers in specialized
economic and telecommunication requirements such as C-LEC network economics and
operation. Prior to consulting, Mr. Kushar spent 14 years with U S WEST
Communications (Executive Director--Carrier Division from 1993 to 1997;
Executive Director--Network Operations from 1991 to 1993; Chief Financial
Officer--Federal Services from 1988 to 1991; Manager, Director and Chief
Financial Officer for U S WEST Information Systems from 1983 to 1988). Prior to
U S WEST, Mr. Kushar was a system planner, market analyst and account executive
for Southern New England Telephone from 1979 to 1983. Mr. Kushar received his
Bachelor of Science Degree in 1977 and Master of Business Administration Degree
in 1979 from the University of Montana.
ROBERT LAUGHLIN is Chief Technology Officer for the Company. Mr.
Laughlin brings over 25 years of technical experience to this position,
including working as a senior design engineer for IBM and a senior scientist
for Digital Systems Corp. From 1994 to December 1998, Mr. Laughlin and two
partners founded DataXchange Network, which they built into a nationwide
Internet backbone provider. He is a frequent lecturer and speaker at many
professional conferences, such as Telecom Business and ISPCON. Mr. Laughlin
received a Bachelor of Arts degree in math and physics from Ursinus College
in 1968, and a Bachelor of Arts in Electrical Engineering in 1969 from
University of Pennsylvania.
CHRISTOPHER J. MELCHER is General Counsel and Vice President -- Law. Mr.
Melcher served as Assistant General Counsel for KN Energy, Inc. from
September 1997 to December 1998, providing legal services on regulated and
unregulated market activities and directing corporate strategy in federal and
state proceedings across the company's 15 state territory. Prior to KN
Energy, he was a senior corporate counsel with Southern California Edison, a
subsidiary of Edison International, Inc. From January 1995 to July 1996, Mr.
Melcher represented corporate clients with the Firm of Brownstein Hyatt
Farber & Strickland. From March 1990 to December 1994, he served as Associate
Independent Counsel with the Office of Independent Counsel (Adams) in
Washington, D.C. Mr. Melcher practiced law with Wilmer Cutler & Pickering
from September 1987 to March 1990. Mr. Melcher received his Bachelor of Arts
degree from Carelton College and his Juris Doctor degree from Yale Law School.
JEREMY J. BLACK is Vice President--Infohiway. Mr. Black was the Chief
Executive Officer of Infohiway from 1996 until joining RMI upon its acquisition
of Infohiway. Prior to joining Infohiway, Mr. Black was the Executive Vice
President of Wilson Associates International. From 1986 to 1992, Mr. Black was
the President of Advanced Investment Software, where he developed the design for
RAMCAP software (Risk program). Mr. Black is an adjunct professor for the
College of Financial Planning and a national professor in investment risk
management and asset allocation.
JAMES H. COMSTOCK is Vice President--Engineering and Operations of the
Company. Prior to joining the Company, Mr. Comstock founded and headed the
consulting firm of TTTeam, Inc., concentrating in technological and strategic
assistance for smaller high tech companies. From June 1995 to November 1997 he
served as Chief Technology Officer for the Williams Communications Group; from
January 1994 to June 1995 he held senior management positions with MCI Consumer
Markets. Mr. Comstock also has extensive experience in the telecommunications
industry as a senior manager with Price Waterhouse. Mr. Comstock has a
bachelor's degree in computer science from Ohio University.
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KEVIN R. LOUD is Vice President--Communication Services of the Company.
Before joining the Company in July 1995, he served as Vice President of
Marketing for SP Telecom, a national long distance company from 1994 to 1995. In
1992, he formed Loud & Associates, where he consulted with regional and national
communication organizations on market development and operations efficiencies
until 1994. While operating Loud & Associates, Mr. Loud undertook a year-long
project for Automated Communications, Inc., during which he was treated as a
statutory employee. From 1984 until 1992, he was employed by Houston Network,
Inc. and held positions ranging from Director of Finance, Vice President of
Operations and Carrier Sales, Vice President Sales and President. The primary
business of that organization was switched long distance communication Services.
Mr. Loud holds a Master of Business Administration degree from William and Mary
and a Bachelor of Arts in Economics from UCLA.
MICHAEL R. MARA is Vice President--Internet Services of the Company. Prior
to joining the Company in November 1995, Mr. Mara was employed by ITC, a
privately held international audio and video conferencing service provider, from
June 1992 until October 1995.
MICHAEL D. SCHAEFER is Vice President--Marketing of the Company. Prior to
joining the Company in April 1998, Mr. Schaefer had been working as an event
producer/promoter in the Denver area for the prior 10 years. Major events to his
credit include: The Denver Museum of Natural History's Imperial Tombs of China,
The Denver International Airshow, World Youth Day and the Denver Grand Prix. Mr.
Schaefer holds a Bachelor of Science degree in Business Administration from the
University of Denver and a Master of Business Administration degree from Regis
University.
COMMITTEES OF THE BOARD OF DIRECTORS
AUDIT COMMITTEE. In November 1997, the Company's board of directors
formed an Audit Committee composed of three directors, a majority of whom
were outside directors. Douglas H. Hanson, D. D. Hock and Reynaldo U. Ortiz
were the members of the initial Audit Committee until Mr. Ortiz resigned as a
director effective December 1, 1997. Mr. Robert W. Grabowski, an outside
director, now serves on the Audit Committee with Messrs. Hanson and Hock. Mr.
Hanson is also the Chief Executive Officer and the Chairman of the board of
directors of the Company. Members of the Audit Committee are appointed
annually by the full board of directors. The functions of the Audit Committee
are to review the Company's internal controls, accounting policies and
financial reporting practices; to review the financial statements, the
arrangements for and scope of the independent audit, as well as the results
of the audit engagement; and to review the services and fees of the
independent auditors, their independence and recommend to the board of
directors for its approval and for ratification by the stockholders the
engagement of the independent auditors to serve the following year in
examining the accounts of the Company.
COMPENSATION COMMITTEE. On March 12, 1998, the Company's board of
directors formed the Compensation Committee. This committee is responsible
for reviewing the salaries, benefits and other compensation of the officers
of the Company and will make recommendations to the board of directors based
on its review. D. D. Hock, Mary Beth Vitale and Douglas H. Hanson are the
members of the Compensation Committee. Mr. Hanson is also the Chief Executive
Officer and the Chairman of the board of directors of the Company. Ms. Vitale
is also the President and Chief Operating Officer of the Company. Mr. Hanson
and Ms. Vitale, as directors, will not vote on any matters affecting their
personal compensation. Mr. Hanson will be responsible for reviewing and
establishing salaries, benefits and other compensation for all other
employees.
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<PAGE>
16bCOMMITTEE. In March 1998, the Company's board of directors formed the
16b Committee comprised of two outside directors. The members of the 16b
Committee are D. D. Hock and Mary Beth Vitale. The 16b Committee is responsible
for the review of management's recommendations regarding various compensation
issues, including the issuance of stock options to officers and directors who
are subject to the Section 16 reporting requirements under the Securities
Exchange Act of 1934, as amended. Effective January 9, 1999, Ms. Vitale began
serving as President and Chief Operating Officer of the Company. The Company
intends to replace Ms. Vitale as a member of the 16b Committee.
From January 1 through December 31, 1997 the board of directors held no
regular meetings and 13 special meetings. During that period, each director
attended at least 75% of the aggregate of the meetings of the board of
directors. In addition, the board of directors acted by unanimous written
consents pursuant to Delaware law and the Company's By-laws. The Audit Committee
was formed in November 1997 and met on May 21, 1998. The Compensation Committee
was formed in March 1998 and met on March 12, 1998 and June 2, 1998.
COMPENSATION OF DIRECTORS
The Company pays cash compensation to each of its non-employee directors of
$12,000 per year for his or her services as a director. The compensation is to
be paid at the end of each year and will be prorated on a monthly basis for each
month (or majority of each month, if the director serves only a partial month)
during which the director served as such. There are no additional amounts
payable to any director for committee participation or special assignments.
Directors are also eligible to participate in the Company's 1996
Non-Employee Directors' Stock Option Plan (the "1996 Directors' Plan"). Under
the 1996 Directors' Plan, each director who is not an employee of the Company
receives a grant, upon his or her appointment or election to the board of
directors, of an option to purchase 1,500 shares of common stock. Thereafter, on
each of the first, second and third anniversary dates of the date of election or
appointment, the director is granted an additional option to purchase an
additional 1,500 shares of common stock, up to a maximum of 6,000 shares. The
exercise price of the options granted under the 1996 Directors' Plan is the fair
market value (as defined in the 1996 Directors' Plan) on the date that the
option is granted. All such options are exercisable beginning six months after
the date of grant. To date, options under the 1996 Directors' Plan have been
issued to the following persons in the following amounts:
<TABLE>
<S> <C>
D. D. Hock 3,000
Robert Grabowski 1,500
Lewis Silverberg 1,500
Mary Beth Vitale 1,500
-----
Total 7,500
</TABLE>
At the RMI Annual Meeting, the stockholders of the Company approved the
adoption of the Rocky Mountain Internet, Inc. 1998 Non-Employee Directors' Stock
Option Plan (the "1998 Directors' Plan"), effective as of January 22, 1998. A
total of 68,000 shares of common stock have been reserved for issuance over the
three-year term of the 1998 Directors' Plan.
The option exercise price of any option granted under the 1998 Directors'
Plan may not be less than the fair market value of the common stock on the date
of grant of the option. Upon the effective date of the 1998 Directors' Plan,
each non-employee director of the Company was granted options to purchase 8,500
shares of common stock, subject to certain adjustments. If an eligible director
has continued to serve as a director of the Company from the effective date
until December 31, 1998, options
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<PAGE>
to purchase 1,500 shares of common stock will vest; if he or she continues to
serve as a director for the entire calendar year ending December 31, 1999,
options to purchase 3,500 shares of common stock will vest; and if he or she
continues to serve as a director for the entire calendar year ending December
31, 2000, options to purchase 3,500 shares of common stock will vest.
Notwithstanding the foregoing, in the event of a change in control of the
Company (as defined in the 1998 Directors' Plan), each outstanding option
under the 1998 Directors' Plan vests immediately. In addition, in the event
of a change in control of the Company, the Administrative Committee (or the
board of directors in the absence of such a committee) may: (i) grant a cash
bonus award to any optionee in an amount equal to the exercise price of all
or any portion of the options then held by the optionee; (ii) pay cash to any
or all optionees in exchange for the cancellation of their outstanding
options in an amount equal to the difference between the exercise price and
the greater of the tender offer price for the common stock underlying such
options (in the event of a tender offer for the securities of the Company) or
the fair market value of the stock on the date of cancellation; and (iii)
make any other adjustments or amendments to the outstanding options. On
January 22, 1998, the effective date of the 1998 Directors' Plan, the closing
price of the common stock was $2.625 and on December 15, 1998 the closing
price was $9.6875 per share, according to data obtained from the Nasdaq Stock
Market, Inc.
Each option granted under the 1998 Directors' Plan shall expire not more
than five years from the date of grant. The 1998 Directors' Plan terminates
on December 31, 2000, unless earlier terminated in the discretion of the
Administrative Committee (or the board of directors in the absence of such a
committee).
CERTAIN TRANSACTIONS
The Nasdaq Stock Market, Inc. adopted changes to the requirements
applicable to corporations qualifying their common stock for trading on
Nasdaq. Among other changes, the required minimum net tangible assets of such
corporations was increased to $2.0 million. These changes were effective
February 23, 1998. At December 31, 1997, the Company did not meet these
increased requirements. On March 12, 1998, a committee of the Company's board
of directors accelerated the vesting period of the Hanson Options to permit
the immediate exercise thereof and Mr. Hanson exercised all of the 408,615
non-qualified options that were exercisable for a price of $1.00 per share.
On March 23, 1998, Mr. Hanson exercised a portion of the Hanson Warrants and
acquired 50,000 shares of common stock. The result and purpose of the
exercise of these options and warrants was to increase our net tangible
assets to satisfy the Nasdaq Stock Market, Inc.'s new requirements.
There is no agreement, arrangement, or understanding between Mr. Hanson and
the Company that requires Mr. Hanson to exercise any Hanson Options or Hanson
Warrants or to otherwise make any capital contributions to the Company.
Robert W. Grabowski, a Company director, has an economic interest in and
is Vice President, Finance and Administration, of Sunny Side, Inc./Temp Side
("Sunny Side"), a private employment service business. The Company has
engaged Sunny Side to provide various services and has created a web site for
Sunny Side.
After the Company entered into an agreement with Novazen Inc. to
purchase billing and accounting software from Novazen, Kevin R. Loud, an
officer of the Company, purchased 38,000 shares of Novazen common stock for
$1.60 per share.
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<PAGE>
In August 1998, October 1998, and November 1998, Douglas H. Hanson
loaned $400,000, and $200,000, respectively, to the Company for various
working capital needs. The principal amount of such loans, together with
interest at the rate of 11% per annum, was payable in full 90 days after
October 20, 1998. On December 14, 1998, the Company repaid the principal
amount of all of these loans, together with the interest then due on the
loans.
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<PAGE>
Selling Shareholders
In this Prospectus, Advantage Fund II Ltd., Koch Industries, Inc.,
Wharton Capital Partners Ltd., Leslie Bines, Eugene L. Neidiger, Charles C.
Bruner, Anthony B. Petrelli, Regina L. Neidiger, Oppenheimer High Yield Fund,
Oppenheimer Champion Income Fund, and Oppenheimer Strategic Income Fund are
offering to sell shares of the Company's common stock.
As of July 4, 1998, the Company issued warrants to the three Oppenheimer
entities referred to above to acquire 24,520, 12,145 and 55,000 shares,
respectively, of the Company's common stock in connection with a proposed
financing. These warrants may be exercised at a price of $.01 per share of
common stock, subject to certain potential adjustments, until July 3, 2003.
On December 10, 1998, and independent of the warrant issuances to the
Oppenheimer entities, Advantage purchased 5,000 shares and Koch purchased
3,000 shares of the Company's Series B Convertible Preferred Stock, for a
purchase price of $1,000 per share of preferred stock. The shares of
preferred stock are convertible, with some restrictions, into shares of the
Company's common stock at a variable rate, based on a formula linked to the
market price of the common stock at the time of conversion. The terms of the
preferred stock include restrictions on conversion depending on certain
market conditions and restrictions on short sales and other transactions by
the holders of the preferred stock. The conversion price of the preferred
stock is at a premium above a specified average market price of the common
stock until June 8, 1999 and a discount below such average market price after
June 8, 1999.
The holders of the preferred stock are entitled to receive dividends at the
rate of $50.00 per year per share of preferred stock, one-half of which is
payable semiannually. Dividends are payable in cash or, at the option of the
Company and subject to certain limitations and restrictions, in additional
shares of preferred stock.
The shares of preferred stock are subject to redemption at the option of
the holders of the shares under certain conditions, including our default
under the stock purchase agreements with Advantage and Koch, the continued
unavailability of this Prospectus for resales of the shares of common stock,
or the absence of reported trading prices for the common stock.
In connection with the sale by the Company of the preferred stock, the
Company also issued warrants to Advantage and Koch to purchase 96,875 and
58,125 shares of common stock, respectively. These warrants may be exercised
at a price of $13.21125 per share of common stock, subject to certain
potential adjustments, until December 9, 2003. The Company also issued
warrants to Wharton, Bines, and Neidiger Tucker Bruner Inc. to purchase
45,000, 45,000, and 10,000 shares of common stock, respectively, as
consideration for acting as brokers for the preferred stock transaction.
Neidiger subsequently transferred its warrants to Messrs. Neidiger (2,800
warrants), Bruner (2,800 warrants), and Petrelli (2,800 warrants), and Ms.
Neidiger (1,600 warrants), all of whom are officers of Neidiger Tucker Bruner
Inc. These warrants may be exercised at a price of $12.195 per share of
common stock, subject to certain potential adjustments, until December 9, 2003.
All of the warrants that we issued to Advantage, Koch, Wharton, Ms.
Bines and Neidiger (and its assignees) have a "cashless exercise" feature.
This feature permits the holders of the warrants to surrender to the Company
a number of underlying shares of common stock having a market value equal to
the total exercise price of the warrants being exercised. A cashless
exercise of the warrants reduces the number of shares of common stock that
the Company is required to issue, but the Company would not receive cash in
the amount of the exercise price of the warrants.
The number of shares shown in the following table as being offered by
the Selling Shareholders represents the number of shares that the Company and
the Selling Shareholders agreed to initially register to cover conversions of
the preferred stock and the exercise of the warrants issued to the Selling
Shareholders.
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<PAGE>
The following table sets forth certain information regarding the ownership
of the common stock by the Selling Shareholders and as adjusted to give effect
to the sale of the shares offered pursuant to this Prospectus:
<TABLE>
<CAPTION>
Shares Owned Prior Shares Being Ownership After Offering(3)
Selling Shareholder to Offering Offered (1) Shares Percent
- ----------------------------------- ------------------- ------------ ------- -------
<S> <C> <C> <C> <C>
Advantage Fund II, Ltd. -0- 1,260,955 -0- -0-
Koch Industries, Inc. -0- 756,573 -0- -0-
Wharton Capital Partners Ltd. -0- 45,000 -0- -0-
Leslie Bines -0- 45,000 -0- -0-
Eugene L. Neidiger 27,552(2) 2,800 27,552(2) *
Charles C. Bruner 11,085(2) 2,800 11,085(2) *
Anthony B. Petrelli -0- 2,800 -0- -0-
Regina L. Neidiger -0- 1,600 -0- -0-
Oppenheimer High Yield Fund -0- 24,520 -0- -0-
Oppenheimer Champion Income Fund -0- 12,145 -0- -0-
Oppenheimer Strategic Income Fund -0- 55,000 -0- -0-
</TABLE>
- -------------------
* Less than 1%
(1) Represents the number of shares issuable upon conversion of the
preferred stock and exercise of the warrants.
(2) Does not include shares of common stock that can be purchased
by Messrs. Neidiger (13,392 shares) and Bruner (13,156 shares)
if they exercise certain other warrants that they currently own.
