UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 OR 15(d) of The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): October 18, 1999
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Convergence Communications, Inc.
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(Exact name of registrant as specified in its charter)
Nevada 00-21143 87-0545056
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(State or other jurisdiction (Commission File (IRS Employer
of incorporation) Number) Identification No.)
102 West 500 South, Suite 320, Salt Lake City, Utah 84101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (801) 328-5618
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Wireless Cable & Communications, Inc.
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(Former name or former address, if changed since last report.)
<PAGE>
Item 5. Other Items.
On October 18, 1999, Convergence Communications, Inc. (the "Company")
closed the first portion of a $109.5 million private equity and credit facility
financing package with six accredited investors. At the closing, the Company
received $33 million in cash from the sale of 4,400,000 shares of its Series C
Convertible Preferred Stock (the "Series C Stock") to three of the six
accredited investors and exchanged approximately $15 million of debt it
previously issued to two of the accredited investors into 1,995,577 shares of
Series C Stock. Those five parties also acquired options to purchase 2,558,230
additional shares of Series C Stock (the "Options") and warrants to purchase
1,598,894 shares of Common Stock (the "Investor Warrants"), and the two existing
shareholders acquired additional warrants to purchase 520,000 shares of Common
Stock (the "FondElec/Internexus Warrants").
The parties under the stock purchase agreement (the "Agreement")
included Telematica EDC, C.A. ("Telematica"), TCW/CCI Holding LLC ("TCW"), the
International Finance Corporation ("IFC"), Glacier Latin-America, Ltd.
("Glacier"), and two existing shareholder entities, FondElec Essential Services
Growth Fund, L.P. ("FondElec"), and Internexus S.A. ("Internexus")
(collectively, the "Investors"). The IFC is a named party to the Agreement, but,
pursuant to a waiver by the other parties, did not join in the execution of the
Agreement at the first closing. The IFC has until November 19, 1999 to join in
the Agreement and fund its purchase obligations under it.
Telematica and TCW are obligated to purchase, for cash, an additional
2,666,666 shares of Series C Stock, Options for 1,066,666 shares of Series C
Stock and Investor Warrants for 666,666 shares of Common Stock for $20 million
at a second closing that will be held after the parties receive clearance under
the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR
Laws"). The parties expect clearance under the HSR Laws from the Department of
Justice and the Federal Trade Commission in early November 1999. The IFC is
obligated to purchase 666,666 shares of Series C Stock, and acquire an Option
for 266,666 shares of Series C Stock and an Investor Warrant for 166,666 shares
of Common Stock, for $5 million in cash if it joins in the execution of the
Agreement.
Assuming the consummation of all of the purchases under the Agreement,
the Investors will hold the following interests in the Company:
First Closing(1) Second Closing(1)
Investor Shares Percentage Shares(2) Percentage(2)
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Telematica 2,000,000 10.5% 3,333,333 14.9%
TCW 2,000,000 10.5% 3,333,333 14.9%
IFC -0- 0% 666,666 3.0%
Glacier 400,000 2.1% 400,000 1.8%
FondElec 3,395,681 17.8%(3) 3,395,681 15.2%(3)
Internexus 3,782,145 19.9%(4) 3,782,145 16.9%(4)
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(1) Assumes (i) the exercise by FondElec and Internexus of warrants to acquire,
respectively, 508,424 and 282,644 shares of Common Stock which were held by
those parties prior to October 18, 1999, but no exercise of any other warrants
or options held by other parties prior to October 18, 1999; (ii) no exercise of
the Option, Investor Warrants or FondElec/Internexus Warrants; and (iii) the
conversion of the outstanding shares of Series C Preferred Stock and Series B
Preferred Stock into shares of Common Stock on a voting basis.
(2) Reflects cumulative shareholder positions.
(3) Includes 2,220,591 shares of Common Stock held by FondElec prior to October
18, 1999 and assumes the exercise of warrants and options for 508,424 shares of
Common Stock. See Note (1) above. The shares FondElec received at the first
closing (666,666 shares) were obtained through the conversion of principal
amounts due FondElec under the Company's December 23, 1998 note in favor of
FondElec, in the original principal amount of $5 million.
(4) Includes 2,170,590 shares of Common Stock held by Internexus prior to
October 18, 1999 and assumes the exercise of warrants and options for 282,644
shares of Common Stock. See Note (1) above. The shares Internexus received at
the first closing (1,328,911 shares) were obtained through the conversion of the
principal and interest amounts due Internexus under the Company's December 23,
1998, June 12, 1999, September 3, 1999 and October 1, 1999 notes in favor of
Internexus, in the aggregate amount of $9,966,836.
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The Series C Stock, which is described in more detail below, is a
newly-designated series of the Company's preferred stock. The Options have a
term of nine (9) months, and may be exercised in whole or in part. The exercise
price for the Series C Stock under the Options is $7.50 per share. The Investor
Warrants and FondElec/Internexus Warrants, which are essentially identical, have
terms of four years, may be exercised only after the occurrence of a Disposition
Event, as described below, and give their holders the right to purchase shares
of Common Stock at an initial exercise price of $7.50 per share. That exercise
price is subject to downward adjustment based on the Company's financial
performance, as measured on the effective date of the Disposition Event that
triggers the right of exercise. The minimum exercise price for the Investor
Warrants and FondElec/Internexus Warrants is $.01 per share. The Company also
granted the Investors both demand and "piggyback" registration rights for any
shares of Common Stock they receive on the exercise of the Investor Warrants or
FondElec/Enternexus Warrants, or through the conversion of their Series C Stock
into Common Stock.
Under the terms of the Agreement, Telematica also agreed to invest, at
the second closing, $5.25 million dollars in Chispa Dos Inc. ("Chispa"), a
controlled subsidiary of the Company which conducts telecommunications
operations in El Salvador. Telematica will acquire approximately 32.64% of the
outstanding stock of Chispa in exchange for its investment, and Chispa will use
a portion of the proceeds of Telematica's investment ($3,864,529) to pay down
the principal and interest amounts outstanding under the promissory note Chispa
delivered to FondElec in April 1999 in the original principal amount of
$4,769,497. In connection with Telematica's investment in Chispa, the Company
will acquire additional shares in Chispa by contributing to capital
approximately $901,000 of the amounts Chispa owes it. Upon consummation of the
Chispa transactions, Chispa will be held approximately 32.64% by each of the
Company and Telematica, 27.87% by FondElec and 6.85% by third parties. Under the
terms of the shareholders' agreements for Chispa's operation, the Company will
maintain day-to-day control over Chispa's operations and will be entitled to
elect 50% of Chispa's directors.
