<PAGE>
As filed with the Securities and Exchange Commission on March 6, 2000
Registration No. 333-94755
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Amendment
No. 3 to
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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ETINUUM, INC.
(Exact name of registrant as specified in its charter)
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Delaware 7389 84-1334615
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification No.)
incorporation or Classification Code
organization) Number)
5619 DTC Parkway, 12th Floor
Englewood, Colorado 80111-3017
(303) 357-3000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Timothy C. O'Crowley
Chief Executive Officer
5619 DTC Parkway, 12th Floor
Englewood, Colorado 80111-3017
(303) 357-3000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------
Copies to:
Laurie P. Glasscock, Esq. Francis S. Currie, Esq.
G. James Williams, Jr., Esq. Davis Polk & Wardwell
Carin M. Kutcipal, Esq. 1600 El Camino Real
Chrisman, Bynum & Johnson, P.C. Menlo Park, California 94025
1900 Fifteenth Street (650) 752-2000
Boulder, Colorado 80302
(303) 546-1300
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this registration statement.
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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 check the following box. [_]
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 this Form is a post-effective amendment filed pursuant to Rule 462(d)
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. [_]
<TABLE>
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<CAPTION>
Proposed Maximum Amount of
Aggregate Offering Price(1) Registration Fee
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<S> <C> <C>
Common Stock...................... $62,100,000 $16,395(2)
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</TABLE>
(1) Estimated pursuant to Rule 457(o) solely for the purpose of calculating the
amount of the registration fee.
(2) Previously paid.
This 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 the registration statement shall become
effective on such date as the Commission, acting pursuant to Section 8(a), may
determine.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+Information contained in this prospectus is not complete and may be changed. +
+We may not sell these securities until the registration statement filed with +
+the Securities and Exchange Commission is effective. This prospectus is not +
+an offer to sell securities, and we are not soliciting an offer to buy these +
+securities, in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+ +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, Dated March 6, 2000
PROSPECTUS
4,500,000 Shares
[LOGO OF ETINUUM]
Common Stock
This is the initial public offering of common stock by Etinuum, Inc. We are
selling 4,500,000 shares of our common stock at an estimated initial public
offering price between $10.00 and $12.00 per share.
--------
There is currently no public market for the common stock. We have applied to
list our common stock on the Nasdaq National Market under the symbol "ETIN."
--------
<TABLE>
<CAPTION>
Per Share Total
--------- -----
<S> <C> <C>
Public offering price........................................... $ $
Underwriting discounts and commissions.......................... $ $
Proceeds, before offering expenses, to Etinuum.................. $ $
</TABLE>
The underwriters may also purchase up to 675,000 additional shares of common
stock from us at the public offering price, less the underwriting discount,
within 30 days from the date of this prospectus to cover over-allotments.
Delivery of the shares of common stock will be made on or about , 2000.
--------
Investing in the common stock involves risks.
See "Risk Factors" beginning on page 6.
--------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus is truthful or complete. Any representation to the contrary is
a criminal offense.
Chase H&Q
Robertson Stephens
U.S. Bancorp Piper Jaffray
Wit SoundView
, 2000
<PAGE>
[Cover 1 is the portion of the cover visible when opening the front cover of
the prospectus. Reversed-out (white) copy over "Etinuum logo."
"Etinuum provides an integrated set of services that takes our clients from
concept to launch and operation of their e-commerce and other direct-to-
customer initiatives."]
<PAGE>
[The prospectus front cover is a gatefold; Cover 2 is the inside front cover
spread visible upon opening the gatefold cover. Four 4-color photographs, with
copy pertaining to each photo, laid out in the circle, to describe our service
offering. Beginning at the top of the page and moving clockwise, the
photographs and text are as follows:
PHOTO #1: This photo is of several people in a conference situation
demonstrating our strategic consulting services. PHOTO #1 COPY: Headline:
"Design"; Subhead: "Strategic Consulting"; "We help clients plan their e-
commerce and other direct-to-customer initiatives from concept to launch and
operation."
PHOTO #2: This photo is of two employees in a computer room. PHOTO #2 COPY:
Headline: "Build"; Subhead: "Technology Solutions"; "We customize and operate
Web-based software that we integrate with our clients' and their vendors'
existing systems.
PHOTO #3: This photo depicts an employee in a Communications Center on the
telephone with a client's customer. PHOTO #3 COPY: Headline: "Operate";
Subhead: "e-Operations"; "We provide communications services that manage our
clients' customer transactions and relationships via voice, e-mail, fax and
real-time online communications."