(3) Assumes sale of all of the shares of common stock issuable upon
exercise of the warrants and upon the conversion of the preferred
stock.
The Selling Shareholders and their respective officers and directors
have not held any positions or office or had any other material relationship
with the Company or any of its affiliates within the past three years.
In recognition of the fact that the Selling Shareholders may wish
to be legally permitted to sell their shares when they deem appropriate, the
Company agreed with the Selling Shareholders to file with the SEC, under the
Securities Act of 1933, a Registration Statement on Form S-3, of which this
Prospectus forms a part, with respect to the resale of the shares, and has
agreed with certain of the Selling Shareholders to prepare and file such
amendments and supplements to the Registration Statement as may be necessary
to keep the Registration Statement effective until the shares are no longer
required to be registered for the sale thereof by each Selling Shareholders.
PLAN OF DISTRIBUTION
The shares of common stock offered pursuant to this Prospectus by the
Selling Shareholders may be sold from time to time by the Selling Shareholders,
or by pledgees, donees, transferees or other successors in interest. Such sales
may be made on one or more exchanges or in the over-the-counter market
(including the Nasdaq SmallCap-TM- Market), in privately negotiated
transactions, through the writing of options on the shares, or otherwise at
market prices then prevailing or at prices related to the then-current market
price, at fixed prices that may be changed, or at negotiated prices. The shares
may be sold to or through brokers or dealers, who may act as agent or principal,
or in direct transactions between
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<PAGE>
the Selling Shareholders and purchasers. In addition, the Selling
Shareholders may, from time to time, sell short the common stock, and in such
instances, this Prospectus may be delivered in connection with such short
sale and the shares offered hereby may be used to cover such short sale.
Transactions involving brokers or dealers may include, without limitation,
(a) ordinary brokerage transactions,
(b) transactions in which the broker or dealer solicits purchasers,
(c) block trades in which the broker or dealer will attempt to sell the
shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction, and
(d) purchases by a broker or dealer as a principal and resale by such
broker or dealer for its account.
In effecting sales, brokers and dealers engaged by the Selling Shareholders or
the purchasers of the shares may arrange for other brokers or dealers to
participate. Such brokers or dealers may receive discounts, concessions or
commissions from the Selling Shareholders, the purchasers of the shares for whom
such broker or dealer may act as agent or to whom they may sell as principal, or
both (which compensation as to a particular broker or dealer may be in excess of
customary commissions). The Selling Shareholders and such brokers and dealers
who act in connection with the sale of shares may be deemed to be "underwriters"
within the meaning of the Securities Act, and any commissions received by them
and any profit on any resale of the shares as principal may be deemed to be
underwriting discounts and commissions under the Securities Act of 1933.
Including and without limiting the foregoing, in connection with
distributions of the common stock, the Selling Shareholders may, under
certain certain circumstances, enter into hedging transactions with brokers
or dealers and the brokers or dealers may engage in short sales of the common
stock in the course of hedging the positions they assume with the Selling
Shareholders. The Selling Shareholders also may enter into option or other
transactions with brokers or dealers that involve the delivery of the common
stock to the brokers or dealers, who may then resell or otherwise transfer
such common stock. The Selling Shareholders also may loan or pledge the
common stock to a broker or dealer and the broker or dealer may sell the
common stock so loaned or upon default may sell or otherwise transfer the
pledged common stock.
The Company is bearing all costs relating to the registration of the
shares. Any commissions, discounts or other fees payable to brokers or
dealers in connection with any sale of the shares will be borne by the
Selling Shareholders, the purchasers participating in such transaction, or
both. The Company will not receive any of the proceeds from the sale of the
shares by the Selling Shareholders. The Company and certain of the Selling
Shareholders each have agreed to indemnify the other against certain
liabilities, including liabilities arising under the Securities Act, that
relate to statements or omissions in the Registration Statement of which this
Prospectus forms a part.
Any shares covered by this Prospectus that qualify for sale pursuant to
Rule 144 under the Securities Act may be sold under such Rule rather pursuant to
this Prospectus.
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 14. Other Expenses of Issuance and Distribution
The following sets forth the various expenses expected to be incurred by
the Registrant in connection with the sale and distribution of the securities
being registered hereby other than underwriting discounts and commissions. All
amounts are estimated except the Securities and Exchange Commission registration
fee and the Nasdaq listing fee.
<TABLE>
<S> <C>
SEC registration fee . . . . . . . . . . . . . . . . . . . . . . .$ 9,750
Nasdaq listing fee . . . . . . . . . . . . . . . . . . . . . . . .$ 7,500
Printing and engraving expenses . . . . . . . . . . . . . . . . .$ 10,000
Legal fees and expenses . . . . . . . . . . . . . . . . . . . . .$ 15,000
Blue Sky fees and expenses . . . . . . . . . . . . . . . . . . . .$ 5,000
Accounting fees and expenses . . . . . . . . . . . . . . . . . . .$ 10,000
Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . .$ 3,000
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$ 60,250
</TABLE>
Item 15. Indemnification of Directors and Officers.
Article 8 of the Company's Certificate of Incorporation, as amended,
provides:
"No director of the corporation shall be personally liable to the
corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except as to liability (i) for any breach of the director's
duty of loyalty to the corporation or its stockholders, (ii) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (iii) for violations of Section 174 of the Delaware General
Corporation Law or (iv) for any transaction from which the director derived any
improper personal benefit. If the Delaware General Corporation Law hereafter is
amended to eliminate or limit further the liability of a director, then, in
addition to the elimination and limitation of liability provided by the
preceding sentence, the liability of each director shall be eliminated or
limited to the fullest extent provided or permitted by the amended Delaware
General Corporation Law. Any repeal or modification of this Article 8 shall not
adversely affect any right or protection of a director under this Article 8 as
in effect immediately prior to such repeal or modification with respect to any
liability that would have accrued, but for this Article 8, prior to such repeal
or modification."
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<PAGE>
Section 5.1 of the Company's by-laws provides, in general, that the
Company shall, to the fullest extent permitted by the DGCL, as now or
hereafter in effect, indemnify any person who was or is threatened to be made
a party to any threatened, pending, or completed action, suit, or proceeding,
whether criminal, civil, administrative, or investigative (a "Proceeding"),
by reason of the fact that he is or was a director or officer of the Company,
or, by reason of the fact that such officer or director is or was serving at
the request of the Company as a director, office, employee, or agent of
another corporation, partnership, joint venture, trust, association, or other
enterprise, against all liability and loss suffered and expenses (including
attorneys' fees), judgments, fines, ERISA excise taxes or penalties, and
amounts paid in settlement reasonably incurred by him in connection with such
Proceeding, including any Proceeding by or on behalf of the Company and will
advance all reasonable expenses incurred by or on behalf of any such person
in connection with any Proceeding, whether prior to or after final
disposition of such Proceeding. Section 5.8 of the bylaws also provides that
the Company may also indemnify and advance expenses to employees or agents
who are not officers or directors of the Company.
The Company has purchased a directors' and officers' liability insurance
contract that provides, within stated limits, reimbursement either to a director
or officer whose actions in his capacity result in liability, or to the
Registrant, in the event it has indemnified the director or officer.
Item 16. Exhibits.
<TABLE>
<CAPTION>
Number Description of Exhibits
<S> <C>
2.4 Agreement and Plan of Reorganization and Liquidation by and
Among Rocky Mountain Internet, Inc., DataXchange Network, Inc.,
and Certain of the Shareholders of DataXchange Network, Inc.,
dated as of December 8, 1998 (13)
3.1 Certificate of Incorporation (1)
3.2 Bylaws of Rocky Mountain Internet, Inc. (1)
3.3 Certificate of Amendment of Certificate of Incorporation of Rocky
Mountain Internet, Inc. (16)
3.4 Certificate of Designations of Series B Convertible Preferred
Stock
4.1 Form of Warrant Agreement dated September 5,1996 between Rocky
Mountain Internet, Inc. and American Securities Transfer, Inc.
(1)
4.2 Form of Subordinated Convertible Promissory Note (1)
4.3 Form of Lock-Up Agreement for Shareholders (1)
4.4 Form of Lock-Up Agreement for Preferred Stockholders (1)
4.5 Form of Lock-Up Agreement for Debenture Holders (1)
4.6 Form of Stock Certificate (1)
4.7 Form of Warrant Certificate (1)
4.8 Warrant Agreement between Rocky Mountain Internet, Inc. and
Douglas H. Hanson dated October 1, 1997 (8)
4.9 1996 Employees' Stock Option Plan (6)
4.10 1996 Non-Employee Directors' Stock Option Plan (6)
4.11 Rocky Mountain Internet Inc. 1997 Non-Qualified Stock Option Plan
(7)
4.12 1997 Stock Option Plan (9)
4.12.1 First Amendment to Non-Qualified Stock Option Agreement pursuant
to the Rocky Mountain Internet, Inc. 1997 Stock Option Plan (16)
4.12.2 First Amendment to Incentive Stock Option Agreement pursuant to
the Rocky Mountain Internet, Inc. 1997 Stock Option Plan) (16)
II-2
<PAGE>
4.13 Rocky Mountain Internet, Inc. 1998 Employees' Stock Option Plan
(10)
4.14 Rocky Mountain Internet, Inc. 1998 Non-Employee Directors' Stock
Option Plan (11)
4.15 Subscription Agreement, dated as of December 10, 1998, by and
between Rocky Mountain Internet, Inc. and Koch Industries,
Inc. (15)
4.16 Subscription Agreement, dated as of December 10, 1998, by and
between Rocky Mountain Internet, Inc. and Advantage Fund II
Ltd. (15)
4.17 Form of Common Stock Purchase Warrant issued to Koch
Industries, Inc., Advantage Fund II Ltd., Wharton Capital
Partners Ltd., Leslie Bines, and Neidiger Tucker Bruner Inc. (15)
4.18 Form of Registration Rights Agreement between Rocky Mountain
Internet, Inc. and (i) Koch Industries, Inc.; and (ii) Advantage
Fund II Ltd. (15)
4.19 Form of Registration Rights Agreement between Rocky Mountain
Internet and (i) Wharton Capital Partners Ltd.; (ii) Leslie
Bines; and (iii) Neidiger Tucker Bruner Inc. (15)
5.3 Opinion and Consent of Jacobs Chase Frick Kleinkopf & Kelly
LLC., as to legality of securities being registered
10.1 Agreement of Lease between Denver-Stellar Associates Limited
Partnership, Landlord and Rocky Mountain Internet, Inc., Tenant
(2)
10.2 Asset Purchase Agreement - Acquisition of CompuNerd, Inc. (2)
10.3 Confirmation of $2.0 million lease line of credit (2)
10.4 Agreement between MCI and Rocky Mountain Internet, Inc. governing
the provision of professional information system development
services for the design and development of the MCI internal
Intranet project referred to as Electronic Advice. (2)
10.5 Sublease Agreement-February 26, 1997-1800 Glenarm, Denver, CO(4)
10.6 Acquisition of The Information Exchange (4)
10.7 Asset purchase of On-Line Network Enterprises (4)
10.8 1996 Incentive Compensation Plan - Annual Bonus Incentive (4)
10.9 1997 Incentive Compensation Plan - Annual Bonus Incentive (4)
10.10 TERMINATION AGREEMENT of joint venture between Rocky Mountain
Internet, Inc. and Zero Error Networks, Inc. (5)
10.11 Private Placement Memorandum (5)
10.12 Carrier Services Switchless Agreement Between Frontier
Communications of the West, Inc. and Rocky Mountain Broadband,
Inc.* (15)
10.13 Wholesale Usage Agreement Between PSINet Inc. and Rocky Mountain
Internet, Inc.* (15)
10.14 PacNet Reseller Agreement between PacNet Inc. and Rocky Mountain
Internet, Inc.* (15)
10.15 Operating Agreement of The Mountain Area EXchange LLC (15)
10.16 Software License and Consulting Services Agreement Between Rocky
Mountain Internet, Inc. and Novazen Inc.* (15)
10.19 Merger Agreement among Rocky Mountain Internet, Inc., RMI-INI,
Internet Now, Hutchinson Persons, Leslie Kelly, Taufik, Islam,
Susan Coupal, and Gary Kim, dated November 20, 1998 (12)
10.20 Asset Purchase Agreement between Rocky Mountain Internet, Inc.
and Unicom Communications Corporation dated as of November 24,
1998 (12)
10.21 Asset Purchase Agreement among Rocky Mountain Internet, Inc.,
Stonehenge Business Systems Corporation, Todd Keener, and Danette
Keener, dated as of November 30, 1998 (12)
10.22 Commitment letter dated December 10, 1998 from Advantage Fund
Ltd. to Rocky Mountain Internet, Inc. (15)
16.1 Letter re change in certifying accountant (3)
16.2 Letter re change in certifying accountant (14)
23.1 Consent of Baird, Kurtz & Dobson
27.1 Financial Data Schedule
</TABLE>
*Portions of these documents have been omitted pursuant to a request for
confidential treatment.
II-3
<PAGE>
(1) Incorporated by reference from the Company's registration
statement on Form SB-2 filed with the Commission on August 30,
1996, registration number 333-05040C.
(2) Incorporated by reference from the Company's Quarterly Report on
Form 10-QSB filing dated September 30, 1996.
(3) Incorporated by reference to the Company's Current Report on Form
8-K dated January 28, 1997.
(4) Incorporated by reference to the Company's Annual Report on Form
10-KSB dated December 31, 1996.
(5) Incorporated by reference to the Company's Quarterly Report on Form
10-QSB dated June 30, 1997.
(6) Incorporated by reference to the Company's documents filed with
Initial Public Offering.
(7) Incorporated by reference to the Company's Form S-8 Registration
Statement filed on September 26, 1997.
(8) Incorporated by reference to the Company's Current Report on Form
8-K dated October 6, 1997.
(9) Incorporated by reference to the Definitive Proxy Statement
(Appendix A) filed on Schedule 14A on February 13, 1998.
(10) Incorporated by reference to the Definitive Proxy Statement
(Appendix B) filed on Schedule 14A on February 13, 1998.
(11) Incorporated by reference to the Definitive Proxy Statement
(Appendix C) filed on Schedule 14A on February 13, 1998.
(12) Incorporated by reference to the Company's Current Report on
Form 8-K dated November 20, 1998.
(13) Incorporated by reference to the Company's Current Report on Form
8-K dated December 8, 1998.
(14) Incorporated by reference to the Company's Current Report on Form
8-K dated December 9, 1998.
(15) Incorporated by reference to the Company's Current Report on Form
8-K dated December 10, 1998
(16) Previously filed.
Item 17. Undertakings.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
II-4
<PAGE>
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration;
(2) That, for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
That, for purposes of determining any liability under the Securities Act
of 1933, each filing of the registrant's annual report pursuant to section
13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where
applicable, each filing of an employee benefit plan's annual report pursuant
to section 15(d) of the Securities Exchange Act of 1934) that is incorporated
by reference in the registration statement shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
II-5
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this registration statement to be signed on its behalf by
the undersigned, thereunto duly authorized, in the City and County of Denver,
State of Colorado, on January 13, 1999.
ROCKY MOUNTAIN INTERNET, INC.
By:
/s/ Douglas H. Hanson
--------------------------------------------------------
Douglas H. Hanson, Chief Executive Officer,
and Chairman of the Board of Directors
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ Douglas H. Hanson Principal Executive Officer and January 13, 1999
- --------------------- Chairman of the Board of Directors
Douglas H. Hanson
/s/ Peter J. Kushar Chief Financial Officer, Secretary, January 13, 1999
- ------------------- Treasurer, and Principal Accounting Officer
Peter J. Kushar
/s/ Mary Beth Vitale President, Chief Operating Officer January 13, 1999
- -------------------- and Director
Mary Beth Vitale
/s/ D. D. Hock Director January 13, 1999
- --------------
D. D. Hock
/s/ Robert W. Grabowski Director January 13, 1999
- -----------------------
Robert W. Grabowski
/s/ Lewis H. Silverberg Director January 13, 1999
- -----------------------
Lewis H. Silverberg
</TABLE>
<PAGE>
ROCKY MOUNTAIN INTERNET, INC.
CERTIFICATE OF DESIGNATIONS OF
SERIES B CONVERTIBLE PREFERRED STOCK
(Pursuant to Section 151 of the General Corporation
Law of the State of Delaware)
Rocky Mountain Internet, Inc., a Delaware corporation (the "Corporation"),
in accordance with the provisions of Section 103 of the General Corporation Law
of the State of Delaware (the "DGCL") DOES HEREBY CERTIFY:
That pursuant to authority vested in the Board of Directors of the
Corporation by the Certificate of Incorporation, as amended, of the Corporation,
the Board of Directors of the Corporation, by unanimous written consent dated
December 8, 1998, adopted a resolution providing for the creation of a series of
the Corporation's Preferred Stock, $.001 par value, which resolution is as
follows:
RESOLVED, that pursuant to authority vested in the Board of Directors by
the Certificate of Incorporation of the Corporation, as amended, the Board of
Directors does hereby provide for and create from the 750,000 shares of
preferred stock, $.001 par value, of the Corporation (the "Preferred Stock")
authorized to be issued pursuant to the Certificate of Incorporation, as
amended, a series of Preferred Stock to consist of 9,600 shares, to be
designated as "Series B Convertible Preferred Stock", and to the extent that the
voting powers and the designations, preferences and relative, participating,
optional or other special rights thereof and the qualifications, limitations or
restrictions of such rights have not been set forth in the Certificate of
Incorporation of the Corporation, as amended, does hereby fix the same as
follows:
SERIES B CONVERTIBLE PREFERRED STOCK
SECTION 1. DEFINITIONS. As used herein, the following terms shall have the
following meanings:
"Affiliate" means, with respect to any person, any other person that
directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with the subject person; for purposes
of this definition, "control" (including, with correlative meanings, the terms
"controlled by" and "under common control with"), as used with respect to any
person, shall mean the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of such person,
whether through the ownership of voting securities or by contract or otherwise.
<PAGE>
"Aggregated Person" means, with respect to any person, any person whose
beneficial ownership of shares of Common Stock would be aggregated with the
beneficial ownership of shares of Common Stock by such person for purposes of
Section 13(d) of the Exchange Act, and Regulation 13D-G thereunder.