Telematica also agreed to under the Agreement negotiate in good faith
with the Company the terms of a joint venture pursuant to which each of the
Company and Telematica will invest $5 million to conduct telecommunications
operations in the Republic of Colombia. The parties anticipate that the joint
venture will be structured in a manner which will provide the Company with
control of its day-to-day management operations. The letter of intent requires
the parties to enter into the definitive agreements for the joint venture by
February 15, 2000.
On October 18, 1999, Telematica also entered into a long-term $26
million credit facility with InterAmerican Net de Venezuela, S.A., the Company's
wholly-owned Venezuelan operating subsidiary ("InterAmerican"). In connection
with that transaction, Telematica agreed that it or its affiliates would also
enter into (i) a fiber optic lease agreement with InterAmerican (the "Lease
Agreement"), pursuant to which InterAmerican will lease a portion of
Telematica's existing fiber optic network in Caracas, Venezuela, and (ii) a
commercial services agreement (the "Commercial Services Agreement"), under which
Telematica's affiliate will provide billing, collection and other commercial
services to InterAmerican.
A portion of the $26 million credit facility, $7 million, will be paid
to InterAmerican in cash, and $19 million will be advanced to InterAmerican, as
required, for the purpose of paying InterAmerican's obligations under the Lease
Agreement and Commercial Services Agreement. Four million dollars ($4 million)
of the $19 million of in-kind payments will be allocated to lease payments under
the Lease Agreement, $12 million will be allocated to the payment of amounts
otherwise payable by InterAmerican for extensions to the fiber optic network
under the Lease Agreement, and the remaining approximately $3 million will be
allocated to the Commercial Services Agreement.
All outstanding amounts under the credit facility bear interest at a
rate of 3% per year. Interest will be capitalized during the first four (4)
years of the facility, and, thereafter, are payable in cash. The outstanding
principal and unpaid interest amounts under the facility are convertible into
shares of InterAmerican at the election of Telematica at any time after the
third anniversary of the facility, but Telematica can convert the amounts due
under the facility prior to the third anniversary of the facility if
InterAmerica defaults under the facility. Assuming the draw down of the entire
facility and no payment by InterAmerican of any of the advanced amounts, the
principal and interest advanced under the facility would be convertible into
shares representing 50% of the equity ownership of InterAmerican. The credit
facility also provides for a corresponding subscription right in favor of
Telematica, pursuant to which it may purchase 50% of the outstanding stock of
InterAmerican for $26 million. As InterAmerican draws on the credit facility,
the subscription obligation will be proportionately reduced. Any election by
Telematica to convert the amounts due under the facility into shares of
InterAmerican must be exercised with the subscription right.
The credit facility requires the parties to negotiate in good faith the
terms of the Commercial Services Agreement and Lease Agreement. The Company
anticipates the parties will complete those negotiations in early November 1999.
In connection with the execution of the Agreement, the Investors, the
Company and other parties (including Lance D'Ambrosio and Troy D'Ambrosio,
officers of the Company) executed a shareholders' agreement (the "Shareholders'
Agreement"). The Shareholders' Agreement provides, among other things, that the
shareholder parties to it may not transfer their securities of the Company
(other than to their affiliates) unless (i) all such parties, acting together,
transfer their Company securities for cash or publicly traded securities, or
(ii) there occurs a registered public offering of the Company's securities
meeting certain requirements (the "Disposition Events"). After a public offering
referred to in clause (ii), the parties may transfer their securities of the
Company, subject to rights of co-sale on the part of the other shareholder
parties to the Shareholders' Agreement, except in the case of transfers to
affiliates. The Shareholders' Agreement provides for a board of directors of
five members (to be expanded to ten members), and permits each of five groups of
shareholder parties to the Shareholders' Agreement to designate a director (two
directors after the expansion of the board to ten members), with all shareholder
parties agreeing to vote for such designees. Under the terms of the
Shareholders' Agreement, the board of directors of the Company will make all
decisions with respect to ordinary matters regarding the business and operations
of the Company by simple majority vote of the directors present at a meeting
duly called and convened. Certain actions by the Company, however, require the
vote of a designated director of any three of the groups, certain other actions
require the vote of a designated director of any four of the groups, and other
actions require the vote of a designated director from all five groups.
The Shareholders' Agreement also provides that, if any third party
offers to acquire all of the Company's equity held by the shareholder parties
for cash consideration at a price that will cause the shareholder parties to
obtain a specified rate of return on their investment, and three of the
shareholder parties who designate director nominees agree to enter into that
transaction, then all of the shareholder parties will be obligated to
participate in the transaction. The Shareholders' Agreement further provides for
purchase and sale options in favor of the Company and Telematica with respect to
any subsidiary of the Company in which Telematica holds (or has the right to
acquire) a 50% or greater interest. The options are triggered in the event of a
public offering of the Company that meets certain size requirements, a sale of
all or substantially all of the Company's assets, or the occurrence of certain
other fundamental corporate transactions.
To facilitate the Company's performance of its obligations under the
Agreement, on October 12, 1999, the Company's Board of Directors designated the
Series C Stock as a new series of the Company's authorized preferred stock. The
certificate designating the rights and preferences of the Series C Shares was
filed with the Nevada Secretary of State's Office on October 13, 1999 and
declared effective on October 14, 1999.
The Series C Stock consists of 14,250,000 shares of preferred stock,
par value $.001 per share, and has the following general rights and preferences:
- It votes with the outstanding shares of the Company's common stock
and Series B Preferred Stock (unless otherwise required by law), and has one
vote per share.