PHOTO #4: This photo shows several employees in a working conference session.
PHOTO #4 COPY: Headline: "Analyze"; Subhead: "Customer Knowledge"; "We offer
database marketing and analysis services to help our clients improve their
marketing efforts and customer relationships."]
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
Prospectus Summary.................................................. 1
Risk Factors........................................................ 6
Forward-Looking Statements.......................................... 13
Use of Proceeds..................................................... 13
Dividend Policy..................................................... 13
Capitalization...................................................... 14
Dilution............................................................ 15
Selected Historical and Pro Forma Financial Data.................... 17
Management's Discussion and Analysis of Financial Condition and
Results of Operations ............................................. 19
Business............................................................ 27
Management.......................................................... 39
Employee Benefit Plans.............................................. 47
Related Party Transactions.......................................... 49
Principal Stockholders.............................................. 58
Description of Capital Stock........................................ 60
Transfer Agent and Registrar........................................ 63
Shares Eligible for Future Sale..................................... 63
Plan of Distribution................................................ 64
Legal Matters....................................................... 67
Experts............................................................. 67
Where You Can Find More Information................................. 67
Index to Consolidated Financial Statements of Etinuum, Inc.......... F-1
Index to Unaudited Pro Forma Condensed Financial Information........ P-1
Index to Financial Statements of Acorn Information Services, Inc. .. A-1
</TABLE>
------------------
Unless otherwise indicated, all references to "Etinuum," "we," "us" and
"our" refer to Etinuum, Inc., a Delaware corporation, and our predecessor
Colorado corporation.
All brand names and trademarks appearing in this prospectus are the
property of their holders.
i
<PAGE>
PROSPECTUS SUMMARY
This summary highlights selected information contained elsewhere in this
prospectus. This summary does not contain all of the information that you
should consider before investing in our common stock. You should read the
entire prospectus carefully, including the information under "Risk Factors"
beginning on page 6 and the financial statements beginning on page F-1, before
making an investment decision.
Our Company
Etinuum provides an integrated set of strategic, technological,
operational and analytical solutions that takes our clients from concept to
launch and operation of their e-commerce and other direct-to-customer sales and
marketing initiatives. Our clients are typically Fortune 1000 and emerging Web-
based companies that sell complex products or employ complicated sales
processes. Our ability to design, build, and operate e-commerce and other
associated direct-to-customer initiatives enables our clients to more
effectively market and sell to their customers. We provide clients access to
our strategic consultants, developers, Web-based processing technology, high-
level customer support personnel, communications services, and database
marketing and analysis services. Our major clients in 1999 included American
Express, Safeway, Sega and Sony. In addition, we have recently established
relationships with emerging Web-based companies.
Our Market Opportunity
Our market is driven by the continued acceptance and rapid growth of the
Internet, which has dramatically changed the way businesses and consumers
communicate and conduct business. International Data Corporation, or IDC,
estimates that the actual number of Web buyers worldwide will increase from
nearly 31 million in 1998 to more than 182 million in 2003, and that the amount
of worldwide commerce conducted over the Internet will increase from
approximately $50 billion in 1998 to about $1.3 trillion in 2003. This dramatic
increase in the use of the Internet for commerce is creating significant new
opportunities and challenges for a broad spectrum of businesses.
In response to growing competitive pressures and the escalating rate of
technological innovation, many companies are outsourcing business functions to
access expertise, resources and technology. As a growing number of companies
offer more complex products and services online, demand has increased for
sophisticated outsourced service providers that use an integrated approach in
delivering technology solutions and specialized services. Additionally, the
delivery of these multiple services must be flexible and easy for the customer
to use and must enable the client to maintain brand recognition and customer
loyalty.
Our Services
Etinuum offers a comprehensive range of solutions for designing, building
and operating our clients' e-commerce and other direct-to-customer initiatives.
Our clients' direct-to-customer initiatives use a combination of Web sites, e-
mail and other Internet-based communications, telephone communications, fax and
mail. Our four service offerings are:
Strategic Consulting. We help our clients plan their e-commerce and other
direct-to-customer initiatives by determining their needs and objectives,
working with them to establish an overall program structure. We design an
integrated solution consisting of the required technology, customer
communications processes, data requirements and personnel skills.