"Amendment Event" means an Optional Redemption Event described in clause
(4) of the definition of Optional Redemption Event which arises under the terms
of any amendment of any of the following: this Certificate of Designations, the
Subscription Agreements, the Registration Rights Agreements, the Warrants, or
any other agreements or documents entered into in connection with the issuance
of shares of Series B Convertible Preferred Stock.
"AMEX" means the American Stock Exchange, Inc.
"Auditors" means Ernst & Young LLP or such other firm of independent public
accountants of recognized national standing as shall have been engaged by the
Corporation to audit its financial statements.
"Auditors' Determination" means a determination requested by the
Corporation and signed by the Auditors concurring with the Company's conclusion
that a requirement of the Corporation to redeem, or a right of any holder of
shares of Series B Convertible Preferred Stock to require redemption of, shares
of Series B Convertible Preferred Stock by reason of the occurrence of (i) a
specified Inconvertibility Day or (ii) a specified Optional Redemption Event
which occurs by reason of (x) an event described in clause (1), (2) or (5) of
the definition of Optional Redemption Event or (y) an Amendment Event, whichever
is applicable, would result in the Corporation being required to classify the
Series B Convertible Preferred Stock as redeemable preferred stock on a balance
sheet of the Corporation in accordance with Generally Accepted Accounting
Principles and Regulation S-X of the SEC. The Auditors' Determination shall (i)
set forth in reasonable detail all relevant facts considered by the Auditors in
connection therewith, (ii) set forth all applicable accounting principles and
assumptions used, and (iii) set forth in reasonable detail or attach copies of
all legal, expert and other advice or information used by the Auditors in
reaching their conclusion. To the extent any facts are assumed for purposes of
either the Company's conclusion or the Auditor's Determination, the validity of
such conclusion or determination shall depend upon such assumed facts being true
and complete in all material respects.
"Average Market Price" for any date means the arithmetic average of the
Market Price on each of the three Trading Days, whether or not consecutive,
during the applicable Measurement Period having the lowest Market Prices.
"Blackout Period" means any period of one or more consecutive Trading Days,
but not in excess of ten Trading Days, occurring after the SEC Effective Date as
to which the
2
<PAGE>
Corporation has notified the holders of shares of Series B Convertible Preferred
Stock on or prior to such Trading Day in accordance with Section 3(f) of the
Registration Rights Agreements that they are required, pursuant to Section 3(f)
of the Registration Rights Agreements, to suspend offers and sales of shares of
Common Stock pursuant to the Registration Statement as a result of an event or
circumstance which relates to a development concerning the business of the
Corporation which development occurred subsequent to the later of (x) the SEC
Effective Date and (y) the latest date prior to such notice on which the
Corporation has amended or supplemented the Registration Statement and as to
which the Board of Directors shall have determined in good faith that public
disclosure of such event or circumstance at such time would not be in the best
interests of the Company, which determination shall be set forth in a resolution
duly adopted by the Board of Directors and copies of which shall be furnished to
the holders of shares of Series B Convertible Preferred Stock; PROVIDED,
HOWEVER, that no more than one Blackout Period may commence in any period of 365
consecutive days.
"Board of Directors" or "Board" means the Board of Directors of the
Corporation.
"Business Day" means any day other than a Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized or required by law
to remain closed.
"Ceiling Price" means
(1) $12.195, unless clause (2) of this definition is applicable, or
(2) if the Market Price of the Common Stock on the Trading Day prior
to the Conversion Date for which the Ceiling Price for a particular conversion
is being determined is greater than $20.00, the Ceiling Price for such
conversion shall equal the sum of (a) the amount set forth in clause (1) of this
definition plus (b) one-half of the amount by which such Market Price of the
Common Stock on the Trading Day prior to such Conversion Date exceeds $20.00
(all dollar amounts referred to in clauses (1) and (2) of this definition are
subject to equitable adjustments from time to time on terms reasonably
acceptable to the Majority Holders for stock splits, stock dividends,
combinations, recapitalizations, reclassifications and similar events occurring
or with respect to which "ex-" trading commences on or after the date of filing
of this Certificate of Designations with the Secretary of State of the State of
Delaware);
PROVIDED, HOWEVER, that, notwithstanding any other provision hereof, the Ceiling
Price applicable to a particular conversion shall be subject to reduction as
provided in Section 10(b)(6); PROVIDED, FURTHER, HOWEVER, that if a Registration
Event occurs, then, in addition to any other right or remedy of any holder of
shares of Series B Convertible Preferred Stock, thereafter the Ceiling Price
shall be permanently reduced on each Computation Date by an amount equal to two
percent of the amount that the Ceiling Price otherwise would
3
<PAGE>
have been without any reduction pursuant to this proviso (pro rated in the case
of any Computation Date which is less than 30 days after a Registration Event
occurs or less than 30 days after another Computation Date); and PROVIDED,
FURTHER, HOWEVER, that if the Registration Event referred to in the immediately
preceding proviso occurs by reason of the occurrence of an event described in
clause (4) of the definition of Registration Event, such reduction in the
Ceiling Price required by the immediately preceding proviso shall be effective
only for a period of 180 days after such Registration Event ceases to continue.
"Common Stock" means the Common Stock, $.001 par value, of the Corporation.
"Computation Date" means, if a Registration Event occurs, any of (1) the
date which is 30 days after such Registration Event occurs, if any Registration
Event is continuing on such date, (2) each date which is 30 days after a
Computation Date, if any Registration Event is continuing on such date, and (3)
the date on which all Registration Events cease to continue.
"Control Notice" means a notice given by the Corporation to the holders of
shares of the Series B Convertible Preferred Stock, in accordance with Section
7(a)(6) or Section 11(b)(4), (i) stating that an Inconvertibility Day or an
Optional Redemption Event, as the case may be, has occurred by reason of events
which are not solely within the control of the Corporation and (ii) enclosing an
executed copy of an Auditors' Determination.
"Conversion Agent" means American Securities Transfer & Trust, Inc., or its
duly appointed successor, as conversion agent for the Series B Convertible
Preferred Stock pursuant to the Transfer Agent Agreement.
"Conversion Amount" initially shall be equal to $1,000.00, subject to
adjustment as provided in Section 10(b)(8).
"Conversion Date" means, with respect to each conversion of shares of
Series B Convertible Preferred Stock pursuant to Section 10, the date on which
the Conversion Notice relating to such conversion is actually received by the
Conversion Agent, whether by mail, courier, personal service, telephone line
facsimile transmission or other means.
"Conversion Notice" means a written notice in the form specified in the
Subscription Agreements, duly signed by or on behalf of a holder of shares of
Series B Convertible Preferred Stock, stating the number of shares of Series B
Convertible Preferred Stock to be converted.
"Conversion Percentage" means the applicable percentage determined with
respect to each Conversion Date as follows:
4
<PAGE>
<TABLE>
CONVERSION DATE CONVERSION PERCENTAGE
- --------------- ---------------------
<S> <C>
Issuance Date through 180th day thereafter 120%
181st through 365th day after Issuance Date 94%
On or after 366th day after Issuance Date 92%;
</TABLE>
PROVIDED, HOWEVER, that, notwithstanding any other provision hereof, if a
Registration Event occurs, then each percentage stated above shall be
permanently reduced by two percentage points on each Computation Date (pro rated
in the case of any Computation Date which is less than 30 days after a
Registration Event occurs or less than 30 days after another Computation Date);
PROVIDED, FURTHER, HOWEVER, that if the Registration Event referred to in the
preceding proviso occurs by reason of the occurrence of an event described in
clause (4) of the definition of Registration Event, such reduction in each
percentage stated above shall be effective only for a period of 180 days after
such Registration Event ceases to continue.
"Conversion Price" means for any date the lesser of:
(1) the product of (a) the Average Market Price for such date TIMES
(b) the applicable Conversion Percentage; and
(2) the Ceiling Price;
PROVIDED, HOWEVER, that the Conversion Price applicable to a particular
conversion shall be subject to reduction as provided in Section 10(b)(6).
"Conversion Rate" shall have the meaning provided in Section 10(a).
"Converted Market Price" means, for any share of Series B Convertible
Preferred Stock as of any date of determination, an amount equal to the product
obtained by multiplying (x) the number of shares of Common Stock which would, at
the time of such determination, be issuable on conversion in accordance with
Section 10(a) of one share of Series B Convertible Preferred Stock and any
accrued and unpaid dividends thereon and any accrued and unpaid interest on
dividends thereon in arrears if a Conversion Notice were given by the holder of
such share of Series B Convertible Preferred Stock on the date of such
determination (determined without regard to any limitation on conversion based
on beneficial ownership contained in Section 10(a) or in the Subscription
Agreements) TIMES (y) the arithmetic average of the Market Price of the Common
Stock for the five consecutive Trading Days ending on the Trading Day prior to
the date of such determination.
5
<PAGE>
"Corporation Optional Redemption Notice" means a notice given by the
Corporation to the holders of shares of Series B Convertible Preferred Stock
pursuant to Section 9(a) which notice shall state (1) that the Corporation is
exercising its right to redeem all or a portion of the outstanding shares of
Series B Convertible Preferred Stock pursuant to Section 9(a), (2) the number of
shares of Series B Convertible Preferred Stock held by such holder which are to
be redeemed, (3) the Redemption Price per share of Series B Convertible
Preferred Stock to be redeemed or the formula for determining the same,
determined in accordance herewith, and (4) the applicable Redemption Date.
"Current Price" means with respect to any date the arithmetic average of
the Market Price of the Common Stock on the 30 consecutive Trading Days
commencing 45 Trading Days before such date.
"Dividend Shares" means shares of Series B Convertible Preferred Stock
issued as dividends on outstanding shares of Series B Convertible Preferred
Stock in accordance with Section 5(b).
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Final Redemption Date" means the date of redemption of shares of Series B
Convertible Preferred Stock pursuant to Section 9(b), determined in accordance
therewith.
"Final Redemption Notice" means a notice given by the Corporation to each
holder of Series B Convertible Preferred Stock pursuant to Section 9(b), which
notice shall state (1) that the Corporation is exercising its right to redeem
all outstanding shares of Series B Convertible Preferred Stock pursuant to
Section 9(b), (2) the number of shares of Series B Convertible Preferred Stock
held by such holder which are to be redeemed, (3) the Final Redemption Price per
share of Series B Convertible Preferred Stock held by such holder which are to
be redeemed, determined in accordance herewith, and (4) the Final Redemption
Date.
"Final Redemption Price" means, for any share of Series B Convertible
Preferred Stock on any date, an amount equal to the sum of (i) $1,000 PLUS (ii)
an amount equal to the accrued but unpaid dividends on the share of Series B
Convertible Preferred Stock to be redeemed to the Final Redemption Date, PLUS
(iii) an amount equal to the accrued and unpaid interest on dividends in arrears
on such share of Series B Convertible Preferred Stock to the Final Redemption
Date (determined as provided in Section 5).
"Generally Accepted Accounting Principles" for any person means the
generally accepted accounting principles and practices applied by such person
from time to time in the preparation of its audited financial statements.
6
<PAGE>
"Inconvertibility Day" means any Trading Day on which the Corporation would
not have been required to convert in accordance with Section 10(a) any shares of
Series B Convertible Preferred Stock as a consequence of the limitations set
forth in Section 7(a)(1) had all outstanding shares of Series B Convertible
Preferred Stock held by such holder on such Trading Day been converted into
Common Stock on such Trading Day (without regard to the limitation, if any, on
beneficial ownership by such holder contained in Section 10(a) or in the
Subscription Agreements).
"Inconvertibility Notice" shall have the meaning provided in Section
7(a)(2).
"Issuance Date" means the first date of original issuance of any shares of
Series B Convertible Preferred Stock.
"Junior Dividend Stock" means, collectively, the Common Stock and any other
class or series of capital stock of the Corporation ranking junior as to
dividends to the Series B Convertible Preferred Stock.
"Junior Liquidation Stock" means the Common Stock or any other class or
series of the Corporation's capital stock ranking junior as to liquidation
rights to the Series B Convertible Preferred Stock.
"Junior Stock" shall have the meaning provided in Section 10(b)(8).
"Liquidation Preference" means, for each share of Series B Convertible
Preferred Stock, the sum of (i) all dividends accrued and unpaid thereon to the
date of final distribution to such holders, (ii) accrued and unpaid interest on
dividends in arrears (computed in accordance with Section 5(a)) to the date of
such distribution, and (iii) $1,000.00.
"Majority Holders" means at any time the holders of shares of Series B
Convertible Preferred Stock which shares constitute a majority of the
outstanding shares of Series B Convertible Preferred Stock.
"Market Price" of the Common Stock on any date means the closing bid price
for one share of Common Stock on such date on the first applicable among the
following: (a) the national securities exchange on which the shares of Common
Stock are listed which constitutes the principal securities market for the
Common Stock, (b) the Nasdaq, if the Nasdaq constitutes the principal market for
the Common Stock on such date, or (c) the Nasdaq SmallCap, if the Nasdaq
SmallCap constitutes the principal securities market for the Common Stock on
such date, in any such case as reported by Bloomberg, L.P.; PROVIDED, HOWEVER,
that if during any Measurement Period or other period during which the Market
Price is being determined:
7
<PAGE>
(i) The Corporation shall declare or pay a dividend or make a
distribution to all holders of the outstanding Common Stock in shares of Common
Stock or fix any record date for any such action, then the Market Price for each
day in such Measurement Period or such other period which day is prior to the
earlier of (1) the date fixed for the determination of stockholders entitled to
receive such dividend or other distribution and (2) the date on which
ex-dividend trading in the Common Stock with respect to such dividend or
distribution begins shall be reduced by multiplying the Market Price (determined
without regard to this proviso) for each such day in such Measurement Period or
such other period by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding at the close of business on the earlier of
(1) the record date fixed for such determination and (2) the date on which
ex-dividend trading in the Common Stock with respect to such dividend or
distribution begins and the denominator of which shall be the sum of such number
of shares and the total number of shares constituting such dividend or other
distribution;
(ii) The Corporation shall issue rights or warrants to all holders of
its outstanding shares of Common Stock, or fix a record date for such issuance,
which rights or warrants entitle such holders (for a period expiring within
forty-five (45) days after the date fixed for the determination of stockholders
entitled to receive such rights or warrants) to subscribe for or purchase shares
of Common Stock at a price per share less than the Market Price (determined
without regard to this proviso) for any day in such Measurement Period or such
other period which day is prior to the end of such 45-day period, then the
Market Price for each such day shall be reduced so that the same shall equal the
price determined by multiplying the Market Price (determined without regard to
this proviso) by a fraction, the numerator of which shall be the number of
shares of Common Stock outstanding at the close of business on the record date
fixed for the determination of stockholders entitled to receive such rights or
warrants plus the number of shares which the aggregate offering price of the
total number of shares so offered would purchase at such Market Price, and the
denominator of which shall be the number of shares of Common Stock outstanding
on the close of business on such record date plus the total number of additional
shares of Common Stock so offered for subscription or purchase. In determining
whether any rights or warrants entitle the holders to subscribe for or purchase
shares of Common Stock at less than the Market Price (determined without regard
to this proviso), and in determining the aggregate offering price of such shares
of Common Stock, there shall be taken into account any consideration received
for such rights or warrants, the value of such consideration, if other than
cash, to be determined in good faith by a resolution of the Board of Directors
of the Corporation;
(iii) The outstanding shares of Common Stock shall be subdivided into
a greater number of shares of Common Stock or a record date for any such
subdivision shall be fixed, then the Market Price of the Common Stock for each
day in such Measurement Period or such other period which day is prior to the
earlier of (1) the day upon which such subdivision becomes effective and (2) the
date on which ex-dividend trading in the
8
<PAGE>
Common Stock with respect to such subdivision begins shall be proportionately
reduced, and conversely, in case the outstanding shares of Common Stock shall be
combined into a smaller number of shares of Common Stock, the Market Price for
each day in such Measurement Period or such other period which day is prior to
the earlier of (1) the date on which such combination becomes effective and (2)
the date on which trading in the Common Stock on a basis which gives effect to
such combination begins, shall be proportionately increased;
(iv) The Corporation shall, by dividend or otherwise, distribute to
all holders of its Common Stock shares of any class of capital stock of the
Corporation (other than any dividends or distributions to which clause (i) of
this proviso applies) or evidences of its indebtedness, cash or other assets
(including securities, but excluding any rights or warrants referred to in
clause (ii) of this proviso and dividends and distributions paid exclusively in
cash and excluding any capital stock, evidences of indebtedness, cash or assets
distributed upon a merger or consolidation) (the foregoing hereinafter in this
clause (iv) of this proviso called the "Securities"), or fix a record date for
any such distribution, then, in each such case, the Market Price for each day in
such Measurement Period or such other period which day is prior to the earlier
of (1) the record date for such distribution and (2) the date on which
ex-dividend trading in the Common Stock with respect to such distribution begins
shall be reduced so that the same shall be equal to the price determined by
multiplying the Market Price (determined without regard to this proviso) by a
fraction, the numerator of which shall be the Market Price (determined without
regard to this proviso) for such date less the fair market value (as determined
in good faith by resolution of the Board of Directors of the Corporation) on
such date of the portion of the Securities so distributed or to be distributed
applicable to one share of Common Stock and the denominator of which shall be
the Market Price (determined without regard to this proviso) for such date;
PROVIDED, HOWEVER, that in the event the then fair market value (as so
determined) of the portion of the Securities so distributed applicable to one
share of Common Stock is equal to or greater than the Market Price (determined
without regard to this clause (iv) of this proviso) for any such Trading Day, in
lieu of the foregoing adjustment, adequate provision shall be made so that the
holders of shares of Series B Convertible Preferred Stock shall have the right
to receive upon conversion of the shares of Series B Convertible Preferred Stock
the amount of Securities the holders of shares of Series B Convertible Preferred
Stock would have received had the number of shares of Common Stock to be issued
in payment of such dividends on the shares of Series B Convertible Preferred
Stock been issued, or had the holders of shares of Series B Convertible
Preferred Stock converted the shares of Series B Convertible Preferred Stock, in
either such case immediately prior to the record date for such distribution. If
the Board of Directors of the Corporation determines the fair market value of
any distribution for purposes of this clause (iv) by reference to the actual or
when issued trading market for any Securities comprising all or part of such
distribution, it must in doing so consider the prices in such market on the same
day for which an adjustment in the Market Price is being determined.