- It is convertible into shares of the Company's common stock,
initially on a one-for-one basis. The conversion ratio is subject to adjustment
for fundamental corporate transactions. Conversion is generally optional, but is
mandatory upon the occurrence of a Disposition Event.
- It has a liquidation preference which is superior to the Company's
common shares, but subordinate to the Company's Series B Preferred Stock. The
initial liquidation preference is $7.50 per share.
- It is not redeemable.
- Its holders are entitled to receive cash dividends or distributions
of property when, as and if declared by the Board of Directors. If the Company
declares a dividend or distribution on its Common Stock, it is required to pay a
dividend or distribution to the holders of the Series C Stock in an amount equal
to what they would have received had the holders converted their Series C Stock
into Common Stock.
- Its holders have a preemptive right to purchase their prorata share
of any new securities issued by the Company. The preemptive rights do not apply
to issuances of stock to management or employees, any merger or similar
transaction approved by the Board of Directors, to securities issued in a stock
split or dividend, or certain other transactions approved by the Board of
Directors. The preemptive rights terminate on the effective date of a public
offering meeting certain size requirements.
In connection with the first closing under the Agreement, Peter
Schiller, Troy D'Ambrosio and George Sorensen resigned from the Company's Board
of Directors, the Board of Directors set the number of the members of the Board
at five, and the Board of Directors appointed Messrs. Mario L. Baeza and
Norberto Corredor as members of the Board of Directors to fill the vacancies
left by Messrs. Shiller's, D'Ambrosio's and Sorenson's resignations. Messrs.
Baeza and Corredor were each appointed as members of the Company's Class II
directors. Mr. Baeza is the Chief Executive Officer and Chairman of TCW/Latin
America Partners, LLC, an affiliate of TCW which is an investment fund
specializing in businesses in emerging growth countries. Mr. Corredor is the
Manager of the Department of Telecommunications and Automation Services for a
Venezuelan utility company that is an affiliate of Telematica.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired. N/A
(b) Pro Forma Financial Information. N/A
(c) Exhibits. The following exhibit is included in this filing in
accordance with the provisions of Item 601 of Regulation S-K:
4.3 Certificate Establishing and Designating the Rights,
Preference and Restrictions of Shares of Series C
Convertible Preferred Stock of Convergence Communications,
Inc.
CONVERGENCE COMMUNICATIONS, INC.
/s/ Jerry Slovinski
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By: Jerry Slovinski, Chief Financial Officer
Dated: November 2, 1999
CERTIFICATE ESTABLISHING AND DESIGNATING
THE RIGHTS, PREFERENCE AND RESTRICTIONS OF SHARES OF
SERIES C CONVERTIBLE PREFERRED STOCK OF
CONVERGENCE COMMUNICATIONS, INC.
We, TROY D'AMBROSIO, Vice President, and ANTHONY SANSONE, Secretary, of
Convergence Communications, Inc. (the "Corporation"), a corporation organized
and existing under the General Corporation Laws of the State of Nevada, in
accordance with the provisions of Seciton 78.195 of the Nevada Revised Statutes,
DO HEREBY CERTIFY:
That, in accordance with the authority expressly vested in the Board of
Directors of the Corporation, the Board of Directors, at a meeting duly held and
convened on October 12, 1999, adopted, fixed and determined the voting rights,
designations, preferences, qualifications, privileges, limitations,
restrictions, options and other special or relative rights of a series of the
Corporation's preferred stock ("Preferred Stock"), hereinafter designated as the
"Series C Convertible Preferred Stock," consisting of 14,250,000 shares of the
Corporation's 15,000,000 shares of authorized Preferred Stock, by adopting the
following resolution:
RESOLVED, that pursuant to the authority expressly vested in
the Board of Directors of the Corporation and pursuant to the
provisions of the General Corporation Law, the Board of
Directors hereby fixes and determines the relative voting
rights, designations, preferences, qualifications, privileges,
limitations, restrictions and other special or relative rights
of the Series C Convertible Preferred Stock, which shall
consist of 14,250,000 shares of the Corporation's preferred
stock (the "Series C Preferred Stock"), as follows:
1. Voting Rights. Each share of Series C Preferred Stock shall entitle
the holder thereof the right to cast one vote on every matter duly brought
before the holders of shares of common stock, $.001 par value, of the
Corporation ("Common Stock"). Except as otherwise provided by law, the holders
of Series C Preferred Stock, the holders of Series B Preferred Stock and the
holders of Common Stock shall vote together as one class on all matters
submitted to a vote of shareholders of the Corporation.
2. Retired Shares. Any Series C Preferred Stock purchased or otherwise
acquired by the Corporation in any manner whatsoever (including by reason of the
conversion of such Series C Preferred Stock into shares of Common Stock) shall
be retired and canceled promptly after the acquisition thereof. All such shares
shall, upon their cancellation, become authorized but unissued preferred stock
and may be reissued as part of a new series of Preferred Stock to be created by
resolution or resolutions of the Board of Directors.
3. Liquidation, Dissolution or Winding Up.
(a) Upon a Liquidation Event (as hereinafter defined), the holders
of the shares of Series C Preferred Stock shall be entitled, before any
distribution or payment is made upon any Common Stock or any other class or
series of stock ranking junior to the Series C Preferred Stock as to
distribution of assets upon liquidation, to be paid an amount equal to the
greater of (A) the sum of (i) $7.50 per share (as adjusted for Reclassification
Events (as hereinafter defined)) and (ii) all accrued and unpaid dividends to
such date and (B) the amount which would be received if all shares of Series C
Preferred Stock had been converted to Common Stock prior to such Liquidation
Event (collectively, the "Liquidation Payments"). A "Liquidation Event" means
the liquidation, dissolution or winding up of the Corporation, whether voluntary
or involuntary. If upon any Liquidation Event the remaining assets of the
Corporation available for distribution to its stockholders shall be insufficient
to pay the holders of shares of Series C Preferred Stock the full amount to
which they shall be entitled, the holders of shares of Series C Preferred Stock
and any class or series of stock ranking upon a Liquidation Event on a parity
with the Series C Preferred Stock shall share ratably in the distribution of the
entire remaining assets and funds of the Corporation legally available for
distribution in proportion to the respective amounts which would otherwise be
payable in respect of such shares held by them upon such distribution if all
amounts payable on or with respect to such shares were paid in full.