Technology Solutions. We develop, customize and operate Web-based
technology platforms, composed of Web-based software and hardware systems, that
enable us to rapidly deploy our clients' e-commerce and other direct-to-
customer initiatives. Our primary technology platform, the
1
<PAGE>
EtinuumWebDirect System, incorporates the Web site interface for customers and
our customer representatives, the product specifications and other reference
materials, the software applications to electronically process transactions,
and the customer and client information databases and hardware systems, all of
which can be tailored to meet a client's specific needs. We integrate this
technology platform with our clients' and their vendors' existing systems to
provide the sharing of information.
e-Operations. We provide communications services that handle our clients'
transactions with their customers via voice, e-mail, fax and real-time online
communications, as well as database management and hosting. These transactions
include the sale of complex products such as financial instruments for direct
brokerage and online trading firms and computer and electronic equipment for
technology manufacturers. Our infrastructure, including our computer systems,
networking equipment and communications centers, permits efficient and reliable
operations of our clients' complex direct-to-customer-initiatives.
Customer Knowledge. We offer sophisticated database marketing and analysis
services to help our clients improve their marketing efforts and customer
relationships through a better understanding of their customers' buying
processes and behaviors.
Our Strategy
Etinuum's strategy is to be a leading provider of integrated solutions to
companies developing e-commerce and other direct-to-customer initiatives that
involve the sale of complex products or the use of complicated sales processes.
We support our clients in both business-to-consumer and business-to-business
transactions. Key elements of our strategy are to:
. target clients that provide substantial growth opportunities;
. pursue clients in specialized markets that require sophisticated
services;
. promote our brand through expanded sales and marketing efforts;
. broaden and continue to strengthen our service offerings; and
. continue to hire, train and retain talented people.
In order to execute our strategy, we must, among other things, continue to
incur significant expenses to increase our marketing efforts, expand our
service offerings, and hire and train new employees. If we are not successful
in these efforts, we may be unable to attract new clients or provide the level
of services required to meet clients' needs. See "Risk Factors" for a more
complete discussion of these and other risks.
Our History
We incorporated in Colorado in March 1996 under the name Intek
Information, Inc. and reincorporated in Delaware in August 1996. In February
2000, we changed our name from Intek Information, Inc. to Etinuum, Inc.
Effective October 1, 1999, we acquired all of the outstanding capital stock of
Acorn Information Services, Inc., a Delaware corporation based in Connecticut
that provides database marketing and analysis services. Also effective October
1, 1999, we transferred software that we had developed to Spider Technologies,
Inc., a newly-formed wholly-owned subsidiary, and we then distributed all of
the stock of Spider to our stockholders. We have three wholly-owned
subsidiaries that are used to hold licenses to conduct operations in various
regulated industries. See "Business-Regulatory Matters."
Our principal executive offices are located at 5619 DTC Parkway, 12th
Floor, Englewood, CO 80111, and our telephone number is (303) 357-3000.
We maintain a Web site at www.etinuum.com and our subsidiary, Acorn,
maintains a Web site at www.acornis.com. Information contained on these Web
sites does not constitute part of this prospectus and is not incorporated by
reference in this prospectus.
2
<PAGE>
The Offering
<TABLE>
<S> <C>
Common stock offered by Etinuum............... 4,500,000 shares
Common stock to be outstanding after this 18,136,384 shares
offering.....................................
Use of proceeds............................... For general corporate purposes.
See "Use of Proceeds."
Proposed Nasdaq National Market symbol........ "ETIN"
</TABLE>
Unless otherwise noted, the information in this prospectus assumes that
all outstanding shares of preferred stock are converted into common stock upon
the closing of this offering and that the underwriters do not exercise their
option to purchase an additional 675,000 shares of common stock from us to
cover over-allotments, if any.
The number of shares of common stock to be outstanding after this offering
is based on the number of shares outstanding as of December 31, 1999, plus
1,473,628 shares issuable to holders of our preferred stock as payment-in-kind
dividends through February 29, 2000, and 721,124 shares issuable to holders of
our Series F preferred stock assuming the sale of shares in this offering at an
initial offering price of $11.00 per share. See "Related Party Transactions -
Securities Issuances and Loans." It does not include the following:
. options to purchase 2,330,563 shares of common stock granted under our
1997 and 1998 Stock Option Plans at a weighted average exercise price
of $6.28 per share;
. 6,437,611 shares of common stock available for future issuance under
our 1997 and 1998 Stock Option Plans, 2000 Stock Incentive Plan and
2000 Employee Stock Purchase Plan;
. a warrant to purchase 181,250 shares of common stock issued to Sony
Electronics Inc. at an exercise price of $8.52 per share; and
. 527,778 shares reserved for contingent future issuance to the former
stockholders of Acorn.
Please see "Capitalization" for a more complete discussion regarding the
outstanding shares of our common stock, the options and warrant to purchase our
common stock and related matters.