9
<PAGE>
For purposes of this clause (iv) and clauses (i) and (ii) of this
proviso, any dividend or distribution to which this clause (iv) is applicable
that also includes shares of Common Stock, or rights or warrants to subscribe
for or purchase shares of Common Stock to which clause (i) or (ii) of this
proviso applies (or both), shall be deemed instead to be (1) a dividend or
distribution of the evidences of indebtedness, assets, shares of capital stock,
rights or warrants other than such shares of Common Stock or rights or warrants
to which clause (i) or (ii) of this proviso applies (and any Market Price
reduction required by this clause (iv) with respect to such dividend or
distribution shall then be made) immediately followed by (2) a dividend or
distribution of such shares of Common Stock or such rights or warrants (and any
further Market Price reduction required by clauses (i) and (ii) of this proviso
with respect to such dividend or distribution shall then be made), except that
any shares of Common Stock included in such dividend or distribution shall not
be deemed "outstanding at the close of business on the date fixed for such
determination" within the meaning of clause (i) of this proviso;
(v) The Corporation or any subsidiary of the Corporation shall (x) by
dividend or otherwise, distribute to all holders of its Common Stock cash in (or
fix any record date for any such distribution), or (y) repurchase or reacquire
shares of its Common Stock (other than an Option Share Surrender) for, in either
case, an aggregate amount that, combined with (1) the aggregate amount of any
other such distributions to all holders of its Common Stock made exclusively in
cash after the Issuance Date and within the 12 months preceding the date of
payment of such distribution, and in respect of which no adjustment pursuant to
this clause (v) has been made, (2) the aggregate amount of any cash plus the
fair market value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration paid in respect of any repurchase
or other reacquisition by the Corporation or any subsidiary of the Corporation
of any shares of Common Stock (other than an Option Share Surrender) made after
the Issuance Date and within the 12 months preceding the date of payment of such
distribution or making of such repurchase or reacquisition, as the case may be,
and in respect of which no adjustment pursuant to this clause (v) has been made,
and (3) the aggregate of any cash plus the fair market value (as determined in
good faith by a resolution of the Board of Directors of the Corporation) of
consideration payable in respect of any Tender Offer by the Corporation or any
of its subsidiaries for all or any portion of the Common Stock concluded within
the 12 months preceding the date of payment of such distribution or completion
of such repurchase or reacquisition, as the case may be, and in respect of which
no adjustment pursuant to clause (vi) of this proviso has been made (such
aggregate amount combined with the amounts in clauses (1), (2) and (3) above
being the "Combined Amount"), exceeds 10% of the product of the Market Price
(determined without regard to this proviso) for any day in such Measurement
Period or such other period which day is prior to the earlier of (A) the record
date with respect to such distribution and (B) the date on which ex-dividend
trading in the Common Stock with respect to such distribution begins or the date
of such repurchase or reacquisition, as the
10
<PAGE>
case may be, times the number of shares of Common Stock outstanding on such
date, then, and in each such case, the Market Price for each such day shall be
reduced so that the same shall equal the price determined by multiplying the
Market Price (determined without regard to this proviso) for such day by a
fraction (i) the numerator of which shall be equal to the Market Price
(determined without regard to this proviso) for such day less an amount equal to
the quotient of (x) the excess of such Combined Amount over such 10% and (y) the
number of shares of Common Stock outstanding on such day and (ii) the
denominator of which shall be equal to the Market Price (determined without
regard to this proviso) for such day; PROVIDED, HOWEVER, that in the event the
portion of the cash so distributed or paid for the repurchase or reacquisition
of shares (determined per share based on the number of shares of Common Stock
outstanding) applicable to one share of Common Stock is equal to or greater than
the Market Price (determined without regard to this clause (v) of this proviso)
of the Common Stock for any such day, then in lieu of the foregoing adjustment
with respect to such day, adequate provision shall be made so that the holders
of shares of Series B Convertible Preferred Stock shall have the right to
receive upon conversion of shares of Series B Convertible Preferred Stock the
amount of cash the holders of shares of Series B Convertible Preferred Stock
would have received had the holders of shares of Series B Convertible Preferred
Stock converted shares of Series B Convertible Preferred Stock immediately prior
to the record date for such distribution or the payment date of such repurchase,
as applicable; or
(vi) A Tender Offer made by the Corporation or any of its subsidiaries
for all or any portion of the Common Stock shall expire and such Tender Offer
(as amended upon the expiration thereof) shall require the payment to
stockholders (based on the acceptance (up to any maximum specified in the terms
of the Tender Offer) of Purchased Shares (as defined below)) of an aggregate
consideration having a fair market value (as determined in good faith by
resolution of the Board of Directors of the Corporation) that combined together
with (1) the aggregate of the cash plus the fair market value (as determined in
good faith by a resolution of the Board of Directors of the Corporation), as of
the expiration of such Tender Offer, of consideration payable in respect of any
other Tender Offers, by the Corporation or any of its subsidiaries for all or
any portion of the Common Stock expiring within the 12 months preceding the
expiration of such Tender Offer and in respect of which no adjustment pursuant
to this clause (vi) has been made, (2) the aggregate amount of any cash plus the
fair market value (as determined in good faith by a resolution of the Board of
Directors of the Corporation) of consideration paid in respect of any repurchase
or other reacquisition by the Corporation or any subsidiary of the Corporation
of any shares of Common Stock (other than an Option Share Surrender) made after
the Issuance Date and within the 12 months preceding the expiration of such
Tender Offer and in respect of which no adjustment pursuant to clause (v) of
this proviso has been made, and (3) the aggregate amount of any distributions to
all holders of Common Stock made exclusively in cash within 12 months preceding
the expiration of such Tender Offer and in respect of which no adjustment
pursuant to clause (v) of this proviso has been made, exceeds 10% of the product
of the Market Price (determined without regard to this
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proviso) for any day in such period times the number of shares of Common Stock
outstanding on such day, then, and in each such case, the Market Price for such
day shall be reduced so that the same shall equal the price determined by
multiplying the Market Price (determined without regard to this proviso) for
such day by a fraction, the numerator of which shall be the number of shares of
Common Stock outstanding on such day multiplied by the Market Price (determined
without regard to this proviso) for such day and the denominator of which shall
be the sum of (x) the fair market value (determined as aforesaid) of the
aggregate consideration payable to stockholders based on the acceptance (up to
any maximum specified in the terms of the Tender Offer) of all shares validly
tendered and not withdrawn as of the last time tenders could have been made
pursuant to such Tender Offer (the "Expiration Time") (the shares deemed so
accepted, up to any such maximum, being referred to as the "Purchased Shares")
and (y) the product of the number of shares of Common Stock outstanding (less
any Purchased Shares) on such day times the Market Price (determined without
regard to this proviso) of the Common Stock on the Trading Day next succeeding
the Expiration Time. If the application of this clause (vi) to any Tender Offer
would result in an increase in the Market Price (determined without regard to
this proviso) for any trade, no adjustment shall be made for such Tender Offer
under this clause (vi) for such day.
"Maximum Share Amount" means 1,838,700 shares, or such greater number as
permitted by the rules of the Nasdaq SmallCap (such amount to be subject to
equitable adjustment from time to time on terms reasonably acceptable to the
Majority Holders for stock splits, stock dividends, combinations, capital
reorganizations and similar events relating to the Common Stock occurring or
with respect to which "ex-" trading commences after the date of filing this
Certificate of Designations with the Secretary of State of the State of
Delaware), of Common Stock.
"Measurement Period" means, with respect to any date, the period of 20
consecutive Trading Days ending on the Trading Day prior to such date.
"Nasdaq" means the Nasdaq National Market.
"Nasdaq SmallCap" means the Nasdaq SmallCap Market.
"1933 Act" means the Securities Act of 1933, as amended.
"NYSE" means the New York Stock Exchange, Inc.
"Option Share Surrender" means the surrender of shares of Common Stock to
the Corporation in payment of the exercise price or tax obligations incurred in
connection with the exercise of a stock option granted by the Corporation to any
of its employees, directors or consultants.
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"Optional Redemption Event" means any one of the following events:
(1) For any period of five consecutive Trading Days there shall be no
closing bid price of the Common Stock on the Nasdaq, the Nasdaq SmallCap, the
NYSE or the AMEX;
(2) The Common Stock ceases to be listed for trading on any of the
Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX;
(3) The inability for 30 or more days (whether or not consecutive) of
any holder of shares of Series B Convertible Preferred Stock to sell such shares
of Common Stock issued or issuable on conversion of shares of Series B
Convertible Preferred Stock pursuant to the Registration Statement for any
reason other than a Blackout Period on each of such 30 days;
(4) The Corporation shall (A) default in the timely performance of the
obligation to issue shares of Common Stock upon conversion of shares of Series B
Convertible Preferred Stock as and when required by Section 10 or (B) fail or
default in the timely performance of any material obligation (other than as
specifically set forth elsewhere in this definition) to a holder of shares of
Series B Convertible Preferred Stock under the terms of this Certificate of
Designations or under the Subscription Agreements, the Registration Rights
Agreements, the Warrants or any other agreement or document entered into in
connection with the issuance of shares of Series B Convertible Preferred Stock,
as such instruments may be amended from time to time; PROVIDED, that an event
described in clause (B) above shall be an Optional Redemption Event only if such
failure or default shall have continued for a period of 15 days after notice
thereof is given to the Corporation by any holder of shares of Series B
Convertible Preferred Stock.
(5) Any consolidation or merger of the Corporation with or into
another entity (other than a merger or consolidation of a subsidiary of the
Corporation into the Corporation or a wholly-owned subsidiary of the
Corporation) where the shareholders of the Corporation immediately prior to such
transaction do not collectively own at least 51% of the outstanding voting
securities of the surviving corporation of such consolidation or merger
immediately following such transaction or the common stock of such surviving
corporation is not listed for trading on the NYSE, the AMEX, the Nasdaq or the
Nasdaq SmallCap; or any sale or other transfer of all or substantially all of
the assets of the Corporation (other than a transfer to a wholly-owned
subsidiary of the Corporation); or
(6) The taking of any action, including any amendment to the
Corporation's Certificate of Incorporation, as amended (other than an increase
in the number of authorized shares of Common Stock), without the consent of the
Majority Holders which materially and adversely affects the rights of any holder
of shares of Series B Convertible Preferred Stock.
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"Optional Redemption Notice" means a notice from a holder of shares of
Series B Convertible Preferred Stock to the Corporation which states (1) that
the holder delivering such notice is thereby requiring the Corporation to redeem
shares of Series B Convertible Preferred Stock pursuant to Section 11, (2) in
general terms the Optional Redemption Event giving rise to such redemption, and
(3) the number of shares of Series B Convertible Preferred Stock held by such
holder which are to be redeemed.
"Optional Redemption Price" means the greater of (i) the Premium Price on
the applicable redemption date and (ii) the Converted Market Price on the
applicable redemption date.
"Parity Dividend Stock" means any class or series of the Corporation's
capital stock ranking, as to dividends, on a parity with the Series B
Convertible Preferred Stock.
"Parity Liquidation Stock" means any class or series of the Corporation's
capital stock having parity as to liquidation rights with the Series B
Convertible Preferred Stock.
"Premium Percentage" means 115%.
"Premium Price" means, for any share of Series B Convertible Preferred
Stock as of any date of determination, the product obtained by multiplying (a)
the sum of (1) the Conversion Amount PLUS (2) an amount equal to the accrued but
unpaid dividends on such share of Series B Convertible Preferred Stock to the
date of determination, PLUS (3) an amount equal to the accrued and unpaid
interest on dividends in arrears (as provided in Section 5) to the date of
determination TIMES (b) the Premium Percentage.
"Redemption Date" means the date of a redemption of shares of Series B
Convertible Preferred Stock pursuant to Section 9(a), determined in accordance
therewith.
"Redemption Price" means the greater of (i) the Premium Price on the
applicable Redemption Date and (ii) the Converted Market Price on the applicable
Redemption Date.
"Registration Event" shall mean (1) the Corporation fails to file the
Registration Statement with the SEC on or before January 29, 1999, (2) the
Registration Statement is not effective within 105 days after the Issuance Date,
(3) the Corporation fails to submit a request for acceleration of the effective
date of the Registration Statement in accordance with Section 3(a) of the
Registration Rights Agreements, (4) the Registration Statement shall cease to be
available for use by any holder of shares of Series B Convertible Preferred
Stock who is named therein as a selling stockholder for any reason (including,
without limitation, by reason of an SEC stop order, a material misstatement or
omission in the Registration Statement or the information contained in the
Registration Statement having become outdated) other than a Blackout Period;
PROVIDED, HOWEVER, that no Registration
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Event pursuant to this clause (4) shall be deemed to occur prior to the SEC
Effective Date, (5) the Common Stock ceases to be listed for trading on any of
the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap, or (6) a holder of shares
of Series B Convertible Preferred Stock having become unable to convert any
shares of Series B Convertible Preferred Stock in accordance with Section 10(a)
for any reason (other than by reason of the 4.9% limitation on beneficial
ownership set forth therein, the limitation on beneficial ownership set forth in
the Subscription Agreements, or a redemption or repurchase thereof).
"Registration Rights Agreements" means the several Registration Rights
Agreements entered into between the Corporation and the original holders of the
shares of Series B Convertible Preferred Stock, as amended or modified from time
to time in accordance with their respective terms.
"Registration Statement" means the Registration Statement required to be
filed by the Corporation with the SEC pursuant to Section 2(a) of the
Registration Rights Agreements.
"SEC" means the United States Securities and Exchange Commission.
"SEC Effective Date" means the date the Registration Statement is first
declared effective by the SEC.
"Senior Dividend Stock" means any class or series of capital stock of the
Corporation ranking senior as to dividends to the Series B Convertible Preferred
Stock.
"Senior Liquidation Stock" means any class or series of capital stock of
the Corporation ranking senior as to liquidation rights to the Series B
Convertible Preferred Stock.
"Series B Convertible Preferred Stock" means the Series B Convertible
Preferred Stock, $.001 par value, of the Corporation.
"Share Limitation Redemption Date" means each date on which the Corporation
is required to redeem shares of Series B Convertible Preferred Stock as provided
in Section 7(a).
"Share Limitation Redemption Price" means the greater of (i) the Premium
Price on the applicable Share Limitation Redemption Date and (ii) the Converted
Market Price on the applicable Share Limitation Redemption Date.
"Stockholder Approval" shall mean the approval by a majority of the votes
cast by the holders of shares of Common Stock (in person or by proxy) at a
meeting of the stockholders of the Corporation (duly convened at which a quorum
was present), or a
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written consent of holders of shares of Common Stock entitled to such number of
votes given without a meeting, of the issuance by the Corporation of 20% or more
of the Common Stock of the Corporation outstanding on the Issuance Date for less
than the greater of the book or market value of such Common Stock on conversion
of the Series B Convertible Preferred Stock, as and to the extent required under
Rule 4310(c)(25)(H) of the Nasdaq SmallCap as in effect from time to time or any
successor, replacement or similar provision thereof or of any other market on
which the Common Stock is listed for trading.
"Stockholder Approval Notice" shall have the meaning provided in Section
7(a)(2).
"Subscription Agreements" means the several Subscription Agreements by and
between the Corporation and the original holders of shares of Series B
Convertible Preferred Stock pursuant to which the shares of Series B Convertible
Preferred Stock were issued.
"Tender Offer" means a tender offer or exchange offer.
"Trading Day" means a day on whichever of (x) the national securities
exchange, (y) the Nasdaq or (z) the Nasdaq SmallCap which at the time
constitutes the principal securities market for the Common Stock is open for
general trading.
"Transfer Agent Agreement" means the Transfer Agent Agreement, dated as of
December 10, 1998, by and among the Corporation, the Conversion Agent and the
original holders of the Series B Convertible Preferred Stock for the benefit of
the holders from time to time of shares of Series B Convertible Preferred Stock.
"Warrants" means the Common Stock Purchase Warrants issued by the
Corporation in connection with the issuance of the shares of Series B
Convertible Preferred Stock.
SECTION 2. DESIGNATION AND AMOUNT. The shares of such series shall be
designated as "Series B Convertible Preferred Stock", and the number of shares
constituting the Series B Convertible Preferred Stock shall be 9,600, and shall
not be subject to increase. Of the authorized shares of Series B Convertible
Preferred Stock, 1,600 shares may be issued only as dividends on the outstanding
shares of Series B Convertible Preferred Stock. The Corporation shall not issue
any shares of Series B Convertible Preferred Stock other than pursuant to the
Subscription Agreements and the Dividend Shares contemplated hereby and thereby,
unless such issuance shall have been approved by the Majority Holders. Any
shares of Series B Convertible Preferred Stock which are redeemed by the
Corporation and retired and any shares of Series B Convertible Preferred Stock
which are converted in accordance with Section 10 shall be restored to the
status of authorized, unissued and undesignated shares of the Corporation's
class of
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Preferred Stock and shall not be subject to issuance, and may not
thereafter be outstanding, as shares of Series B Convertible Preferred Stock.
SECTION 3. SERIES B CONVERTIBLE PREFERRED STOCK CAPITAL. The amount to be
represented in the Series B Convertible Preferred Stock capital of the
Corporation at all times for each outstanding share of Series B Convertible
Preferred Stock shall be the greater of (i) the Premium Price and (ii) the
Converted Market Price. The Corporation shall take such action as may be
required to maintain the amount required by this Section 3 to be represented in
stated capital for the Series B Convertible Preferred Stock capital not less
frequently than quarterly.