(b) Upon any Liquidation Event, after the holders of Series C
Preferred Stock shall have been paid in full the Liquidation Payments, the
remaining assets of the Corporation may be distributed ratably per share in
order of preference to the holders of Common Stock and any other class or series
of stock ranking junior to the Series C Preferred Stock as to distribution of
assets upon liquidation.
(c) Written notice of a Liquidation Event, stating a payment date,
the amount of the Liquidation Payments and the place where said Liquidation
Payments shall be payable, shall be given by mail, postage prepaid, not less
than thirty (30) days prior to the payment date stated therein, to each holder
of record of Series C Preferred Stock at his post office address as shown by the
records of the Corporation.
4. Redemption. The Series C Preferred Stock shall not be redeemable.
5. Conversion. The holders of the Series C Preferred Stock shall have
the following conversion rights:
(a) Mandatory Conversion. Each share of Series C Preferred Stock
shall be converted automatically into fully paid and nonassessable shares of
Common Stock at the "conversion rate" (as defined in paragraph (c) below) in
effect immediately preceding the occurrence of either of the following events:
(i) all of the holders of the outstanding Series C Preferred
Stock, acting together, transfer their equity securities (including their Series
C Preferred Stock and any options, warrants or other rights they may hold to
acquire the Corporation's equity securities) for cash consideration or for
securities of another entity that are registered and are freely tradable
pursuant to a registration statement filed with and declared effective by the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "Act"), and where the class of securities so registered are listed or
admitted for trading on the New York Stock Exchange, the American Stock Exchange
or the National Association of Securities Dealers Automated Quotation System
National Market (each a "Recognized Exchange"); or
(ii) the effective date of a registration statement for an
underwritten registered public offering of the Corporation's securities under
the Act, pursuant to which the class of the shares so registered is approved for
listing on a Recognized Exchange, the Corporation receives net proceeds from the
offering of not less than $75 million, and the offering is managed by a lead
underwriter of international standing (a "Qualified Public Offering").
(b) Optional Conversion. Each share of Series C Preferred Stock
shall be convertible at any time, at the option of the holder of record thereof,
into fully paid and nonassessable shares of Common Stock at the conversion rate
then in effect upon notice of conversion and surrender to the Corporation or its
transfer agent of the certificate or certificates representing the Series C
Preferred Stock to be converted, as provided below, or if the holder notifies
the Corporation or its transfer agent that such certificate or certificates have
been lost, stolen or destroyed, upon the execution and delivery of an agreement
satisfactory to the Corporation to indemnify the Corporation from any losses
incurred by it in connection therewith.
(c) Basis For Conversion; Converted Shares. The basis for any
conversion under this Section 5 shall be the "conversion rate" in effect at the
time of conversion (for mandatory conversions under the provisions of (a)
above), or at the time of notice and surrender (for optional conversions under
the provisions of (b) above), which for the purposes hereof shall mean the
number of shares of Common Stock issuable for each share of Series C Preferred
Stock surrendered for conversion under this Section 5 based on the conversion
price then in effect. The conversion price shall be $7.50 per share of Common
Stock, as adjusted pursuant hereto, and the conversion rate shall be $7.50
divided by the conversion price then in effect. If any fractional interest in a
share of Common Stock would be deliverable upon conversion of Series C Preferred
Stock, the Corporation shall pay in lieu of such fractional share an amount in
cash equal to the conversion price in effect at the close of business on the
date of conversion multiplied by such fractional share (computed to the nearest
one hundredth of a share). Any shares of Series C Preferred Stock which have
been converted shall be canceled and any dividends on converted shares shall
cease to accrue, and the certificates representing shares of Series C Preferred
Stock so converted shall represent only the right to receive (i) such number of
shares of Common Stock into which such shares of Series C Preferred Stock are
convertible, plus (ii) cash payable for any fractional share plus (iii) any
accrued but unpaid dividends relating to such shares through the immediately
preceding dividend payment date. Upon the conversion of shares of Series C
Preferred Stock as provided in this Section 5, the Corporation shall promptly
pay all then accrued but unpaid dividends to the holder of the Series C
Preferred Stock being converted. The Board of Directors of the Corporation shall
at all times reserve a sufficient number of authorized but unissued shares of
Common Stock to be issued in satisfaction of the conversion rights and
privileges aforesaid.
(d) Mechanics of Conversion. In the case of any mandatory
conversion, the Series C Preferred Stock shall automatically, and without
further action by the holder thereof, convert into shares of Common Stock and,
upon surrender of the certificate or certificates therefor at the office of the
Corporation or its transfer agent for the Series C Preferred Stock, the
Corporation shall, as soon as practicable thereafter, issue and deliver to such
holder, or to the nominees or nominee of such holder, a certificate or
certificates for the number of shares of Common Stock to which such holder shall
be entitled as aforesaid. In the case of an optional conversion, before any
holder of Series C Preferred Stock shall be entitled to convert the same into
shares of Common Stock, it shall surrender the certificate or certificates
therefor, duly endorsed, at the office of the Corporation or its transfer agent
for the Series C Preferred Stock, shall give written notice to the Corporation
of the election to convert the same and shall state therein the name or names in
which the certificate or certificates for shares of Common Stock are to be
issued and, upon the Corporation's receipt of such certificates, election to
convert and information regarding the names in which the shares of Common Stock
are to be issued, such shares of Series C Preferred Stock shall be deemed
converted. The Corporation shall, as soon as practicable thereafter, issue and
deliver to such holder of Series C Preferred Stock, or to the nominee or
nominees of such holder, a certificate or certificates for the number of shares
of Common Stock to which such holder shall be entitled as aforesaid. A
certificate or certificates will be issued for the remaining shares of Series C
Preferred Stock in any case in which fewer than all of the shares of Series C
Preferred Stock represented by a certificate are converted. Upon any conversion
of Series C Preferred Stock into Common Stock, all declared but unpaid cash
dividends on the converted Series C Preferred Stock shall be paid in cash.