3
<PAGE>
Summary Financial Information
The following table presents summary financial data. You should read this
information together with the financial statements and the notes to those
statements appearing elsewhere in this prospectus and the information under
"Selected Historical and Pro Forma Financial Data," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Unaudited
Pro Forma Condensed Financial Infomation."
The unaudited pro forma condensed statements of operations information for
the year ended December 31, 1999, gives effect to our acquisition of Acorn and
the spin-off of Spider as if those transactions had occurred on January 1,
1999. The following transactions are assumed to have occurred on January 1,
1999, in the pro forma as adjusted per share data in the pro forma as adjusted
statements of operations data, and on December 31, 1999, in the pro forma as
adjusted balance sheet data:
. the issuance of 4,500,000 shares in this offering and receipt by us of
net proceeds of approximately $44.5 million assuming an initial public
offering price of $11.00 per share and after deducting the estimated
underwriting discounts and commissions and estimated offering expenses;
. the automatic conversion of all shares of preferred stock outstanding
as of December 31, 1999, into 9,560,188 shares of common stock;
. the issuance of 1,333,433 shares of common stock to the holders of our
preferred stock as payment-in-kind dividends accrued through December
31, 1999; and
. the issuance of 721,124 additional shares of common stock to the
holders of our Series F preferred stock assuming the sale of shares in
this offering at an initial offering price of $11.00 per share. See
"Related Party Transactions - Securities Issuances and Loans."
Additional shares of common stock will be issued to the holders of our
preferred stock as payment-in-kind dividends subsequent to December 31, 1999.
Assuming this offering closes by April 15, 2000, the payment-in-kind dividend
will accrue through February 29, 2000 and we will issue 140,195 additional
shares.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1999
Period from ----------------------
inception to Pro forma
December 31, 1996 1997 1998 Actual as adjusted
----------------- --------- --------- --------- -----------
(unaudited)
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations
Data:
Revenue............... $ 480 $ 9,546 $ 17,664 $ 24,699 $ 26,707
Gross profit.......... 269 1,779 4,455 7,713 8,743
Loss from operations.. (1,802) (12,084) (9,509) (11,919) (10,597)
Net loss applicable to
common stockholders.. $ (1,809) $ (13,226) $ (11,464) $ (25,235) $ (13,997)
Per share data:
Basic and diluted net
loss per share....... $ (1.07) $ (7.09) $ (6.14) $ (13.50) $ (0.90)
Weighted average
common shares
outstanding.......... 1,697,417 1,866,585 1,867,941 1,869,803 15,596,317
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
---------------------
Pro forma
Actual as adjusted
-------- -----------
(unaudited)
(in thousands)
<S> <C> <C>
Balance Sheet Data:
Cash and cash equivalents............................... $ 6,204 $52,239
Working capital......................................... 7,533 52,719
Total assets............................................ 26,378 71,762
Long-term borrowings, net of current portion............ 1,722 1,722
Total stockholders' equity (deficit).................... (41,997) 61,946
</TABLE>
5
<PAGE>
RISK FACTORS
You should carefully consider the risks and uncertainties described below
before making an investment decision. Our business, financial condition and
operating results could be adversely affected by any of the following factors,
in which event the trading price of our common stock could decline, and you
could lose part or all of your investment.
Risks Related to Our Business
The loss of any of our current major clients could cause our revenue to
decline.
A substantial majority of our revenue during the past two years has been
derived from on-going business with a few significant clients. If our
relationships with any of our major clients were to end, we would lose a
significant portion of our revenue. In 1999, Sony accounted for 27% of our
revenue and American Express, Safeway and Sega accounted for a total of 29% of
our revenue. Although we are continuing to provide services to Sega, we have
not finalized a new contract with it for those or future services. In addition,
American Express has reduced somewhat its level of services as compared to the
fourth quarter of 1999. We anticipate that our revenue will continue to be
concentrated with a limited number of clients and that the amount of revenue
from any particular client will vary from period to period.
Our arrangements with our clients may be cancelled with little or no penalty
and may not be indicative of our future business.
Our agreements with our clients generally provide for services and payment
on a month-to-month basis. Under most of our existing contracts, our clients
may reduce or cancel their agreements with us with little or no penalty. In
addition, we sometimes perform work for a client without a written agreement.
Consequently, you should not anticipate our future revenue based on the number
or identity of the clients we have, the level of services we have performed for
those clients in the past or the scope of our existing agreements with those
clients. See "Business-Our Clients" for further information regarding our
arrangements with our clients.