SECTION 4. RANK. All Series B Convertible Preferred Stock shall rank (i)
senior to the Common Stock, now or hereafter issued, as to payment of dividends
and distribution of assets upon liquidation, dissolution, or winding up of the
Corporation, whether voluntary or involuntary, (ii) senior to any series or
class of Preferred Stock designated prior to the date of filing of this
Certificate of Designations with the Secretary of State of the State of
Delaware, (iii) senior to any additional series of the class of Preferred Stock
which series the Board of Directors may from time to time authorize, both as to
payment of dividends and as to distributions of assets upon liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary
and (iv) senior to any additional class of preferred stock (or series of
preferred stock of such class) which the Board of Directors or the stockholders
may from time to time authorize in accordance herewith; PROVIDED, HOWEVER, that
the Series B Convertible Preferred Stock shall rank pari passu with any
additional series or class of Preferred Stock from time to time authorized by
the Board of Directors or the stockholders the shares of which are originally
issued to Advantage Fund II Ltd., a British Virgin Islands corporation, or its
designees.
SECTION 5. DIVIDENDS AND DISTRIBUTIONS. (a) The holders of shares of Series
B Convertible Preferred Stock shall be entitled to receive, when, as, and if
declared by the Board of Directors out of funds legally available for such
purpose, dividends at the rate of $50.00 per annum per share, and no more, which
shall be fully cumulative, shall accrue without interest (except as otherwise
provided herein as to dividends in arrears) from the date of original issuance
of each share of Series B Convertible Preferred Stock and shall be payable
semiannually on May 15 and November 15 of each year commencing May 15, 1999
(except that if any such date is a Saturday, Sunday, or legal holiday, then such
dividend shall be payable on the next succeeding day that is not a Saturday,
Sunday, or legal holiday) to holders of record as they appear on the stock books
of the Corporation on such record dates, not more than 20 nor less than 10 days
preceding the payment dates for such dividends, as shall be fixed by the Board.
Dividends on the Series B Convertible Preferred Stock shall be paid in cash or,
subject to the limitations in Section 5(b) hereof, Dividend Shares or any
combination of cash and Dividend Shares, at the option of the Corporation as
hereinafter provided. The amount of the dividends payable per share of Series B
Convertible Preferred Stock for each semiannual dividend period shall be
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computed by dividing the annual dividend amount by two. The amount of dividends
payable for the initial dividend period and any period shorter than a full
semiannual dividend period shall be computed on the basis of a 360-day year of
twelve 30-day months. Dividends not paid on a payment date, whether or not such
dividends have been declared, will bear interest at the rate of 14% per annum
until paid (or such lesser rate as shall be the maximum rate allowable by
applicable law). No dividends or other distributions, other than the dividends
payable solely in shares of any Junior Dividend Stock, shall be paid or set
apart for payment on any shares of Junior Dividend Stock, and no purchase,
redemption, or other acquisition shall be made by the Corporation of any shares
of Junior Dividend Stock (except for Option Share Surrenders), unless and until
all accrued and unpaid dividends on the Series B Convertible Preferred Stock and
interest on dividends in arrears at the rate specified herein shall have been
paid or declared and set apart for payment.
If at any time any dividend on any Senior Dividend Stock shall be in
arrears, in whole or in part, no dividend shall be paid or declared and set
apart for payment on the Series B Convertible Preferred Stock unless and until
all accrued and unpaid dividends with respect to the Senior Dividend Stock,
including the full dividends for the then current dividend period, shall have
been paid or declared and set apart for payment, without interest. No full
dividends shall be paid or declared and set apart for payment on any Parity
Dividend Stock for any period unless all accrued but unpaid dividends (and
interest on dividends in arrears at the rate specified herein) have been, or
contemporaneously are, paid or declared and set apart for such payment on the
Series B Convertible Preferred Stock. No full dividends shall be paid or
declared and set apart for payment on the Series B Convertible Preferred Stock
for any period unless all accrued but unpaid dividends have been, or
contemporaneously are, paid or declared and set apart for payment on the Parity
Dividend Stock for all dividend periods terminating on or prior to the date of
payment of such full dividends. When dividends are not paid in full upon the
Series B Convertible Preferred Stock and the Parity Dividend Stock, all
dividends paid or declared and set apart for payment upon shares of Series B
Convertible Preferred Stock (and interest on dividends in arrears at the rate
specified herein) and the Parity Dividend Stock shall be paid or declared and
set apart for payment pro rata, so that the amount of dividends paid or declared
and set apart for payment per share on the Series B Convertible Preferred Stock
and the Parity Dividend Stock shall in all cases bear to each other the same
ratio that accrued and unpaid dividends per share on the shares of Series B
Convertible Preferred Stock and the Parity Dividend Stock bear to each other.
Any references to "distribution" contained in this Section 5 shall not be
deemed to include any stock dividend or distributions made in connection with
any liquidation, dissolution, or winding up of the Corporation, whether
voluntary or involuntary.
(b) If the Corporation elects in the exercise of its sole discretion
to issue Dividend Shares in payment of dividends on the Series B Convertible
Preferred Stock in
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respect of any dividend payment date, the Corporation shall issue and deliver,
or cause to be issued and delivered, by the third Trading Day after such
dividend payment date to each holder of shares of Series B Convertible Preferred
Stock a certificate representing the number of whole Dividend Shares arrived at
by dividing (x) the total amount of cash dividends such holder would be entitled
to receive if the aggregate dividends on the Series B Convertible Preferred
Stock held by such holder which are being paid in Dividend Shares were being
paid in cash BY (y) $1,000.00; PROVIDED, HOWEVER, that if certificates
representing Dividend Shares are issued and delivered to holders of Series B
Convertible Preferred Stock subsequent to the third Trading Day after a dividend
payment date, the amount so divided into such total amount of cash dividends
will be reduced by $10.00 for each Trading Day after the third Trading Day
following such dividend payment date to the date of delivery of Dividend Shares.
No fractional Dividend Shares shall be issued in payment of dividends. In lieu
thereof, the Corporation shall pay cash in an amount equal to the product of (x)
the arithmetic average of the Market Price of the Common Stock for the five
consecutive Trading Days ending on the Trading Day prior to such dividend
payment date TIMES (y) the number of shares of Common Stock which the fraction
of a Dividend Share which would otherwise be issuable by the Corporation would
be convertible in accordance with Section 10(a) if so converted on the
applicable dividend payment date. The Corporation shall not exercise its right
to issue Dividend Shares in payment of dividends on Series B Convertible
Preferred Stock if:
(i) the number of shares of Series B Convertible Preferred Stock at
the time authorized, unissued and unreserved for all purposes, or held in the
Corporation's treasury, is insufficient to permit the issuance of such number of
Dividend Shares; or the number of shares of Common Stock at the time authorized,
unissued and unreserved for all purposes, or held in the Corporation's treasury,
is insufficient to permit the conversion of such Dividend Shares into shares of
Common Stock;
(ii) the issuance or delivery of Dividend Shares as a dividend payment
or the issuance of shares of Common Stock upon conversion of such Dividend
Shares would require registration with or approval of any governmental authority
under any law or regulation, and such registration or approval has not been
effected or obtained;
(iii) the shares of Common Stock issuable upon conversion of such
Dividend Shares have not been authorized for listing, upon official notice of
issuance, on any securities exchange or market on which the Common Stock is then
listed; or have not been approved for quotation if the Common Stock is traded in
the over-the-counter market;
(iv) the number of shares of Common Stock registered pursuant to
Section 2(a) of the Registration Rights Agreements for resale upon issuance upon
conversion of Dividend Shares shall be insufficient (after taking into account
the number of shares of Common Stock issued or issuable upon conversion of
Dividend Shares
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theretofore issued) to permit the resale pursuant to the Registration Statement
of the shares of Common Stock issuable upon conversion of such Dividend Shares;
(v) the shares of Common Stock issuable upon conversion of such
Dividend Shares (A) cannot be sold or transferred without restriction by
unaffiliated holders who receive such Dividend Shares or (B) are no longer
listed on any of the NYSE, the AMEX, the Nasdaq or the Nasdaq SmallCap; or
(vi) an Optional Redemption Event shall have occurred and any holder
of shares of Series B Convertible Preferred Stock (A) shall be entitled to
exercise optional redemption rights under Section 11 by reason of such Optional
Redemption Event or (B) shall have exercised optional redemption rights under
Section 11 by reason of such Optional Redemption Event and the Corporation shall
not have paid the Optional Redemption Price to each holder.
Dividend Shares issued in payment of dividends on Series B Convertible
Preferred Stock pursuant to this Section and shares of Common Stock issuable
upon conversion of such Dividend Shares shall be, and for all purposes shall be
deemed to be, validly issued, fully paid and nonassessable shares of the
Corporation; the issuance and delivery thereof is hereby authorized; and the
delivery will be, and for all purposes shall be deemed to be, payment in full of
the cumulative dividends to which holders are entitled on the applicable
dividend payment date.
(c) Neither the Corporation nor any subsidiary of the Corporation
shall redeem, repurchase or otherwise acquire in any one transaction or series
of related transactions any shares of Common Stock, Junior Dividend Stock or
Junior Liquidation Stock if the number of shares so repurchased, redeemed or
otherwise acquired in such transaction or series of related transactions
(excluding any Option Share Surrender) is more than either (x) 5% of the number
of shares of Common Stock, Junior Dividend Stock or Junior Liquidation Stock, as
the case may be, outstanding immediately prior to such transaction or series of
related transactions or (y) 1% of the number of shares of Common Stock, Junior
Dividend Stock or Junior Liquidation Stock, as the case may be, outstanding
immediately prior to such transaction or series of related transactions if such
transaction or series of related transactions is with any one person or group of
affiliated persons, unless the Corporation or such subsidiary offers to purchase
for cash from each holder of shares of Series B Convertible Preferred Stock at
the time of such redemption, repurchase or acquisition the same percentage of
such holder's shares of Series B Convertible Preferred Stock as the percentage
of the number of outstanding shares of Common Stock, Junior Dividend Stock or
Junior Liquidation Stock, as the case may be, to be so redeemed, repurchased or
acquired at a purchase price per share of Series B Convertible Preferred Stock
equal to the greater of (i) the Premium Price in effect on the date of purchase
pursuant to this Section 5(c) and (ii) the Converted Market Price on the date of
purchase pursuant to this Section 5(c).
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(d) Neither the Corporation nor any subsidiary of the Corporation
shall (1) make any Tender Offer for outstanding shares of Common Stock, unless
the Corporation contemporaneously therewith makes an offer, or (2) enter into an
agreement regarding a Tender Offer for outstanding shares of Common Stock by any
person other than the Corporation or any subsidiary of the Corporation, unless
such person agrees with the Corporation to make an offer, in either such case to
each holder of outstanding shares of Series B Convertible Preferred Stock to
purchase for cash at the time of purchase in such Tender Offer the same
percentage of shares of Series B Convertible Preferred Stock held by such holder
as the percentage of outstanding shares of Common Stock offered to be purchased
in such Tender Offer at a price per share of Series B Convertible Preferred
Stock equal to the greater of (i) the Premium Price in effect on the date of
purchase pursuant to this Section 5(d) and (ii) the Converted Market Price on
the date of purchase pursuant to this Section 5(d).
SECTION 6. LIQUIDATION PREFERENCE. In the event of a liquidation,
dissolution, or winding up of the Corporation, whether voluntary or involuntary,
the holders of Series B Convertible Preferred Stock shall be entitled to receive
out of the assets of the Corporation, whether such assets constitute stated
capital or surplus of any nature, an amount per share of Series B Convertible
Preferred Stock equal to the Liquidation Preference, and no more, before any
payment shall be made or any assets distributed to the holders of Junior
Liquidation Stock; PROVIDED, HOWEVER, that such rights shall accrue to the
holders of Series B Convertible Preferred Stock only in the event that the
Corporation's payments with respect to the liquidation preference of the holders
of Senior Liquidation Stock are fully met. After the liquidation preferences of
the Senior Liquidation Stock are fully met, the entire assets of the Corporation
available for distribution shall be distributed ratably among the holders of the
Series B Convertible Preferred Stock and any Parity Liquidation Stock in
proportion to the respective preferential amounts to which each is entitled (but
only to the extent of such preferential amounts). After payment in full of the
liquidation price of the shares of the Series B Convertible Preferred Stock and
the Parity Liquidation Stock, the holders of such shares shall not be entitled
to any further participation in any distribution of assets by the Corporation.
Neither a consolidation or merger of the Corporation with another corporation
nor a sale or transfer of all or part of the Corporation's assets for cash,
securities, or other property in and of itself will be considered a liquidation,
dissolution or winding up of the Corporation.
SECTION 7. MANDATORY REDEMPTION.
(A) MANDATORY REDEMPTION BASED ON MAXIMUM SHARE AMOUNT. (1)
Notwithstanding any other provision herein, unless the Stockholder Approval
shall have been obtained from the stockholders of the Corporation or waived by
the Nasdaq or the Nasdaq SmallCap, so long as the Common Stock is listed on the
Nasdaq, the Nasdaq SmallCap, the NYSE or the AMEX, the Corporation shall not be
required to issue upon
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conversion of shares of Series B Convertible Preferred Stock pursuant to Section
10 more than the Maximum Share Amount. The Maximum Share Amount shall be
allocated among the shares of Series B Convertible Preferred Stock at the time
of initial issuance thereof pro rata based on the initial issuance of 8,000
shares of Series B Convertible Preferred Stock. Each certificate for shares of
Series B Convertible Preferred Stock initially issued shall bear a notation as
to the number of shares constituting the portion of the Maximum Share Amount
allocated to the shares of Series B Convertible Preferred Stock represented by
such certificate for purposes of conversion thereof. The Corporation shall
maintain records which show the number of shares of Series B Convertible
Preferred Stock issued by the Corporation pursuant to Section 5 as dividends on
the shares of Series B Convertible Preferred Stock represented by each
certificate, which records shall be controlling in the absence of manifest
error. Each such additional share of Series B Convertible Preferred Stock shall
be allocated a portion of the Maximum Share Amount allocated to the shares of
Series B Convertible Preferred Stock in respect of which such additional shares
of Series B Convertible Preferred Stock are issued as a dividend and the
certificate for such additional shares of Series B Convertible Preferred Stock
shall bear a notation as to the certificate number of the share of Series B
Convertible Preferred Stock in respect of which such additional share of Series
B Convertible Preferred Stock is issued as a dividend. Upon surrender of any
certificate for shares of Series B Convertible Preferred Stock for transfer or
re-registration thereof (or, at the option of the holder, for conversion
pursuant to Section 10(a) of less than all of the shares of Series B Convertible
Preferred Stock represented thereby), the Corporation shall make a notation on
the new certificate issued upon such transfer or re-registration or evidencing
such unconverted shares, as the case may be, as to the remaining number of
shares of Common Stock from the Maximum Share Amount remaining available for
conversion of the shares of Series B Convertible Preferred Stock evidenced by
such new certificate. If any certificate for shares of Series B Convertible
Preferred Stock is surrendered for split-up into two or more certificates
representing an aggregate number of shares of Series B Convertible Preferred
Stock equal to the number of shares of Series B Convertible Preferred Stock
represented by the certificate so surrendered (as reduced by any contemporaneous
conversion of shares of Series B Convertible Preferred Stock represented by the
certificate so surrendered), each certificate issued on such split-up shall bear
a notation of the portion of the Maximum Share Amount allocated thereto
determined by pro rata allocation from among the remaining portion of the
Maximum Share Amount allocated to the certificate so surrendered. If any shares
of Series B Convertible Preferred Stock represented by a single certificate are
converted in full pursuant to Section 10, all of the portion of the Maximum
Share Amount allocated to such shares of Series B Convertible Preferred Stock
which remains unissued after such conversion shall be re-allocated pro rata to
the outstanding shares of Series B Convertible Preferred Stock held of record by
the holder of record at the close of business on the date of such conversion of
the shares of Series B Convertible Preferred Stock so converted, and if there
shall be no other shares of Series B Convertible Preferred Stock held of record
by such holder at the close of business on such date, then such portion of the
Maximum Share
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Amount shall be allocated pro rata among the shares of Series B
Convertible Preferred Stock outstanding on such date.
(2) The Corporation shall promptly, but in no event later than five
Business Days after the occurrence, give notice to each holder of shares of
Series B Convertible Preferred Stock (by telephone line facsimile transmission
at such number as such holder has specified in writing to the Corporation for
such purposes or, if such holder shall not have specified any such number, by
overnight courier or first class mail, postage prepaid, at such holder's address
as the same appears on the stock books of the Corporation) and any holder of
shares of Series B Convertible Preferred Stock may at any time after the
occurrence give notice to the Corporation, in either case, if on any ten Trading
Days within any period of 20 consecutive Trading Days the Corporation would not
have been required to convert shares of Series B Convertible Preferred Stock of
such holder in accordance with Section 10(a) as a consequence of the limitations
set forth in Section 7(a)(1) had the shares of Series B Convertible Preferred
Stock held by such holder been converted in full into Common Stock on each such
day, determined without regard to the limitation, if any, on such holder
contained in the proviso to the second sentence of Section 10(a) (any such
notice, whether given by the Corporation or a holder, an "Inconvertibility
Notice"). If the Corporation shall have given or been required to give any
Inconvertibility Notice, or if a holder shall have given any Inconvertibility
Notice, then within ten Trading Days after such Inconvertibility Notice is first
given or was required to be given, the holder receiving or giving, as the case
may be, such Inconvertibility Notice shall have the right by written notice to
the Corporation (which written notice may be contained in the Inconvertibility
Notice given by such holder) to direct the Corporation to redeem the portion of
such holder's outstanding shares of Series B Convertible Preferred Stock (which,
if applicable, shall be all of such holder's outstanding shares of Series B
Convertible Preferred Stock) as shall not, on the Business Day prior to the date
of such redemption, be convertible into shares of Common Stock by reason of the
limitations set forth in Section 7(a)(1) (determined without regard to the
limitation, if any, on beneficial ownership of Common Stock by such holder
contained in the proviso to the second sentence of Section 10(a) or in the
Subscription Agreements), within five Business Days after such holder so directs
the Corporation, at a price per share equal to the Share Limitation Redemption
Price unless prior to the earlier of (i) the date of the Corporation's 1999
annual meeting of stockholders and (ii) the date the Corporation is required to
redeem such shares of Series B Convertible Preferred Stock the Corporation
delivers written notice to the holder otherwise so entitled to redemption of
such shares of Series B Convertible Preferred Stock stating that the Corporation
has elected to seek the Stockholder Approval (a "Stockholder Approval Notice").