(e) Issue Taxes. The Corporation shall pay all issue taxes, if
any, incurred in respect of the issue of shares of Common Stock on conversion.
If a holder of shares surrendered for conversion specifies that the shares of
Common Stock to be issued on conversion are to be issued in a name or names
other than the name or names in which such surrendered shares stand, the
Corporation shall not be required to pay any transfer or other taxes incurred by
reason of the issuance of such shares of Common Stock to the name of another,
and if the appropriate transfer taxes shall not have been paid to the
Corporation or the transfer agent for the Series C Preferred Stock at the time
of surrender of the shares involved, the shares of Common Stock issued upon
conversion thereof may be registered in the name or names in which the
surrendered shares were registered, despite the instructions to the contrary.
6. Adjustment of Conversion Price and Conversion Rate. The conversion
price and the conversion rate shall be subject to adjustment from time to time
in accordance with the following provisions:
(a) Certain Definitions. For purposes of this Certificate:
(i) The term "Additional Shares of Common Stock" shall mean
all shares of Common Stock issued, or deemed to be issued by the Corporation
pursuant to paragraph (g) of this Section 6, after the Original Issue Date, as
defined below, except:
(A) shares of Common Stock issuable upon conversion of,
or distributions with respect to, the Series B Preferred Stock or Series C
Preferred Stock now or hereafter issued by the Corporation, or pursuant to the
terms of any options or warrants to acquire Common Stock or Series C Preferred
Stock to be delivered in connection with the Corporation's anticipated sale of
shares of its Series C Preferred Stock, an option to acquire additional shares
of Series C Preferred Stock and warrants to purchase shares of Common Stock
under the terms of that certain proposed Participation Agreement among the
Corporation and certain accredited investors (the "Participation Agreement");
and
(B) shares of Common Stock issuable upon the exercise of
any options or warrants outstanding or approved by the Board of Directors prior
to the Original Issue Date; and
(C) the grant of options either prior to or after the
Original Issue Date to officers, directors, employees and agents to purchase up
to an aggregate of 10% of the shares of Common Stock outstanding, as determined
on the basis of the assumed exercise of all outstanding warrants and options and
the conversion of all Preferred Stock of the Corporation into Common Stock.
(ii) The term "Convertible Securities" shall mean any
evidence of indebtedness, shares (other than Series C Preferred Stock) or other
securities convertible into or exchangeable for Common Stock.
(iii) The term "Fair Market Price" shall mean with respect to
a share of CommonStock, (a) if the shares are listed or admitted for trading on
any Recognized Exchange, the last reported sales price as reported on such
exchange or market; (b) if the shares are not listed or admitted for trading on
any Recognized Exchange, the average of the last reported closing bid and asked
quotation for the shares as reported on NASDAQ or a similar service if NASDAQ is
not reporting such information; (c) if the shares are not listed or admitted for
trading on any national securities exchange or included in The Nasdaq National
Market or Nasdaq SmallCap Market or quoted by NASDAQ or a similar service, the
average of the last reported bid and asked quotation for the shares as quoted by
a market maker in the shares (or if there is more than one market maker, the bid
and asked quotation shall be obtained from two market makers and the average of
the lowest bid and highest asked quotation). In the absence of any available
public quotations for the Common Stock, the Board of Directors of the
Corporation shall determine in good faith the fair value of the Common Stock,
which determination shall be set forth in a certificate by the Secretary of the
Corporation, and such fair value shall be deemed the Fair Market Price.
(iv) The term "Options" shall mean rights, options or
warrants to subscribe for, purchase or otherwise acquire Common Stock or
Convertible Securities.
(v) The term "Original Issue Date" shall mean the Subsequent
Closing Date, as thatterm is defined in the Participation Agreement or, if the
Participation Agreement is not executed by the parties thereto or is executed by
the parties thereto but no Subsequent Closing (as defined in the Participation
Agreement) takes place, the date of the initial issuance of any Series C
Preferred Stock.
(b) Reorganization, Reclassification. In the event of a
reorganization, share exchange or reclassification (other than a change in par
value, or from par value to no par value, or from no par value to par value, or
a transaction described in subsection (c) or (d) below), each share of Series C
Preferred Stock shall, after such reorganization, share exchange or
reclassification (a "Reclassification Event"), be convertible at the option of
the holder into the kind and number of shares of stock or other securities or
other property of the Corporation which the holder of Series C Preferred Stock
would have been entitled to receive if the holder had held the Common Stock
issuable upon conversion of such share of Series C Preferred Stock immediately
prior to such reorganization, share exchange or reclassification.
(c) Consolidation, Merger. In the event of a merger or
consolidation to which the Corporation is a party and pursuant to which the
rights of preferences of the holders of the Series C Preferred Stock are reduced
or such parties' ownership interests in the Corporation relative to one another
are changed, each share of Series C Preferred Stock shall, after such merger or
consolidation, be converted into the kind and number of shares of stock and/or
other securities, cash or other property which the holder of such share of
Series C Preferred Stock would have been entitled to receive if the holder had
held the Common Stock issuable upon conversion of such share of Series C
Preferred Stock immediately prior to such consolidation or merger.
(d) Subdivision or Combination of Shares. In case outstanding
shares of Common Stock shall be subdivided, the conversion price shall be
proportionately reduced as of the effective date of such subdivision, or as of
the date a record is taken of the holders of Common Stock for the purpose of so
subdividing, whichever is earlier. In case outstanding shares of Common Stock
shall be combined, the conversion price shall be proportionately increased as of
the effective date of such combination, or as of the date a record is taken of
the holders of Common Stock for the purpose of so combining, whichever is
earlier.
(e) Stock Dividends. In case shares of Common Stock are issued as
a dividend or other distribution on the Common Stock (or such dividend is
declared), then the conversion price shall be adjusted, as of the date a record
is taken of the holders of Common Stock for the purpose of receiving such
dividend or other distribution (or if no such record is taken, as of the
earliest of the date of such declaration, payment or other distribution), to
that price determined by multiplying the conversion price in effect immediately
prior to such declaration, payment or other distribution by a fraction (i) the
numerator of which shall be the number of shares of Common Stock outstanding
immediately prior to the declaration or payment of such dividend or other
distribution, and (ii) the denominator of which shall be the total number of
shares of Common Stock outstanding immediately after the declaration or payment
of such dividend or other distribution. In the event that the Corporation shall
declare or pay any dividend on the Common Stock payable in any right to acquire
Common Stock for no consideration, then the Corporation shall be deemed to have
made a dividend payable in Common Stock in an amount of shares equal to the
maximum number of shares issuable upon exercise of such rights to acquire Common
Stock.