Our quarterly operating results may fluctuate, which could cause our stock
price to decline.
Our revenue and operating results may vary significantly from quarter-to-
quarter due to a number of factors. If our operating results are below market
expectations, the price of our common stock may decline. Factors that have
affected our operations in the past and that may affect our operations in the
future, and that could cause quarterly fluctuations, include:
. the beginning, ending or deferral of significant services for clients
during a quarter, particularly when we must add personnel and other
resources in advance of new client initiatives;
. variations in the number, size and scope of our clients' direct-to-
customer initiatives, which in the past have ranged from small pilot
programs involving only a few of our employees to nationwide programs
using over fifty new employees;
. the utilization of our employees and communications center facilities,
which can be affected significantly, for example, by reassigning or
terminating personnel following the completion of a client's
initiative or by opening a new facility in anticipation of future
business;
. fluctuations in demand for our clients' products, which are beyond our
control but which directly affect our revenue as a substantial portion
of our client billings depends upon the time our personnel devote to
client's customers or, under a new contract with a major client, are
based on the client's sales generated from our operation of its
direct-to-customer initiative;
. expenses incurred in connection with acquisitions, such as our recent
acquisition of Acorn, which are part of our strategy to broaden and
expand our service offerings; and
. expenses related to our sales and marketing efforts, which are
expected to increase in 2000.
6
<PAGE>
We are devoting significant time and money to expand our Strategic Consulting,
Technology Solutions and Customer Knowledge services, and if we are unable to
generate sufficient additional revenue from these efforts, our operating
results will be harmed.
We are expanding our Strategic Consulting, Technology Solutions and
Customer Knowledge professional services as part of our plan to increase our
revenue and operating margins in the future. For example, we recently acquired
Acorn to significantly enhance our database marketing and analysis
capabilities. If we are unable to generate enough additional revenue to cover
our increased costs associated with these activities, our margins and financial
results may be impaired.
Our e-Operations generate a substantial majority of our revenue and therefore a
decrease in its gross margins could have a significant negative effect on our
overall gross margins.
Our e-Operations have and are expected for the foreseeable future to be
our major source of revenue and therefore the gross margins for these services
have a substantial effect on our overall gross margins. We must continue to
rely on providing high-end, value-added services to maintain or improve gross
margins in this area of our business. There are relatively few competitive
barriers to providing communications center operations, as they do not
generally require a specialized labor force or facilities. For these reasons,
we may be vulnerable to competitive pressures in this area of our operations,
which could negatively affect our gross margins.
The IRS may challenge the valuation of Spider that we used in accounting for
the spin-off and, if we were required to recognize a significant taxable
dividend, our operating results and financial condition could be harmed.
The value of Spider in the spin-off was based on an independent third
party appraisal. As in any similar transaction, particularly one involving
software assets that may be more difficult to value than other types of assets,
the IRS could challenge our valuation method. If it were to require us to
recognize a signifcantly greater taxable dividend, we could lose some or all of
the future tax benefits of our net operating loss carryforward or recognize
taxable income if the tax resulting from the Spider spin-off exceeded our net
operating loss carryforward. The amount of any additional tax would depend upon
a final judicial or administrative determination of the value of Spider. Any of
these events would negatively affect our financial results and condition.
Several of our executive officers recently joined Etinuum and may take time to
become fully integrated into our business.
Eleven of our sixteen executive officers joined us in 1999 or 2000, some
from other industries. In addition, six of our new officers are located in
California, Connecticut or Massachusetts and do not have frequent face-to-face
contact with the other members of our management team. The combination of the
need for a number of our officers to continue developing expertise in our
operations and for our management team to become integrated may place a strain
on our ability to implement our strategies as rapidly and effectively as we
would desire.
If we do not successfully build a sales and marketing organization, we will
continue to strain our senior management personnel and may miss business
opportunities.
Most of our revenue to date has been generated by the sales efforts of our
senior management and key technical personnel. In the past, we have not been
able to pursue some new business opportunities because of our limited personnel
resources. We have only recently hired a director of marketing as well as two
dedicated sales personnel. Because of the intensely competitive employment
environment, we may not be successful in attracting and retaining the
additional personnel we need to build our sales and marketing organization.
7
<PAGE>
If we do not successfully hire, train and retain sufficient personnel, we may
be unable to meet our obligations to existing clients or take on work for new
clients and we may incur unnecessary costs.