If a holder of shares of Series B Convertible Preferred Stock directs the
Corporation to redeem outstanding shares of Series B Convertible Preferred Stock
pursuant to this Section 7(a)(2) and, prior to the date the Corporation is
required to redeem such shares of Series B Convertible Preferred Stock, the
Corporation would have been able, within the limitations set forth in Section
7(a)(1), to convert all of such holder's shares of Series B Convertible
Preferred Stock (determined without regard to the limitation, if any,
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on beneficial ownership of shares of Common Stock by such holder contained in
the proviso to the second sentence of Section 10(a) or in the Subscription
Agreements) on any ten Trading Days within any period of 15 consecutive Trading
Days commencing after the period of 20 consecutive Trading Days which gave rise
to the applicable Inconvertibility Notice from the Corporation or such holder of
shares of Series B Convertible Preferred Stock, as the case may be, had all of
such holder's shares of Series B Convertible Preferred Stock been surrendered
for conversion into Common Stock on each of such ten Trading Days within such 15
Trading Day period, then the Corporation shall not be required to redeem any
shares of Series B Convertible Preferred Stock by reason of such
Inconvertibility Notice.
(3) If the Corporation shall have timely given a Stockholder Approval
Notice, then the Corporation thereafter shall use its best efforts to convene a
meeting of the stockholders of the Corporation to obtain the Stockholder
Approval. If (x) the Stockholder Approval is sought but is not obtained at such
meeting or any adjournment thereof, (y) the Corporation abandons its efforts to
obtain the Stockholder Approval or (z) the Stockholder Approval is not obtained
within 60 days after the earliest Inconvertibility Notice is given in respect of
which shares of Series B Convertible Preferred Stock have not been redeemed by
reason of the Corporation=s decision to seek the Stockholder Approval, then in
each such case the Corporation shall thereafter promptly (but in no event more
than five Business Days thereafter) redeem such portion (which may be all, if
all shares of Series B Convertible Preferred Stock are not convertible by reason
of the limitations in Section 7(a)(1)) of the outstanding shares of Series B
Convertible Preferred Stock as shall not, on the Business Day prior to the date
of such redemption, be convertible into shares of Common Stock by reason of the
limitations as set forth in Section 7(a)(1), on and subject to the terms and
conditions of this Section 7(a).
(4) Notwithstanding the giving of any Inconvertibility Notice by the
Corporation to the holders of Series B Convertible Preferred Stock pursuant to
Section 7(a)(2) or the giving or the absence of any notice by the holders of the
Series B Convertible Preferred Stock in response thereto or any redemption of
shares of Series B Convertible Preferred Stock pursuant to Section 7(a)(2),
thereafter the provisions of Section 7(a)(2) shall continue to be applicable on
any occasion unless the Stockholder Approval shall have been obtained from the
stockholders of the Corporation or waived by the Nasdaq or the Nasdaq SmallCap.
(5) On each Share Limitation Redemption Date (or such later date as a
holder of shares of Series B Convertible Preferred Stock shall surrender to the
Corporation the certificate(s) for the shares of Series B Convertible Preferred
Stock being redeemed pursuant to this Section 7(a)), the Corporation shall make
payment in immediately available funds of the applicable Share Limitation
Redemption Price to such holder of shares of Series B Convertible Preferred
Stock to be redeemed to or upon the order of such holder as specified by such
holder in writing to the Corporation at least one Business Day prior to
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such Share Limitation Redemption Date. Upon redemption of less than all of the
shares of Series B Convertible Preferred Stock evidenced by a particular
certificate, promptly, but in no event later than three Business Days after
surrender of such certificate to the Corporation, the Corporation shall issue a
replacement certificate for the shares of Series B Convertible Preferred Stock
evidenced by such certificate which have not been redeemed. Only whole shares of
Series B Convertible Preferred Stock may be redeemed.
(6) (A) Notwithstanding any other provision of this Certificate of
Designations, if an Inconvertibility Day occurs by reason of events which are
not solely within the control of the Corporation, the Corporation shall have the
right to give a Control Notice to the holders of Series B Convertible Preferred
Stock at any time after such Inconvertibility Day occurs and prior to the
earlier of (1) the date on which all holders of shares of Series B Convertible
Preferred Stock who had the right (other than as limited by this Section
7(a)(6)) to require redemption of any shares of Series B Convertible Preferred
Stock by reason of the occurrence of such Inconvertibility Day no longer have
such right and (2) the applicable Share Limitation Redemption Date by reason of
the earliest notice given by any holder of shares of Series B Convertible
Preferred Stock directing the Corporation to redeem such shares in accordance
with Section 7(a)(2) by reason of such Inconvertibility Day. For purposes of
this Section 7(a)(6), an Inconvertibility Day shall be deemed to have occurred
by reason of events which are not solely within the control of the Corporation
if a requirement of the Corporation to redeem, or a right of any holder of
shares of Series B Convertible Preferred Stock to require redemption of, shares
of Series B Convertible Preferred Stock by reason thereof would result in the
Corporation being required to classify the Series B Convertible Preferred Stock
as redeemable preferred stock on a balance sheet of the Corporation prepared in
accordance with Generally Accepted Accounting Principles and Regulation S-X of
the SEC. If the Corporation timely gives a Control Notice to the holders of
shares of Series B Convertible Preferred Stock, then in lieu of payment of the
Share Limitation Redemption Price pursuant to a redemption notice given by any
holder of shares of Series B Convertible Preferred Stock in accordance with
Section 7(a)(2) by reason of such Inconvertibility Day and commencing on such
Inconvertibility Day the Conversion Price for all outstanding shares of Series B
Convertible Preferred Stock will be 80% of the amount the Conversion Price would
otherwise be. Such adjustment of the Conversion Price shall continue in effect
until the earliest of (x) the date which is 90 days after the Stockholder
Approval shall have been obtained from the stockholders of the Corporation or
waived by the Nasdaq SmallCap or other securities market on which the Common
Stock is then listed, (y) the date any further adjustments are made following a
failure to obtain the Stockholder Approval as provided below, and (z) the date
when shares of Series B Convertible Preferred Stock are no longer outstanding.
On or after the date the Corporation gives such Control Notice, upon notice from
the Majority Holders, the Corporation promptly shall call a special meeting of
its stockholders, to be held not later than 60 days after such notice is given,
to seek the Stockholder Approval for the issuance of all shares of Common Stock
issuable upon conversion of the Series B Convertible Preferred Stock in
accordance with Section 10 and shall use its best efforts to
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obtain the Stockholder Approval. The Corporation shall prepare and file with the
SEC within 20 days after such notice is given preliminary proxy materials which
set forth a proposal to seek such Stockholder Approval. The Corporation shall
provide the Majority Holders an opportunity to consult with the Corporation
regarding the content of such proxy materials insofar as it relates to the
Stockholder Approval by providing copies of such preliminary proxy materials and
any revised preliminary proxy materials to the Majority Holders a reasonable
period of time prior to their filing with the SEC. Such consultation shall occur
within five Business Days after each draft of such materials are provided to the
Majority Holders. The Corporation shall furnish to each holder of shares of
Series B Convertible Preferred Stock a copy of its definitive proxy materials
for such special meeting and any amendments or supplements thereto promptly
after the same are mailed to stockholders or filed with the SEC. Upon the
earlier of (i) the failure to obtain the Stockholder Approval at the special
meeting or (ii) the failure to hold the special meeting within such 60-day
period, the Corporation shall so notify the holders of shares of Series B
Convertible Preferred Stock and such of the following as shall be specified by
notice to the Corporation from the Majority Holders shall occur: (1) commencing
on the Business Day following the Corporation's receipt of such notice, the
Conversion Price of the outstanding shares of Series B Convertible Preferred
Stock will be 60% of the amount the Conversion Price would otherwise be without
regard to other adjustments pursuant this Section 7(a)(6) or Section 11(b)(4)
and (2) the Corporation shall promptly file applications and take all other
actions necessary to (i) list the Common Stock for trading and quotation on the
OTC Bulletin Board or such other securities market or exchange which will not
restrict the number of shares of Common Stock issuable upon conversion of the
Series B Convertible Preferred Stock and (ii) upon filing such applications,
request the immediate removal of the Common Stock from listing on the securities
market on which it is then listed which restricts the issuance of shares of
Common Stock upon conversion of shares of Series B Convertible Preferred Stock
without the Stockholder Approval.
(B) If and for so long as an adjustment of the Conversion Price is
simultaneously required by this Section 7(a)(6) and by Section 11(b)(4), the
applicable Conversion Price shall be the lower of the two amounts required by
each such section.
(C) The rights of holders of shares of Series B Convertible Preferred
Stock to require redemption of their shares and exercise other rights pursuant
to Sections 7(a)(1) through 7(a)(5) by reason of an Inconvertibility Day as to
which the Corporation does not have a right to give a Control Notice, or fails
to exercise such right on a timely basis, shall not be limited by the operation
of this Section 7(a)(6).
(B) NO OTHER MANDATORY REDEMPTION. The shares of Series B Convertible
Preferred Stock shall not be subject to mandatory redemption by the Corporation
except as provided in Section 7(a).
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SECTION 8. NO SINKING FUND. The shares of Series B Convertible Preferred
Stock shall not be subject to the operation of a purchase, retirement or sinking
fund.
SECTION 9. OPTIONAL REDEMPTION.
(A) CORPORATION OPTIONAL REDEMPTION. If (1) the Corporation shall
be in compliance in all material respects with its obligations to the holders of
shares of Series B Convertible Preferred Stock (including, without limitation,
its obligations under the Subscription Agreements, the Registration Rights
Agreements, the Warrants and the provisions of this Certificate of
Designations), (2) on the date the Corporation Optional Redemption Notice is
given and at all times thereafter until the Redemption Date, the Registration
Statement is effective and available for use by each holder of shares of Series
B Convertible Preferred Stock for the resale of shares of Common Stock acquired
by such holder upon conversion of all shares of Series B Convertible Preferred
Stock held by such holder and (3) no Optional Redemption Event shall have
occurred with respect to which, on the date a Corporation Optional Redemption
Notice is to be given or on the Redemption Date, any holder of shares of Series
B Convertible Preferred Stock (A) shall be entitled to exercise optional
redemption rights under Section 11 by reason of such Optional Redemption Event
or (B) shall have exercised optional redemption rights under Section 11 by
reason of such Optional Redemption Event and the Corporation shall not have paid
the Optional Redemption Price to such holder, then the Corporation shall have
the right, exercisable by giving a Corporation Optional Redemption Notice not
less than 20 days or more than 50 days prior to the Redemption Date to all
holders of record of the shares of Series B Convertible Preferred Stock, at any
time to redeem all or from time to time to redeem any part of the outstanding
shares of Series B Convertible Preferred Stock in accordance with this Section
9(a). If the Corporation shall redeem less than all outstanding shares of Series
B Convertible Preferred Stock, such redemption shall be made as nearly as
practical pro rata from all holders of shares of Series B Convertible Preferred
Stock. Any Corporation Optional Redemption Notice under this Section 9(a) shall
be given to the holders of record of the shares of Series B Convertible
Preferred Stock at their addresses appearing on the records of the Corporation;
PROVIDED, HOWEVER, that any failure or defect in the giving of such notice to
any such holder shall not affect the validity of notice to or the redemption of
shares of Series B Convertible Preferred Stock of any other holder. On the
Redemption Date (or such later date as a holder of shares of Series B
Convertible Preferred Stock surrenders to the Corporation the certificate(s) for
shares of Series B Convertible Preferred Stock to be redeemed pursuant to this
Section 9(a)), the Corporation shall make payment of the applicable Redemption
Price to each holder of shares of Series B Convertible Preferred Stock to be
redeemed in immediately available funds to such account as specified by such
holder in writing to the Corporation at least one Business Day prior to the
Redemption Date. A holder of shares of Series B Convertible Preferred Stock to
be redeemed pursuant to this Section 9(a) shall be entitled to convert such
shares of Series B Convertible Preferred Stock in accordance with Section 10 (1)
through the day prior to the Redemption Date and (2) if the Corporation shall
fail to pay the Redemption
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Price of any share of Series B Convertible Preferred Stock when due, at any time
after the due date thereof until such date as the Corporation pays the
Redemption Price of such share of Series B Convertible Preferred Stock. No share
of Series B Convertible Preferred Stock as to which the holder exercises the
right of conversion pursuant to Section 10 or the optional redemption right
pursuant to Section 11 may be redeemed by the Corporation pursuant to this
Section 9(a) on or after the date of exercise of such conversion right or
optional redemption right, as the case may be, regardless of whether the
Corporation Optional Redemption Notice shall have been given prior to, or on or
after, the date of exercise of such conversion right or optional redemption
right, as the case may be.
(B) FINAL REDEMPTION. The Corporation shall have the right to
redeem all, but not less than all, outstanding shares of Series B Convertible
Preferred Stock at any time on or after the date which is 1,080 days after the
Issuance Date so long as (1) the Corporation shall be in compliance in all
material respects with its obligations to the holders of the Series B
Convertible Preferred Stock (including, without limitation, its obligations
under the Subscription Agreements, the Registration Rights Agreements, the
Warrants and this Certificate of Designations) and (2) no Optional Redemption
Event shall have occurred with respect to which on the date a Final Redemption
Notice is to be given or on the Final Redemption Date, any holder of shares of
Series B Convertible Preferred Stock (a) shall be entitled to exercise optional
redemption rights under Section 11 by reason of such Optional Redemption Event
or (b) shall have exercised optional redemption rights under Section 11 by
reason of such Optional Redemption Event and the Corporation shall not have paid
the Optional Redemption Price to such holder. In order to exercise its rights
under this Section 9(b), the Corporation shall give a Final Redemption Notice
not less than 20 or more than 40 Trading Days prior to the Final Redemption Date
to all holders of record of the shares of Series B Convertible Preferred Stock.
Any Final Redemption Notice shall be given to the holders of record of the
shares of Series B Convertible Preferred Stock by telephone line facsimile
transmission to such number as shown on the records of the Corporation for such
purpose; PROVIDED, HOWEVER, that any failure or defect in the giving of such
notice to any such holder shall not affect the validity of notice to or the
redemption of shares of Series B Convertible Preferred Stock of any other
holder. On the Final Redemption Date (or such later date as a holder of shares
of Series B Convertible Preferred Stock surrenders to the Corporation the
certificate(s) for shares of Series B Convertible Preferred Stock to be redeemed
pursuant to this Section 9(b)), the Corporation shall make payment of the
applicable Final Redemption Price to each holder of shares of Series B
Convertible Preferred Stock to be redeemed in immediately available funds to
such account as specified by such holder in writing to the Corporation at least
one Business Day prior to the Final Redemption Date. A holder of shares of
Series B Convertible Preferred Stock to be redeemed pursuant to this Section
9(b) shall be entitled to convert such shares of Series B Convertible Preferred
Stock in accordance with Section 10 through the day prior to the Final
Redemption Date and (2) if the Corporation shall fail to pay the Final
Redemption Price of any share of Series B Convertible Preferred Stock when due,
at any time after the due date thereof until such date as the Corporation pays
the Final Redemption Price of such share
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of Series B Convertible Preferred Stock to such holder. No share of Series B
Convertible Preferred Stock as to which a holder exercises the right of
conversion pursuant to Section 10 or the optional redemption right pursuant to
Section 11 may be redeemed by the Corporation pursuant to this Section 9(b) on
or after the date of exercise of such conversion right or optional redemption
right, as the case may be, regardless of whether the Final Redemption Notice
shall have been given prior to, or on or after, the date of exercise of such
conversion right or optional redemption right, as the case may be. So long as
during the period from the Issuance Date through the date the Corporation pays
the Final Redemption Price either (i) the Corporation shall not have commenced a
voluntary case or other proceeding, and no person shall have commenced an
involuntary case or other proceeding against the Corporation, in any such case
seeking liquidation, reorganization or other relief with respect to the
Corporation or its debts under any bankruptcy, insolvency, receivership,
moratorium, or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian, or other similar
official of the Corporation or any substantial part of the Corporation's
property, the Corporation shall not have consented to any such relief or to the
appointment of or taking possession by any such official in an involuntary case
or other proceeding commenced against it, and the Corporation shall not have
made a general assignment for the benefit of creditors or (ii) any of the events
described in clause (i) of this sentence shall have been dismissed or otherwise
terminated within 90 days after the first occurrence thereof and such dismissal
or termination occurs at least nine months prior to the Final Redemption Date,
then the Corporation shall have the right, exercisable by a statement to such
effect in the Final Redemption Notice, to pay all or a portion of the Final
Redemption Price by the issuance to the holders of shares of Series B
Convertible Preferred Stock to be redeemed of shares of Common Stock, valued for
this purpose at the Conversion Price on the Final Redemption Date, in lieu of
payment of cash, so long as all shares of Common Stock to be so issued would, if
issued as dividends on shares of Series B Convertible Preferred Stock, meet the
criteria in clauses (i) through (vi) of Section 5(b).
(C) NO OTHER OPTIONAL REDEMPTION. The shares of Series B
Convertible Preferred Stock shall not be subject to redemption at the option of
the Corporation except as provided in Sections 9(a) and 9(b).
SECTION 10. CONVERSION.
(A) CONVERSION AT OPTION OF HOLDER. The holders of the Series
B Convertible Preferred Stock may at any time on or after the earlier of (x)
the SEC Effective Date and (y) the date which is 90 days after the Issuance
Date convert at any time all or from time to time any part of their shares of
Series B Convertible Preferred Stock into fully paid and nonassessable shares
of Common Stock and such other securities and property as herein provided.