(f) Issuance of Additional Shares of Common Stock. If the
Corporation shall issue any Additional Shares of Common Stock (including
Additional Shares of Common Stock to be issued pursuant to paragraph (g) below)
after the Original Issue Date (other than as provided in the foregoing
subsections (b) through (e)), for no consideration or for a consideration per
share less than the greater of (i) the Fair Market Price in effect on the date
of and immediately prior to such issue or (ii) the conversion price in effect on
the date of and immediately prior to such issue (such applicable consideration
per share being the "Applicable Price"), then in such event, the conversion
price shall be reduced, concurrently with such issue, to a price equal to the
prior conversion price multiplied by the quotient obtained by dividing (A) an
amount equal to (x) the total number of shares of Common Stock outstanding
immediately prior to such issuance or sale multiplied by the conversion price in
effect immediately prior to such issuance or sale, plus (y) the number of
Additional Shares of Common Stock deemed issued for the aggregate consideration
received or deemed to be received by the Corporation upon such issuance or sale
based on the Applicable Price, by (B) the total number of shares of Common Stock
outstanding immediately after such issuance or sale.
For purposes of the formulas expressed in paragraph 6(e) and 6(f), all
shares of Common Stock issuable upon the exercise of outstanding Options or
issuable upon the conversion of the Series C Preferred Stock or outstanding
Convertible Securities (including Convertible Securities issued upon the
exercise of outstanding Options), shall be deemed outstanding shares of Common
Stock both immediately before and after such issuance or sale.
(g) Deemed Issue of Additional Shares of Common Stock. In the
event the Corporation at any time or from time to time after the Original Issue
Date shall issue any Options or Convertible Securities or shall fix a record
date for the determination of holders of any class of securities then entitled
to receive any such Options or Convertible Securities, then the maximum number
of shares (as set forth in the instrument relating thereto without regard to any
provisions contained therein designed to protect against dilution) of Common
Stock issuable upon the exercise of such Options, or, in the case of Convertible
Securities and Options therefor, the conversion or exchange of such Convertible
Securities, shall be deemed to be Additional Shares of Common Stock issued as of
the time of such issue of Options or Convertible Securities or, in case such a
record date shall have been fixed, as of the close of business on such record
date for the consideration determined pursuant to paragraph 6(h)(ii), provided
that in any such case in which Additional Shares of Common Stock are deemed to
be issued:
(i) no further adjustments in the conversion price shall be
made upon the subsequent issue of Convertible Securities or shares of Common
Stock upon the exercise of such Options or the issue of Common Stock upon the
conversion or exchange of such Convertible Securities;
(ii) if such Options or Convertible Securities by their terms
provide, with the passage of time or otherwise, for any increase or decrease in
the consideration payable to the Corporation, or increase or decrease in the
number of shares of Common Stock issuable, upon the exercise, conversion or
exchange thereof, the conversion price computed upon the original issuance of
such Options or Convertible Securities (or upon the occurrence of a record date
with respect thereto), and any subsequent adjustments based thereon, upon any
such increase or decrease becoming effective, shall be recomputed to reflect
such increase or decrease insofar as it affects such Options or the rights of
conversion or exchange under such Convertible Securities (provided, however,
that no such adjustment of the conversion price shall affect Common Stock
previously issued upon conversion of the Series C Preferred Stock);
(iii) upon the expiration of any such Options or any rights
of conversion or exchange under such Convertible Securities which shall not have
been exercised, the conversion price computed upon the original issue of such
Options or Convertible Securities (or upon the occurrence of a record date with
respect thereto), and any subsequent adjustments based thereon, shall, upon such
expiration, be recomputed as if:
(A) in the case of Options or Convertible Securities,
the only Additional Shares of Common Stock issued were the shares of Common
Stock, if any, actually issued upon the exercise of such Options or the
conversion or exchange of such Convertible Securities and the consideration
received therefor was the consideration actually received by the Corporation (x)
for the issue of all such Options, whether or not exercised, plus the
consideration actually received by the Corporation upon exercise of the Options
or (y) for the issue of all such Convertible Securities which were actually
converted or exchanged plus the additional consideration, if any, actually
received by the Corporation upon the conversion or exchange of the Convertible
Securities; and
(B) in the case of Options for Convertible Securities,
only the Convertible Securities, if any, actually issued upon the exercise
thereof were issued at the time of issue of such Options, and the consideration
received by the Corporation for the Additional Shares of Common Stock deemed to
have been then issued was the consideration actually received by the Corporation
for the issue of all such Options, whether or not exercised, plus the
consideration deemed to have been received by the Corporation upon the issue of
the Convertible Securities with respect to which such Options were actually
exercised.
(iv) No readjustment pursuant to clause (ii) or (iii) above
shall have the effect of increasing the conversion price to an amount which
exceeds the lower of (x) the conversion price on the original adjustment date or
(y) the conversion price that resulted from any issuance or deemed issuance of
Additional Shares of Common Stock between the original adjustment date and such
readjustment date.
(v) In the case of any Options which expire by their terms
not more than 30 days after the date of issue thereof, no adjustment of the
conversion price shall be made until the expiration or exercise of all such
Options, whereupon such adjustment shall be made in the same manner provided in
clause (iii) above.
(h) Determination of Consideration. For purposes of this Section
6, the consideration received by the Corporation for the issue of any Additional
Shares of Common Stock shall be computed as follows:
(i) Cash and Property. Such consideration shall:
(A) insofar as it consists of cash, be the aggregate
amount of cash received by the Corporation; and
(B) insofar as it consists of property other than cash,
be computed at the fair value thereof at the time of the issue, as determined by
the vote of 66-2/3% of the Corporation's Board of Directors or if the Board of
Directors cannot reach such agreement, by a qualified independent public
accounting firm, other than the accounting firm then engaged as the
Corporation's independent auditors, agreed upon by the Corporation on the one
hand and the holders of 66-2/3% of the outstanding shares of Series C Preferred
Stock on the other hand.