Some client initiatives have required that we hire a substantial number of
new employees for our e-Operations services in a relatively short period of
time. During 1999, we added approximately 300 employees in e-Operations. In
some cases, it may be difficult to hire and train sufficient personnel as
quickly as might be required to meet a client's needs. In addition, we have
experienced, and may in the future experience, difficulty getting personnel
licensed by governmental or other regulatory agencies as quickly as necessary
to meet existing and new clients' programs. This may harm our relationships
with our current clients and may limit our ability to take on new clients.
Additionally, if we have higher than anticipated turnover, we may have to
absorb costs of training new personnel in excess of the costs to be paid by our
clients.
Our operations also require the services of highly-skilled employees, such
as database programmers, Web developers and personnel with advanced analytic
capabilities, for which competition is particularly intense, especially in
Internet-related fields. In addition, because our EtinuumWebDirect System is
unique, some new employees will require substantial training. We also face the
issues of escalating recruitment and labor costs and expectations of
significant benefits.
If we do not successfully put in place the procedures, systems and personnel
necessary to manage and support our expansion, we could have difficulty
coordinating our business and financial operations.
Since the beginning of 1999, we have expanded our operations substantially
in several ways, including increasing our services offerings, opening a new
communications center in Kansas, acquiring Acorn and adding over 350 new
personnel. If we fail to put in place processes to manage the expansion of our
business, our operations and financial results could be harmed because of the
inability of our infrastructure to support our levels of business activity. To
avoid these problems, we must:
. improve existing and implement new managerial, operational and
financial controls, reporting and information systems, and procedures;
. hire additional personnel who are trained in managing these types of
systems; and
. improve communications among our management and operations personnel.
We plan to incur substantial expenses to build our brand awareness, and if we
are not successful our operating results and competitive position could be
harmed.
We plan to significantly increase our marketing expenses to promote our
brand. If we are not successful in building brand awareness, we may be unable
to attract new clients and increase our revenue sufficiently to cover our
additional expenses. We believe that establishing our brand and reputation is
critical for attracting and retaining clients, particularly large established
companies such as American Express and Sony. In addition, we believe building
brand awareness is especially important for us because a number of our
competitors have established brand names and reputations. See "Business-
Competition" for information regarding our competitors.
Our recent transfer to Spider of software assets upon which we rely will lessen
our control over our primary technology platform and could cause us to incur
significant costs and experience delays with respect to the software, and face
increased competition.
To date, we have used our EtinuumWebDirect System as the technology
platform in the vast majority of solutions we have developed for our clients.
Spider now controls the development of the
8
<PAGE>
proprietary software that is used in the EtinuumWebDirect System and has the
right to license it to third parties. Although we have a 20-year non-exclusive
license from Spider to use this software, as well as other protections, if
Spider were to cease operations, or otherwise cause us to have to take over
development of its software, or if the Spider software does not meet our
requirements in the future so that we would need to develop new software, we
would incur significant costs and could experience substantial delays in
implementing solutions for our clients, which would harm our business. In
addition, to the extent that our clients or competitors license the software
directly from Spider, we would lose our competitive advantage of being the sole
provider of this technology to the marketplace.
Some members of our management will continue to spend time on Spider matters,
which will divert their attention from our business.
Under various agreements with Spider, Paul Tartre, president of our
Technology Solutions group, will spend 40% of his time on Spider matters, and
Timothy O'Crowley, our president and chief executive officer, will be chairman
of the board of directors of and a consultant to Spider. These roles will
divert time that these individuals would otherwise spend on our matters.
Spider has financial obligations to us in connection with the spin-off, which
it may be unable to repay unless it is able to generate revenues or obtain
financing.
In connection with the spin-off and in order to maintain Spider as a
viable entity in the near term, we distributed $1 million to Spider in November
1999, which is to be repaid out of Spider's minimum royalty obligation to us of
$1.45 million. We also expensed approximately $1 million in the fourth quarter
of 1999 for salaries and other costs incurred by Spider. We anticipate that
Spider will incur costs of approximately $1 million a quarter to continue its
current level of operations. We may elect to continue funding these costs for
the next one or two quarters if we believe there is a reasonable likelihood
that Spider will generate sufficient revenue or obtain third-party financing to
pay its obligations to us. If Spider were not able to pay its obligations to
us, it would have a negative effect on our results of operations in the period
in which the losses are recognized. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations - Overview" for further
information regarding our financial transactions with Spider.
Federal, state and other agencies may require us to have licenses for some of
the activities we conduct on behalf of our clients. We have not always had all
the licenses we needed, which exposes us to possible actions for damages or
other penalties.