Each share of Series B Convertible Preferred Stock may be converted at the
office of the Conversion Agent or at such other additional office or offices,
if any, as the Board of Directors may designate, into such number of fully
paid and nonassessable
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shares of Common Stock (calculated as to each conversion to the nearest
1/100th of a share) determined by dividing (x) the sum of (i) the Conversion
Amount, (ii) accrued but unpaid dividends to the applicable Conversion Date
on the share of Series B Convertible Preferred Stock being converted, and
(iii) accrued but unpaid interest on the dividends on the share of Series B
Convertible Preferred Stock being converted in arrears to the applicable
Conversion Date at the rate provided in Section 5 BY (y) the Conversion Price
for such Conversion Date (the "Conversion Rate"); PROVIDED, HOWEVER, that in
no event shall any holder of shares of Series B Convertible Preferred Stock
be entitled to convert any shares of Series B Convertible Preferred Stock in
excess of that number of shares of Series B Convertible Preferred Stock upon
conversion of which the sum of (1) the number of shares of Common Stock
beneficially owned by such holder and all Aggregated Persons of such holder
(other than shares of Common Stock deemed beneficially owned through the
ownership of (x) unconverted shares of Series B Convertible Preferred Stock
and (y) the unconverted or unexercised portion of any instrument, including
without limitation the Warrants, which contains limitations similar to those
set forth in this sentence) and (2) the number of shares of Common Stock
issuable upon the conversion of the number of shares of Series B Convertible
Preferred Stock with respect to which the determination in this proviso is
being made, would result in beneficial ownership by such holder and all
Aggregated Persons of such holder of more than 4.9% of the outstanding shares
of Common Stock. For purposes of the proviso to the immediately preceding
sentence, beneficial ownership shall be determined in accordance with Section
13(d) of the Exchange Act and Regulation 13D-G thereunder, except as
otherwise provided in clause (1) of the proviso to the immediately preceding
sentence.
(B) OTHER PROVISIONS. (1) Notwithstanding anything in this
Section 10(b) to the contrary, no change in the Conversion Amount pursuant to
this Section 10(b) shall actually be made until the cumulative effect of the
adjustments called for by this Section 10(b) since the date of the last change
in the Conversion Amount would change the Conversion Amount by more than 1%.
However, once the cumulative effect would result in such a change, then the
Conversion Amount shall actually be changed to reflect all adjustments called
for by this Section 10(b) and not previously made. Notwithstanding anything in
this Section 10(b), no change in the Conversion Amount shall be made that would
result in the price at which a share of Series B Convertible Preferred Stock is
converted being less than the par value of the Common Stock into which shares of
Series B Convertible Preferred Stock are at the time convertible.
(2) The holders of shares of Series B Convertible Preferred Stock
at the close of business on the record date for any dividend payment to holders
of Series B Convertible Preferred Stock shall be entitled to receive the
dividend payable on such shares on the corresponding dividend payment date
notwithstanding the conversion thereof after such dividend payment record date
or the Corporation's default in payment of the dividend due on such dividend
payment date; PROVIDED, HOWEVER, that the holder of shares of Series B
Convertible Preferred Stock surrendered for conversion during the period between
the
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close of business on any record date for a dividend payment and the opening of
business on the corresponding dividend payment date must pay to the Corporation,
within five days after receipt by such holder, an amount equal to the dividend
payable on such shares on such dividend payment date if such dividend is paid by
the Corporation to such holder. A holder of shares of Series B Convertible
Preferred Stock on a record date for a dividend payment who (or whose
transferee) tenders any of such shares for conversion into shares of Common
Stock on or after such dividend payment date will receive the dividend payable
by the Corporation on such shares of Series B Convertible Preferred Stock on
such date, and the converting holder need not make any payment of the amount of
such dividend in connection with such conversion of shares of Series B
Convertible Preferred Stock. Except as provided above, no adjustment shall be
made in respect of cash dividends on Common Stock or Series B Convertible
Preferred Stock that may be accrued and unpaid at the date of surrender of
shares of Series B Convertible Preferred Stock.
(3) (A) The right of the holders of Series B Convertible
Preferred Stock to convert their shares shall be exercised by giving (which may
be done by telephone line facsimile transmission) a Conversion Notice to the
Conversion Agent and a copy thereof to the Corporation. If a holder of Series B
Convertible Preferred Stock elects to convert any shares of Series B Convertible
Preferred Stock in accordance with Section 10(a), such holder shall not be
required to surrender the certificate(s) representing such shares of Series B
Convertible Preferred Stock to the Corporation unless all of the shares of
Series B Convertible Preferred Stock represented thereby are so converted. Each
holder of shares of Series B Convertible Preferred Stock and the Corporation
shall maintain records showing the number of shares so converted and the dates
of such conversions or shall use such other method, satisfactory to such holder
and the Corporation, so as to not require physical surrender of such
certificates upon each such conversion. In the event of any dispute or
discrepancy, such records of the Corporation shall be controlling and
determinative in the absence of manifest error. Notwithstanding the foregoing,
if any shares of Series B Convertible Preferred Stock evidenced by a particular
certificate therefor are converted as aforesaid, the holder of Series B
Convertible Preferred Stock may not transfer the certificate(s) representing
such shares of Series B Convertible Preferred Stock unless such holder first
physically surrenders such certificate(s) to the Corporation, whereupon the
Corporation will forthwith issue and deliver upon the order of such holder of
shares of Series B Convertible Preferred Stock new certificate(s) of like tenor,
registered as such holder of shares of Series B Convertible Preferred Stock
(upon payment by such holder of shares of Series B Convertible Preferred Stock
of any applicable transfer taxes) may request, representing in the aggregate the
remaining number of shares of Series B Convertible Preferred Stock represented
by such certificate(s). Each holder of shares of Series B Convertible Preferred
Stock, by acceptance of a certificate for such shares, acknowledges and agrees
that (1) by reason of the provisions of this paragraph, following conversion of
any shares of Series B Convertible Preferred Stock represented by such
certificate, the number of shares of Series B Convertible Preferred Stock
represented by such certificate may be less than the number of shares stated on
such certificate, and (2)
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the Corporation may place a legend on the certificates for shares of Series B
Convertible Preferred Stock which refers to or describes the provisions of this
paragraph.
(B) The Corporation shall pay any transfer tax arising in
connection with any conversion of shares of Series B Convertible Preferred Stock
except that the Corporation shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issue and delivery
upon conversion of shares of Common Stock or other securities or property in a
name other than that of the holder of the shares of the Series B Convertible
Preferred Stock being converted, and the Corporation shall not be required to
issue or deliver any such shares or other securities or property unless and
until the person or persons requesting the issuance thereof shall have paid to
the Corporation the amount of any such tax or shall have established to the
satisfaction of the Corporation that such tax has been paid.
(C) The number of shares of Common Stock to be issued upon each
conversion of shares of Series B Convertible Preferred Stock shall be the number
set forth in the applicable Conversion Notice which number shall be conclusive
absent manifest error. Within one Trading Day after receipt of each Conversion
Notice, the Corporation shall send a notice by telephone line facsimile
transmission to the Conversion Agent confirming the instructions in such
Conversion Notice. If in connection with a particular conversion of shares of
Series B Convertible Preferred Stock the Corporation determines that manifest
error has been made by virtue of the Conversion Price or other information set
forth in the applicable Conversion Notice, the Corporation shall, within one
Trading Day after a holder of shares of Series B Convertible Preferred Stock
gives such Conversion Notice, notify the Conversion Agent and such holder of
such error, which notice shall state the number of shares of Common Stock in
dispute, and, notwithstanding such notice from the Corporation, the Conversion
Agent shall issue and deliver the number of shares of Common Stock which are not
in dispute. A Conversion Notice shall be deemed for all purposes to be in proper
form unless the Corporation otherwise notifies the holder of shares of Series B
Convertible Preferred Stock giving such Conversion Notice by telephone line
facsimile transmission within one Trading Day after a Conversion Notice has been
given (which notice from the Corporation shall specify all defects in the
Conversion Notice), and any Conversion Notice containing any such defect shall
nonetheless be effective on the date given if such holder corrects all such
defects within two Trading Days after receiving such notice from the
Corporation. If the Corporation shall have notified the Conversion Agent and
such holder of any such claim of manifest error, and the Corporation and such
holder do not agree as to a resolution of such claim on or before the date of
such notice by the Corporation of an error in such Conversion Notice, the
Corporation shall on the date such notice is given submit the dispute to the
Auditors for determination and shall instruct the Auditors to resolve such
dispute and to notify the Corporation, the Conversion Agent and such holder
within two Trading Days after such dispute is submitted to the Auditors.
Immediately after receipt of timely notice of the Auditors' determination (but
in any event within three Trading Days after the applicable Conversion Notice is
given to the Conversion
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Agent), the Corporation shall cause the Conversion Agent to issue to the
converting holder any additional shares of Common Stock to which such holder is
entitled based on the determination of the Auditors. If the Auditors shall fail
to notify the Conversion Agent, the Corporation and the holder of their
determination within three Trading Days after the applicable Conversion Notice
is given to the Conversion Agent, then the Corporation shall cause the
Conversion Agent to, within three Trading Days after the date the applicable
Conversion Notice was given, issue to the converting holder any additional
shares of Common Stock to which such holder is entitled based on the applicable
Conversion Notice.
(4) The Corporation (and any successor corporation) shall take
all action necessary so that a number of shares of the authorized but unissued
Common Stock (or common stock in the case of any successor corporation)
sufficient to provide for the conversion of the Series B Convertible Preferred
Stock outstanding upon the basis hereinbefore provided are at all times reserved
by the Corporation (or any successor corporation), free from preemptive rights,
for such conversion, subject to the provisions of the next succeeding paragraph.
If the Corporation shall issue any securities or make any change in its capital
structure which would change the number of shares of Common Stock into which
each share of the Series B Convertible Preferred Stock shall be convertible as
herein provided, the Corporation shall at the same time also make proper
provision so that thereafter there shall be a sufficient number of shares of
Common Stock authorized and reserved, free from preemptive rights, for
conversion of the outstanding Series B Convertible Preferred Stock on the new
basis. If at any time the number of authorized but unissued shares of Common
Stock shall not be sufficient to effect the conversion of all of the outstanding
shares of Series B Convertible Preferred Stock, the Corporation promptly shall
seek, and use its best efforts to obtain and complete, such corporate action as
may, in the opinion of its counsel, be necessary to increase its authorized but
unissued shares of Common Stock to such number of shares as shall be sufficient
for such purpose.
(5) In case of any consolidation or merger of the Corporation
with any other corporation (other than a wholly-owned subsidiary of the
Corporation) in which the Corporation is not the surviving corporation, or in
case of any sale or transfer of all or substantially all of the assets of the
Corporation (other than to a wholly-owned subsidiary of the Corporation), or in
the case of any share exchange pursuant to which all of the outstanding shares
of Common Stock are converted into other securities or property, the Corporation
shall make appropriate provision or cause appropriate provision to be made so
that each holder of shares of Series B Convertible Preferred Stock then
outstanding shall have the right thereafter to convert such shares of Series B
Convertible Preferred Stock into the kind of shares of stock and other
securities and property receivable upon such consolidation, merger, sale,
transfer, or share exchange by a holder of shares of Common Stock into which
such shares of Series B Convertible Preferred Stock could have been converted
immediately prior to the effective date of such consolidation, merger, sale,
transfer, or share exchange and on a basis which preserves the economic benefits
of the conversion rights of the holders of shares of Series B Convertible
Preferred Stock on a basis
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as nearly as practical as such rights exist hereunder prior thereto. If, in
connection with any such consolidation, merger, sale, transfer, or share
exchange, each holder of shares of Common Stock is entitled to elect to receive
securities, cash, or other assets upon completion of such transaction, the
Corporation shall provide or cause to be provided to each holder of Series B
Convertible Preferred Stock the right to elect the securities, cash, or other
assets into which the Series B Convertible Preferred Stock held by such holder
shall be convertible after completion of any such transaction on the same terms
and subject to the same conditions applicable to holders of the Common Stock
(including, without limitation, notice of the right to elect, limitations on the
period in which such election shall be made, and the effect of failing to
exercise the election). The Corporation shall not effect any such transaction
unless the provisions of this paragraph have been complied with. The above
provisions shall similarly apply to successive consolidations, mergers, sales,
transfers, or share exchanges.
(6) If a holder shall have given a Conversion Notice for shares
of Series B Convertible Preferred Stock, the Corporation shall issue and deliver
to such person certificates for the Common Stock issuable upon such conversion
within three Trading Days after such Conversion Notice is given and the person
converting shall be deemed to be the holder of record of the Common Stock
issuable upon such conversion, and all rights with respect to the shares
surrendered shall forthwith terminate except the right to receive the Common
Stock or other securities, cash, or other assets as herein provided. If a holder
shall have given a Conversion Notice as provided herein, the Corporation's
obligation to issue and deliver the certificates for Common Stock shall be
absolute and unconditional, irrespective of any action or inaction by the
converting holder to enforce the same, any waiver or consent with respect to any
provision thereof, the recovery of any judgment against any person or any action
to enforce the same, any failure or delay in the enforcement of any other
obligation of the Corporation to such holder, or any setoff, counterclaim,
recoupment, limitation or termination, or any breach or alleged breach by such
holder or any other person of any obligation to the Corporation or any violation
or alleged violation of law by such holder or any other person, and irrespective
of any other circumstance which might otherwise limit such obligation of the
Corporation to the holder in connection with such conversion. If the Corporation
fails to issue and deliver the certificates for the Common Stock to the holder
converting shares of Series B Convertible Preferred Stock pursuant to the first
sentence of this paragraph within three Trading Days after such Conversion
Notice is given, in addition to any other liabilities the Corporation may have
hereunder and under applicable law (1) the Corporation shall pay or reimburse
such holder on demand for all out-of-pocket expenses including, without
limitation, reasonable fees and expenses of legal counsel incurred by such
holder as a result of such failure, (2) for each Trading Day thereafter on which
the Corporation so fails to deliver such certificates, (x) the Conversion
Percentage used to determine the Conversion Price applicable to such conversion
shall be reduced by one percentage point from the Conversion Percentage
otherwise used to calculate the Conversion Price applicable to such conversion
or (y) if such conversion is based on the Ceiling Price, the Ceiling Price used
to
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determine the Conversion Price applicable to such conversion shall be reduced by
an amount equal to one percent of the amount that the Ceiling Price otherwise
would have been without reduction pursuant hereto, and (3) such holder may by
written notice (which may be given by mail, courier, personal service or
telephone line facsimile transmission) or oral notice (promptly confirmed in
writing) given at any time prior to delivery to such holder of the certificates
for the shares of Common Stock issuable upon such conversion of shares of Series
B Convertible Preferred Stock, rescind such conversion, whereupon such holder
shall have the right to convert such shares of Series B Convertible Preferred
Stock thereafter in accordance herewith.
(7) No fractional shares of Common Stock shall be issued upon
conversion of Series B Convertible Preferred Stock but, in lieu of any fraction
of a share of Common Stock to purchase fractional shares of Common Stock which
would otherwise be issuable in respect of the aggregate number of such shares
surrendered for conversion at one time by the same holder, the Corporation shall
pay in cash an amount equal to the product of (i) the arithmetic average of the
Market Price of one share of Common Stock on the three consecutive Trading Days
ending on the Trading Day immediately preceding the Conversion Date TIMES (ii)
such fraction of a share.
(8) The Conversion Amount shall be adjusted from time to time
under certain circumstances, subject to the provisions of Section 10(b)(1), as
follows:
(i) In case the Corporation shall issue rights or warrants on a
pro rata basis to all holders of the Common Stock entitling such holders to
subscribe for or purchase Common Stock on the record date referred to below at a
price per share less than the Current Price for such record date, then in each
such case the Conversion Amount in effect on such record date shall be adjusted
in accordance with the following formula:
C(1) = C x O + N
---------
O + N X P
-----
M
where
C(1) = the adjusted Conversion Amount
C = the current Conversion Amount
O = the number of shares of Common Stock outstanding on the
record date.
N = the number of additional shares of Common Stock issuable
pursuant to the exercise of such rights or warrants.
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P = the offering price per share of the additional shares
(which amount shall include amounts received by the
Corporation in respect of the issuance and the exercise of
such rights or warrants).
M = the Current Price per share of Common Stock on the record
date.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such rights or warrants. If
any or all such rights or warrants are not so issued or expire or terminate
before being exercised, the Conversion Amount then in effect shall be readjusted
appropriately.
(ii) In case the Corporation shall, by dividend or otherwise,
distribute to all holders of its Junior Stock (as hereinafter defined) evidences
of its indebtedness or assets (including securities, but excluding any warrants
or subscription rights referred to in subparagraph (i) above and any dividend or
distribution paid in cash out of the retained earnings of the Corporation), then
in each such case the Conversion Amount then in effect shall be adjusted in
accordance with the formula
M
C(1) = C x -----
M - F
where
C(1) = the adjusted Conversion Amount
C = the current Conversion Amount
M = the Current Price per share of Common Stock on the record
date mentioned below.
F = the aggregate amount of such cash dividend and/or the fair
market value on the record date of the assets or securities
to be distributed divided by the number of shares of Common
Stock outstanding on the record date. The Board of
Directors shall determine such fair market value, which
determination shall be conclusive.
Such adjustment shall become effective immediately after the record date for the
determination of stockholders entitled to receive such dividend or distribution.
For purposes of this subparagraph (ii), "Junior Stock" shall include any class
of capital stock ranking junior as to dividends or upon liquidation to the
Series B Convertible Preferred Stock.
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<PAGE>
(iii) All calculations hereunder shall be made to the nearest cent
or to the nearest 1/100 of a share, as the case may be.
(iv) If at any time as a result of an adjustment made pursuant to
Section 10(b)(5), the holder of any Series B Convertible Preferred Stock
thereafter surrendered for conversion shall become entitled to receive
securities, cash, or assets other than Common Stock, the number or amount of
such securities or property so receivable upon conversion shall be subject to
adjustment from time to time in a manner and on terms nearly equivalent as
practicable to the provisions with respect to the Common Stock contained in
subparagraphs (i) to (iii) above.
(9) Except as otherwise provided above in this Section 10, no
adjustment in the Conversion Amount shall be made in respect of any conversion
for share distributions or dividends theretofore declared and paid or payable on
the Common Stock.
(10) Whenever the Conversion Amount is adjusted as herein
provided, the Corporation shall send to each holder and each transfer agent, if
any, for the Series B Convertible Preferred Stock and the transfer agent for the
Common Stock, a statement signed by the Chairman of the Board, the President, or
any Vice President of the Corporation and by its Treasurer or its Secretary or
an Assistant Secretary stating the adjusted Conversion Amount determined as
provided in this Section 10, and any adjustment so evidenced, given in good
faith, shall be binding upon all stockholders and upon the Corporation. Whenever
the Conversion Amount is adjusted, the Corporation will give notice by mail to
the holders of record of Series B Convertible Preferred Stock, which notice
shall be made within 15 days after the effective date of such adjustment and
shall state the adjustment and the Conversion Amount. Notwithstanding the
foregoing notice provisions, failure by the Corporation to give such notice or a
defect in such notice shall not affect the binding nature of such corporate
action of the Corporation.