(ii) Options and Convertible Securities. The consideration
per share received by the Corporation for Additional Shares of Common Stock
deemed to have been issued pursuant to paragraph (g) above, relating to Options
and Convertible Securities shall be determined by dividing:
(A) the total amount, if any, received or receivable by
the Corporation as consideration for the issue of such Options or Convertible
Securities, plus the minimum aggregate amount of additional consideration (as
set forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) payable to the
Corporation upon the exercise of such Options or the conversion or exchange of
such Convertible Securities, or in the case of Options for Convertible
Securities, the exercise of such Options for Convertible Securities and the
conversion or exchange of such Convertible Securities by
(B) the maximum number of shares of Common Stock (as set
forth in the instruments relating thereto, without regard to any provision
contained therein designed to protect against dilution) issuable upon the
exercise of such Options or conversion or exchange of such Convertible
Securities.
(i) Other Provisions Applicable to Adjustment Under this Section.
The following provisions will be applicable to the adjustments in conversion
price and conversion rate as provided in this Section 6:
(i) Treasury Shares. The number of shares of Common Stock at
any time outstanding shall not include any shares thereof then directly or
indirectly owned or held by or for the account of the Corporation or any shares
or securities subject to purchase or acquisition by the Corporation pursuant to
any executory contract of purchase.
(ii) Other Action Affecting Common Stock. In case the
Corporation shall take any action affecting the outstanding number of shares of
Common Stock other than an action described in any of the foregoing subsections
6(b) to 6(g) hereof, inclusive, which would have an inequitable effect on the
holders of Series C Preferred Stock, the conversion price shall be adjusted in
such manner and at such time as the Board of Directors of the Corporation on the
advice of the Corporation's independent public accountants may in good faith
determine to be equitable in the circumstances.
(iii) Minimum Adjustment. No adjustment of the conversion
price shall be made if the amount of any such adjustment would be an amount less
than one percent (1%) of the conversion price then in effect, but any such
amount shall be carried forward and an adjustment with respect thereof shall be
made at the time of and together with any subsequent adjustment which, together
with such amount and any other amount or amounts so carried forward, shall
aggregate an increase or decrease of one percent (1%) or more.
(iv) Certain Adjustments. The conversion price shall not be
adjusted upward except in the case of a combination of the outstanding shares of
Common Stock into a smaller number of shares of Common Stock, or in the event of
a readjustment of the conversion price pursuant to Section 6(g)(ii) or (iii).
(j) Notices of Adjustments. Whenever the conversion rate and
conversion price is adjusted as herein provided, an officer of the Corporation
shall compute the adjusted conversion rate and conversion price in accordance
with the foregoing provisions and shall prepare a written certificate setting
forth such adjusted conversion rate and conversion price and showing in detail
the facts upon which such adjustment is based, and such written instrument shall
promptly be delivered to the record holders of the Series C Preferred Stock.
7. Ranking. The Series C Preferred Stock shall rank prior to the Common
Stock and all other classes or series of the Preferred Stock other than the
Series B Preferred Stock authorized by the Corporation's Board of Directors and
established pursuant to a filing with the Nevada Secretary of State's office on
August 18, 1997.
8. Fractional Shares. Series C Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion of such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of the
holders of Series C Preferred Stock.
9. Dividends and Distributions. The holders of Series C Preferred Stock
shall be entitled to receive cash dividends and other distributions of cash or
property when, as and if declared by the Board of Directors out of funds legally
available for such purposes. If at any time the Corporation declares any such
dividend or other distribution on its Common Stock and there are shares of its
Series C Preferred Stock issued and outstanding, then a dividend or other
distribution shall also be declared on the Series C Preferred Stock, payable at
the same time and on the same terms and conditions, entitling each holder of
Series C Preferred Stock to receive the dividend or distribution such holder
would have received had such holder converted the Series C Preferred Stock as of
the record date for determining stockholders entitled to receive such dividend
or distribution.
10. Information Rights. From and after the date hereof until such time
as the Series C Preferred Stock has been converted into shares of Common Stock,
the Corporation will furnish to holders of Series C Preferred Stock copies of
the following financial statements, reports and information:
(a) a copy of the Corporation's consolidated annual report
(including audited balance sheets, statements of operations, statements of
stockholders' equity and statements of cash flow) for the Corporation and each
subsidiary of the Corporation for such fiscal year, prepared in accordance with
generally accepted accounting principles ("GAAP") consistent with the preceding
year, certified by the Corporation's independent public accountants. During such
period as the Corporation is subject to the periodic reporting requirements of
either Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended,
such report and financial statements shall be delivered to the holders of Series
C Preferred Stock at such time as the Corporation files with the Securities and
Exchange Commission its annual report on Form 10-K or 10-KSB (but in no event
later than 105 days after the end of each fiscal year of the Corporation).
During such period as the Corporation is not subject to the periodic reporting
requirements of either Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, such report and financial statements shall be delivered to the
holders of Series C Preferred Stock as soon as available and in any event within
90 days after the end of each fiscal year of the Corporation.
(b) a consolidated balance sheet, statement of operations and
statement of cash flow for the Corporation and its subsidiaries, as of the end
of, and for, each such quarter, prepared in accordance with GAAP consistently
applied (subject to the absence of notes and to customary and reasonable
year-end adjustments), certified by the Corporation's chief financial officer as
fairly and accurately representing the financial condition of the Corporation
and its subsidiaries as of the end of, and for, the period covered thereby.