Some of our activities for financial services, mortgage broker and
insurance clients and relating to telephone contacts with customers are
regulated by federal, state and other regulatory agencies. Their regulations
may require that we and, in some cases, our employees who are involved in those
activities be licensed. We have not always had all the licenses we needed. This
could expose us to regulatory or private actions for damages or penalties. We
cannot assure you that we will be in compliance with all applicable regulations
in the future. See "Business - Regulatory Matters" for further information
about regulations that apply to our operations.
We may selectively acquire complementary businesses to broaden our services
offerings, but if we are not successful in integrating acquired companies or
identifying attractive acquisition candidates, our operations and financial
results could be harmed.
We recently acquired Acorn in Shelton, Connecticut to significantly
enhance our database marketing and analysis capabilities. The integration of
Acorn into our operations will require, among other things, educating our
personnel about Acorn's capabilities and establishing good communications
channels to overcome the challenges arising from its geographic separation from
our other facilities. If we are not successful in these efforts, we will not be
able to effectively market Acorn's capabilities to existing and potential
clients or realize the full economic benefits of the acquisition. In addition,
in connection with our
9
<PAGE>
expansion strategy, management has spent time in the past evaluating potential
acquisitions that have not been consummated. Similar occurrences in the future
could result in diverting our personnel and financial resources from other
activities.
A contract with a major client prohibits us from providing some services to
other clients, which may limit our potential client base and our ability to
take advantage of skills our personnel have developed through working on
particular initiatives.
We have a contract with a major client that currently prohibits us from
working on competing initiatives for other clients or allowing our employees
who have worked on the client's initiative to work on a competitor's
initiative. We may enter into contracts with similar provisions in the future.
We could pay substantial additional purchase consideration to the former
stockholders of Acorn.
In connection with our acquisition of Acorn, if Acorn achieves its earn-
out goals, we will pay substantial additional cash and stock consideration to
the former stockholders of Acorn. The non-cash amortization of this additional
purchase consideration could significantly affect our earnings over the next
five years.
Our limited operating history makes it difficult for you to evaluate our
business, prospects and an investment in our common stock.
Although we were incorporated in March 1996, we did not begin providing a
number of our current services to clients until mid-1997. Our experience with
some services we offer, such as the database marketing and analysis
capabilities we significantly enhanced in October 1999, are more limited.
Because of our limited operating history, we may encounter unexpected problems
and expenses. These uncertainties make it difficult for you to evaluate our
business, prospects and an investment in our common stock.
We have incurred losses since inception and expect to incur losses for the
foreseeable future.
We have incurred net losses of approximately $36.2 million for the period
from inception (March 6, 1996) through December 31, 1999. Our stockholders'
deficit was approximately $42.0 million at December 31, 1999. We expect to
incur losses for the foreseeable future. In particular, we anticipate that our
sales and marketing expenses will increase substantially in the near future as
we add personnel and expand our brand awareness and other marketing efforts. We
do not anticipate that revenue will grow sufficiently in the near term to
offset these and other costs.
Because our sales and implementation cycles vary significantly, it is difficult
to predict when and if we will receive revenue from any particular client.
The sales cycle for our services is variable, typically ranging between a
few weeks to several months and, occasionally, much longer. In addition, the
time required to structure and implement a program for a client may vary
depending upon the complexity of the client's needs. This variability makes it
difficult for us to forecast future revenue amounts and timing. For example, in
the past we have hired and trained personnel in anticipation of a new client
program that was subsequently deferred. These types of events can negatively
impact our operating results.
10
<PAGE>
Risks Related to Our Industry
We anticipate that the market for our types of services will become
increasingly competitive, which could impair our market position and our
financial results.
We expect that a number of existing and new competitors will enter our
market to take advantage of the trends toward direct-to-customer marketing and
outsourcing. Many of these companies, such as the consulting arms of the Big
Five accounting firms, have greater name recognition, marketing, technical and
financial resources than we have. We believe that competition for Strategic
Consulting and Technology Solutions services will be particularly intense as
companies that had been concentrating on providing Year 2000 related assistance
to their clients refocus their efforts. We believe the greatest competitive
threat to us would occur if a company were to offer the full range of services
we do on a more cost-effective or timely basis. While we are not aware of any
such competitors, our industry is experiencing rapid consolidation, which
increases the possibility that such competition could occur. See "Business -
Competition" for additional information regarding our competition.
The proportion of our activities for our clients involving the Internet is
increasing, and therefore our business is becoming more dependent on continued
growth in the use and improvement of the Internet.