(11) Whenever the Corporation shall propose to take any of the
actions specified in Section 10(b)(5) or in subparagraphs (i) or (ii) of Section
10(b)(8) which would result in any adjustment in the Conversion Amount under
this Section 10(b), the Corporation shall cause a notice to be mailed at least
20 days prior to the date on which the books of the Corporation will close or on
which a record will be taken for such action, to the holders of record of the
outstanding Series B Convertible Preferred Stock on the date of such notice.
Such notice shall specify the action proposed to be taken by the Corporation and
the date as of which holders of record of the Common Stock shall participate in
any such actions or be entitled to exchange their Common Stock for securities or
other property, as the case may be. Failure by the Corporation to mail the
notice or any defect in such notice shall not affect the validity of the
transaction.
SECTION 11. REDEMPTION AT OPTION OF HOLDERS.
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(A) REDEMPTION RIGHT. If an Optional Redemption Event occurs,
then, in addition to any other right or remedy of any holder of shares of Series
B Convertible Preferred Stock, each holder of shares of Series B Convertible
Preferred Stock shall have the right, at such holder's option, to require the
Corporation to redeem all of such holder's shares of Series B Convertible
Preferred Stock, or any portion thereof, on the date that is three Business Days
after the date such holder gives the Corporation an Optional Redemption Notice
with respect to such Optional Redemption Event at any time while any of such
holder's shares of Series B Convertible Preferred Stock are outstanding, at a
price equal to the Optional Redemption Price.
(B) NOTICES; METHOD OF EXERCISING OPTIONAL REDEMPTION RIGHTS,
ETC. (1) On or before the fifth Business Day after the occurrence of an Optional
Redemption Event, the Corporation shall give to each holder of outstanding
shares of Series B Convertible Preferred Stock a notice of the occurrence of
such Optional Redemption Event and of the redemption right set forth herein
arising as a result thereof. Such notice from the Corporation shall set forth:
(i) the date by which the optional redemption right must be
exercised, and
(ii) a description of the procedure (set forth below) which each
such holder must follow to exercise such holder's optional redemption right.
No failure of the Corporation to give such notice or defect therein shall limit
the right of any holder of shares of Series B Convertible Preferred Stock to
exercise the optional redemption right or affect the validity of the proceedings
for the redemption of such holder's shares of Series B Convertible Preferred
Stock.
(2) To exercise its optional redemption right, each holder of
outstanding shares of Series B Convertible Preferred Stock shall deliver to the
Corporation on or before the 30th day after the notice required by Section
11(b)(1) is given to such holder (or if no such notice has been given by the
Corporation to such holder, within 40 days after such holder first learns of
such Optional Redemption Event) an Optional Redemption Notice to the
Corporation. An Optional Redemption Notice may be revoked by such holder giving
such Optional Redemption Notice by giving notice of such revocation to the
Corporation at any time prior to the time the Corporation pays the Optional
Redemption Price to such holder.
(3) If a holder of shares of Series B Convertible Preferred Stock
shall have given an Optional Redemption Notice, on the date which is three
Business Days after the date such Optional Redemption Notice is given (or such
later date as such holder surrenders such holder's certificates for the shares
of Series B Convertible Preferred Stock to be redeemed) the Corporation shall
make payment in immediately available funds of the
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<PAGE>
applicable Optional Redemption Price to such account as specified by such holder
in writing to the Corporation at least one Business Day prior to the applicable
redemption date.
(4) Notwithstanding any other provision of this Certificate of
Designations, if an Optional Redemption Event occurs by reason of the occurrence
of (x) an event described in clause (1), (2) or (5) of the definition of the
term Optional Redemption Event or (y) an Amendment Event, and such occurrence is
by reason of events which are not solely within the control of the Corporation,
the Corporation shall have the right to give a Control Notice to the holders of
shares of Series B Convertible Preferred Stock at any time after such Optional
Redemption Event occurs and prior to the earlier of (1) the date on which all
holders of shares of Series B Convertible Preferred Stock who had the right
(other than as limited by this Section 11(b)(4)) to require redemption of any
shares of Series B Convertible Preferred Stock by reason of the occurrence of
such Optional Redemption Event no longer have such right and (2) the applicable
redemption date by reason of the earliest Optional Redemption Notice given by
any holder of shares of Series B Convertible Preferred Stock by reason of such
Optional Redemption Event. If the Corporation timely gives such Control Notice
to the holders of shares of Series B Convertible Preferred Stock, then in lieu
of payment of the Optional Redemption Price by reason of any such Optional
Redemption Event and commencing on the first date on which such Optional
Redemption Event occurs the following adjustments shall take effect (subject to
the provisions of Section 7(a)(6)(B)):
(A) In the case of an Optional Redemption Event described in
clause (1) of the definition of the term Optional Redemption Event, for a period
of 180 days after the occurrence of such Optional Redemption Event the
Conversion Price will be 70% of the amount which the Conversion Price would
otherwise be.
(B) In the case of an Optional Redemption Event described in
clause (2) of the definition of the term Optional Redemption Event or in the
case of an Amendment Event, for so long as such Optional Redemption Event or
Amendment Event continues the Conversion Price will be 70% of the amount which
the Conversion Price would otherwise be.
(C) In the case of an Optional Redemption Event described in
clause (5) of the definition of the term Optional Redemption Event, for so long
as any shares of Preferred Stock are outstanding the Conversion Price will be
70% of the amount which the Conversion Price would otherwise be.
For purposes of this Section 11(b)(4), an Optional Redemption Event described in
clause (1), (2) or (5) of the definition of the term Optional Redemption Event
or an Amendment Event shall be deemed to have occurred by reason of events which
are not solely within the control of the Corporation if a requirement of the
Corporation to redeem, or a right of any holder of shares of Series B
Convertible Preferred Stock to require redemption of,
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<PAGE>
shares of Series B Convertible Preferred Stock by reason thereof would result in
the Corporation being required to classify the Series B Convertible Preferred
Stock as redeemable preferred stock on a balance sheet of the Corporation
prepared in accordance with Generally Accepted Accounting Principles and
Regulation S-X of the SEC, and, in the case of an Optional Redemption Event
described in clause (5) of the definition of the term Optional Redemption Event,
the Board or the stockholders of the Corporation do not have the right to
approve or disapprove the transactions resulting in such event.
(C) OTHER. (1) In connection with a redemption pursuant to this
Section 11 of less than all of the shares of Series B Convertible Preferred
Stock evidenced by a particular certificate, promptly, but in no event later
than three Business Days after surrender of such certificate to the Corporation,
the Corporation shall issue and deliver to such holder a replacement certificate
for the shares of Series B Convertible Preferred Stock evidenced by such
certificate which have not been redeemed.
(2) An Optional Redemption Notice given by a holder of shares of
Series B Convertible Preferred Stock shall be deemed for all purposes to be in
proper form unless the Corporation notifies such holder in writing within three
Business Days after such Optional Redemption Notice has been given (which notice
shall specify all defects in such Optional Redemption Notice), and any Optional
Redemption Notice containing any such defect shall nonetheless be effective on
the date given if such holder corrects all such defects within three Business
Days after receiving such notice from the Corporation. No such claim of error
shall limit or delay performance of the Corporation's obligation to redeem all
shares of Series B Convertible Preferred Stock not in dispute whether or not
such holder makes such undertaking.
SECTION 12. VOTING RIGHTS; CERTAIN RESTRICTIONS.
(A) VOTING RIGHTS. Except as otherwise required by law or
expressly provided herein, shares of Series B Convertible Preferred Stock shall
not be entitled to vote on any matter.
(B) CERTIFICATE OF INCORPORATION; CERTAIN STOCK. The affirmative
vote or consent of the Majority Holders, voting separately as a class, will be
required for (1) any amendment, alteration, or repeal, whether by merger or
consolidation or otherwise, of the Corporation's Certificate of Incorporation if
the amendment, alteration, or repeal materially and adversely affects the
powers, preferences, or special rights of the Series B Convertible Preferred
Stock, or (2) the creation and issuance of any Senior Dividend Stock or Senior
Liquidation Stock; PROVIDED, HOWEVER, that (A) any increase in the authorized
Preferred Stock or the authorized Common Stock of the Corporation, (B) the
creation and issuance of any stock which is both Junior Dividend Stock and
Junior Liquidation Stock or (C) the creation and original issuance of Preferred
Stock to Advantage Fund II Ltd., a British Virgin Islands corporation, or its
designees on terms similar to and which ranks pari passu with
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<PAGE>
the Series B Convertible Preferred Stock shall not be deemed to affect
materially and adversely such powers, preferences, or special rights and any
such increase or creation and issuance may be made without any such vote by the
holders of Series B Convertible Preferred Stock except as otherwise required by
law.
(C) REPURCHASES OF SERIES B CONVERTIBLE PREFERRED STOCK. The
Corporation shall not repurchase or otherwise acquire any shares of Series B
Convertible Preferred Stock (other than pursuant to Sections 7(a), 9(a), 9(b) or
11) unless the Corporation offers to repurchase or otherwise acquire
simultaneously a pro rata portion of each holder's shares of Series B
Convertible Preferred Stock for cash at the same price per share.
(D) OTHER. So long as any shares of Series B Convertible
Preferred Stock are outstanding:
(1) PAYMENT OF OBLIGATIONS. The Corporation will pay and
discharge, and will cause each subsidiary of the Corporation to pay and
discharge, when due all their respective obligations and liabilities which are
material to the Corporation and its subsidiaries taken as a whole, including,
without limitation, tax liabilities, except where the same may be contested in
good faith by appropriate proceedings.
(2) MAINTENANCE OF PROPERTY; INSURANCE. (A) The Corporation will
keep, and will cause each subsidiary of the Corporation to keep, all material
property useful and necessary in its business in good working order and
condition, ordinary wear and tear excepted.
(B) The Corporation will maintain, and will cause each subsidiary
of the Corporation to maintain, with financially sound and responsible insurance
companies, insurance against loss or damage by fire or other casualty and such
other insurance in such amounts and covering such risks as is reasonably
adequate for the conduct of their businesses and the value of their properties.
(3) CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE. The
Corporation will continue, and will cause each subsidiary of the Corporation to
continue, to engage in business of the same general type as conducted by the
Corporation and its operating subsidiaries at the time this Certificate of
Designations is filed with the Secretary of State of the State of Delaware, and
will preserve, renew and keep in full force and effect, and will cause each
subsidiary of the Corporation to preserve, renew and keep in full force and
effect, their respective corporate existence and their respective material
rights, privileges and franchises necessary or desirable in the normal conduct
of business; PROVIDED, HOWEVER, that this Section 12(d)(3) shall not prevent the
Corporation from merging, combining or transferring its operating subsidiaries
with, into or to the Corporation or any of its wholly-owned subsidiaries.
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(4) COMPLIANCE WITH LAWS. The Corporation will comply, and will
cause each subsidiary of the Corporation to comply, in all material respects
with all applicable laws, ordinances, rules, regulations, decisions, orders and
requirements of governmental authorities and courts (including, without
limitation, environmental laws) except (i) where compliance therewith is
contested in good faith by appropriate proceedings or (ii) where non-compliance
therewith could not reasonably be expected to have a material adverse effect on
the business, condition (financial or otherwise), operations, performance,
properties or prospects of the Corporation and its subsidiaries taken as a
whole.
(5) INVESTMENT COMPANY ACT. The Corporation will not be or become
an open-end investment trust, unit investment trust or face-amount certificate
company that is or is required to be registered under Section 8 of the
Investment Company Act of 1940, as amended, or any successor provision.
(6) TRANSACTIONS WITH AFFILIATES. The Corporation will not, and
will not permit any subsidiary of the Corporation, directly or indirectly, to
pay any funds to or for the account of, make any investment (whether by
acquisition of stock or indebtedness, by loan, advance, transfer of property,
guarantee or other agreement to pay, purchase or service, directly or
indirectly, any indebtedness, or otherwise) in, lease, sell, transfer or
otherwise dispose of any assets, tangible or intangible, to, or participate in,
or effect any transaction in connection with, any joint enterprise or other
joint arrangement with, any Affiliate of the Corporation, except, on terms to
the Corporation or such subsidiary no less favorable than terms that could be
obtained by the Corporation or such subsidiary from a person that is not an
Affiliate of the Corporation, as determined in good faith by the Board of
Directors.
SECTION 13. OUTSTANDING SHARES. For purposes of this Certificate of
Designations, all authorized and issued shares of Series B Convertible Preferred
Stock shall be deemed outstanding except (i) from the applicable Conversion
Date, each share of Series B Convertible Preferred Stock converted into Common
Stock, unless the Corporation shall default in its obligation to issue and
deliver shares of Common Stock upon such conversion as and when required by
Section 10 and such shares of Common Stock are not thereafter delivered to and
accepted by the holder of Series B Convertible Preferred Stock who had given the
applicable Conversion Notice; (ii) from the date of registration of transfer,
all shares of Series B Convertible Preferred Stock held of record by the
Corporation or any subsidiary or Affiliate of the Corporation (other than any
original holder of shares of Series B Convertible Preferred Stock) and (iii)
from the applicable Redemption Date, Share Limitation Redemption Date, Final
Redemption Date or date of redemption pursuant to Section 11, all shares of
Series B Convertible Preferred Stock which are redeemed or repurchased, so long
as in each case the Redemption Price, the Share Limitation Redemption Price, the
Final Redemption Price, the Optional Redemption Price or other repurchase price,
as the case may be, of such shares of Series B Convertible
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Preferred Stock shall have been paid by the Corporation together with any amount
due pursuant to Section 14(c).
SECTION 14. MISCELLANEOUS.
(A) NOTICES. Any notices required or permitted to be given under
the terms of this Certificate of Designations shall be in writing and shall be
delivered personally (which shall include telephone line facsimile transmission
with answer back confirmation) or by courier and shall be deemed given upon
receipt, if delivered personally or by courier (a) in the case of the
Corporation, addressed to the Corporation at 1099 18th Street, Suite 3000,
Denver, Colorado 80202, Attention: Chief Executive Officer (telephone line
facsimile transmission number (303) 672-0711), or (b) in the case of any holder
of shares of Series B Convertible Preferred Stock, at such holder's address or
telephone line facsimile transmission number shown on the stock books maintained
by the Corporation with respect to the Series B Convertible Preferred Stock or
such other address as the Corporation shall have provided by notice to the
holders of shares of Series B Convertible Preferred Stock in accordance with
this Section or any holder of shares of Series B Convertible Preferred Stock
shall have provided to the Corporation in accordance with this Section.
(B) REPLACEMENT OF CERTIFICATES. Upon receipt by the Corporation
of evidence reasonably satisfactory to the Corporation of the ownership of and
the loss, theft, destruction or mutilation of any certificate for shares of
Series B Convertible Preferred Stock and (1) in the case of loss, theft or
destruction, of indemnity from the record holder of the certificate for such
shares of Series B Convertible Preferred Stock reasonably satisfactory in form
to the Corporation (and without the requirement to post any bond or other
security) or (2) in the case of mutilation, upon surrender and cancellation of
the certificate for such shares of Series B Convertible Preferred Stock, the
Corporation will execute and deliver to such holder a new certificate for such
shares of Series B Convertible Preferred Stock without charge to such holder.
(C) OVERDUE AMOUNTS. Except as otherwise specifically provided in
Section 5 with respect to dividends in arrears on the Series B Convertible
Preferred Stock, whenever any amount which is due to any holder of shares of
Series B Convertible Preferred Stock is not paid to such holder when due, such
amount shall bear interest at the rate of 14% per annum (or such other rate as
shall be the maximum rate allowable by applicable law) until paid in full.
* * * * *
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IN WITNESS WHEREOF, Rocky Mountain Internet, Inc. has caused this
Certificate of Designations to be signed by ___________________________, its
_______________, as of the ___ day of December, 1998.
ROCKY MOUNTAIN INTERNET, INC.
By:
---------------------------
Title:
44
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS
Board of Directors
Rocky Mountain Internet, Inc.
Denver, Colorado
We hereby consent to the incorporation by reference in this Registration
Statement of Rocky Mountain Internet, Inc., on Form S-3, of our report
included in Form 10-KSB, dated February 27, 1998, with respect to the balance
sheets of Rocky Mountain Internet, Inc. as of December 31, 1997 and 1996, and
the related statements of income, stockholders' equity (deficit), and cash
flows for the years then ended. We also consent to the reference of us under
the heading "Experts" in Form 10-KSB.
BAIRD, KURTZ & DOBSON
Denver, Colorado
January 13, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET DATED SEPTEMBER 30, 1998 AND THE CONSOLIDATED
STATEMENT OF OPERATIONS FOR THE YEAR ENDED SEPTEMBER 30, 1998 FOR ROCKY MOUNTAIN
INTERNET, INC. AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 730,713
<SECURITIES> 0
<RECEIVABLES> 1,105,038
<ALLOWANCES> 205,248
<INVENTORY> 57,008
<CURRENT-ASSETS> 1,842,445
<PP&E> 4,853,733
<DEPRECIATION> 1,833,499
<TOTAL-ASSETS> 9,721,529
<CURRENT-LIABILITIES> 6,275,133
<BONDS> 0
0
0
<COMMON> 7,990
<OTHER-SE> 3,735,951
<TOTAL-LIABILITY-AND-EQUITY> 9,952,556
<SALES> 265,580
<TOTAL-REVENUES> 6,506,366
<CGS> 202,888
<TOTAL-COSTS> 2,121,663
<OTHER-EXPENSES> 7,146,339
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 232,494
<INCOME-PRETAX> (7,328,360)
<INCOME-TAX> 0
<INCOME-CONTINUING> (7,328,360)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (7,328,360)
<EPS-PRIMARY> (.99)
<EPS-DILUTED> (.99)
</TABLE>