During such period as the Corporation is subject to the periodic reporting
requirements of either Section 13 or 15(d) of the Securities Exchange Act of
1934, as amended, such report and financial statements shall be delivered to the
holders of Series C Preferred Stock at such time as the Corporation files with
the Securities and Exchange Commission its quarterly report on Form 10-Q or
10-QSB (but in no event later than 60 days after the end of each fiscal quarter
of the Corporation. During such period as the Corporation is not subject to the
periodic reporting requirements of either Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, such report and financial statements shall be
delivered to the holders of Series C Preferred Stock as soon as available and in
any event within 45 days after the end of each fiscal quarter of the
Corporation; and
(c) such other information with respect to the financial condition
and operations of the Corporation and its subsidiaries and affiliates as the
holders of Series C Preferred Stock may reasonably request or as the Corporation
may be required to provide the holders of the Common Stock under the Nevada
General Corporation Laws.
11. Preemptive Rights.
(a) Subsequent Offerings. Each of the holders of Series C
Preferred Stock shall have a right to purchase its pro rata share on a
fully-diluted basis of all Equity Securities that the Corporation may, from time
to time, propose to sell and issue after the Original Issue Date, other than the
Equity Securities excluded by Section 11(f) hereof. Each such holder's "pro rata
share on a fully-diluted basis" for purposes of this Section shall be defined as
the ratio of (A) the number of outstanding shares of Common Stock (based on the
shares of Common Stock issued or issuable upon conversion of all outstanding
shares of Series C Preferred Stock into shares of Common Stock or upon the
exercise of any outstanding options and warrants for the purchase or acquisition
of Series C Preferred Stock) of which such holder of Series C Preferred Stock is
deemed to be a holder immediately prior to the issuance of such Equity
Securities to (B) the total number of outstanding shares of Common Stock
(including all shares of Common Stock issued or issuable upon conversion of
outstanding shares of Preferred Stock into shares of Common Stock or upon the
exercise of any outstanding options and warrants to acquire Common Stock
immediately prior to the issuance of the Equity Securities. As used herein,
"Equity Security" shall mean any equity security of the Corporation, including,
but not limited to (i) any shares of Common Stock or shares of Preferred Stock,
(ii) any security convertible, with or without consideration, into shares of
Common Stock, shares of Preferred Stock or other equity securities of the
Corporation (including any option to purchase such a convertible security),
(iii) any right to subscribe to or purchase shares of Common Stock, shares of
Preferred Stock or other equity security of the Corporation or (iv) any security
carrying such right.
(b) Exercise of Rights. If the Corporation proposes to issue any
Equity Securities (the "Offered Securities"), it shall give the holders of
Series C Preferred Stock written notice of its intention, describing the Equity
Securities, the price thereof and the terms and conditions upon which the
Corporation proposes to issue the same. Each such holder of Series C Preferred
Stock shall have the right, for a period of fifteen (15) business days from the
receipt of such notice, to deliver a notice to the Corporation agreeing to
purchase its pro rata share on a fully-diluted basis of the Equity Securities
for the price and upon the terms and conditions specified in the Corporation's
notice, stating therein the quantity of Offered Securities to be purchased and
its agreement to close the purchase of such Equity Securities concurrently with
the Corporation's sale of the Equity Securities to other parties.
Notwithstanding the foregoing, the Corporation shall not be required to offer or
sell such Equity Securities to any such holder of Series C Preferred Stock who
would cause the Corporation to be in violation of applicable securities laws by
virtue of such offer or sale.
(c) Issuance of Equity Securities to Other Person. Following the
fifteen (15) day notice period set forth in Section 11(b) hereof, the
Corporation shall have one hundred twenty (120) days thereafter to issue the
Equity Securities in respect of which the holders of Series C Preferred Stock
rights were not exercised, at a price and upon general terms and conditions
materially no more favorable to the purchasers thereof than specified in the
Corporation's notice to the holders of Series C Preferred Stock pursuant to
Section 11(b) hereof. If the Corporation has not sold such Equity Securities
within such 120-day period set forth in this Section 11(c), the Corporation
shall not thereafter issue or sell any Equity Securities without first offering
such securities to the holders of Series C Preferred Stock in the manner
provided above.
(d) Termination of Preemptive Rights. The preemptive rights
established by this Article 11 shall not apply to, and shall terminate
immediately prior to the effective date of the registration statement pertaining
to, a Qualified Public Offering.
(e) Transfer of Preemptive Rights. The preemptive rights of the
holders of Series C Preferred Stock under this Article 11 may not be
transferred.
(f) Excluded Securities. The preemptive rights established by this
Article 11 shall have no application to any of the following Equity Securities:
(i) shares of Common Stock (and/or options or other shares of
Common Stock purchase rights issued pursuant to such options or other rights)
issued or to be issued to employees, officers or directors of, or consultants or
advisors to, the Corporation or any subsidiary, pursuant to stock purchase or
stock option or other plans or other arrangements that are approved by the Board
of Directors;
(ii) any Equity Securities issued in connection with the
Corporation effectuating or entering into: (1) a merger, consolidation,
amalgamation, acquisition or similar business combination approved by the Board
of Directors; or (2) a joint venture, commercial transaction (including, without
limitation, equipment lessors or other persons guaranteeing the obligations of
the Corporation to equipment lessors) or other commercial relationship approved
by the Board of Directors; or
(iii) any Equity Securities described in Section 6(a)(i)(A)
or Section 6(a)(i)(B); or
(iv) shares of Common Stock issued in connection with any
stock split, stock dividend or recapitalization by the Corporation.
12. Amendment. The rights, designations, preferences, qualifications,
privileges, limitations and restrictions set forth herein may be modified or
amended by a writing executed by the Corporation and the holders of 66 2/3% of
the outstanding Series C Preferred Stock.
* * * *
IN WITNESS WHEREOF, the undersigned hereby certify that the foregoing
resolution was duly and unanimously adopted by the Board of Directors of the
Corporation on October 12, 1999, and have caused this Certificate to be executed
this 13th day of October, 1999.
/s/
-----------------------------------------
Troy D'Ambrosio, Vice President
/s/
-----------------------------------------
Anthony J. Sansone, Secretary
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
The foregoing instrument was acknowledged before me this 13th day of
October, 1999, by Troy D'Ambrosio and Anthony Sansone, the Vice President and
Secretary, respectively, of Convergence Communications, Inc.
/s/ Sophia Tzannes
-----------------------------------------
Notary Public
Qualified in Queens County
-----------------------------------------
My Commission Expires:
July 27, 2001
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[SEAL]