An increasing percentage of our clients' customers are using Web sites, e-
mail and other Internet-based channels of communication. In addition, we are
offering more Internet-related services, such as Web site user interface
implementation, to our clients. As a result, our future success is becoming
increasingly dependent on the continued expansion of, and reliance of consumers
and businesses on, the Internet. There can be no assurance that the
infrastructure, products or services necessary to maintain and expand the
Internet will be developed, or that the Internet will remain a successful
commercial medium. If consumers have difficulties when buying products on the
Internet, as happened with a number of Web sites last holiday season, they may
be reluctant to use the Internet in the future. The Internet has already
experienced outages and delays as a result of damage to portions of its
infrastructure, and recently the operations of several Web sites have been
deliberately disrupted by unknown third parties.
Consumers' concerns and possible regulations about privacy of consumer
information on the Internet may adversely affect our Customer Knowledge
business.
An important feature of our Customer Knowledge services is the ability to
collect and analyze personal customer data to refine and measure the
effectiveness of marketing programs. Privacy concerns may cause consumers to
stop visiting Web sites that collect personal data or to resist providing
personal data. Privacy concerns and regulations, as well as risks of breaches
of security, may also inhibit market acceptance of the Internet as a means of
commerce, particularly where the personal data may be highly sensitive to the
consumer, such as brokerage account activity and credit card data. A decrease
in the availability of personal data about Internet customers could hurt our
Customer Knowledge business. See "Business - Regulatory Matters" for further
information regarding the possible negative effects of regulation of the
Internet.
Risks Related to the Offering
After the offering, three existing stockholders will own over 50% of the
outstanding common stock and could control or strongly influence actions
requiring the approval of stockholders, which could be detrimental to your
voting and economic interests as a stockholder.
After the offering, our chief executive officer and two major
stockholders, each of which is represented on our board of directors, will own
51% of the common stock. If these stockholders were to act together, they could
substantially influence our business and control some stockholder votes. In
addition, this concentration of stock ownership may discourage someone from
making a tender offer or bid to acquire us at a price per share higher than the
then current market price. See "Principal Stockholders" for additional
information about our stockholders.
11
<PAGE>
Our stock price, like that of many other Internet-related and technology
companies, may be extremely volatile after the offering, which could negatively
affect your investment.
The market prices of securities of many companies, particularly those in
businesses related to the Internet, have been experiencing extreme fluctuations
in recent times. These fluctuations are often unrelated to the companies'
operating performance, but instead are influenced by changes in securities
analysts estimates or recommendations or factors relating to the companies'
competitors or industry in general. The market price for our common stock
following this offering may be similarly volatile and could decline or
fluctuate in response to a variety of factors, including:
. changes in our relationships with our major customers, such as
American Express, Safeway, Sega and Sony;
. announcements of technological innovations that render our
EtinuumWebDirect System or other capabilities outdated;
. our announcement of new services or pricing policies, such as our new
policy of charging for Strategic Consulting services; and
. acquisitions, such as of Acorn, or strategic alliances.
We may issue equity securities or seek debt funding in connection with
acquisitions, hiring of new employees, or strategic relationships which may be
dilutive to stockholders or impose operational restrictions.
We may raise additional funds, make acquisitions or seek to strengthen
strategic relationships, as we have done with Sony, through the issuance of
equity securities, and we intend to continue to grant options or stock to
employees and consultants, which will reduce the percentage ownership of
existing stockholders. These stockholders may experience additional dilution in
net book value per share, and any additional equity securities may have rights,
preferences and privileges senior to those of the holders of common stock. In
addition, debt financing, if available, may involve restrictive covenants that
limit our operating flexibility with respect to some business matters.
The substantial number of shares that will be eligible for sale in the near
future may cause the market price of our common stock to decline.
A substantial number of shares of common stock will be available for sale
in the public market following this offering, which could adversely affect the
market price of our common stock. This includes up to 9,241,392 shares of
common stock held by our current stockholders that may be sold in compliance
with Rule 144 under the Securities Act 180 days after the date of this
prospectus. See "Description of Capital Stock-Registration Rights" and "Shares
Eligible for Future Sale" for a more detailed description of the eligibility of
shares of our common stock for future sale.
Some provisions of our charter documents may have anti-takeover effects that
could discourage a change in control, even if an acquisition would be
beneficial to our stockholders.
Our certificate of incorporation, our bylaws and Delaware law contain
provisions that could make it more difficult for a third party to acquire us,
even if doing so would be beneficial to our stockholders. See "Description of
Capital Stock - Preferred Stock" and "- Delaware Anti-Takeover Law and Charter
and By-law Provisions" for further information relating to these provisions.
As a new investor, you will incur substantial dilution as a result of future
equity issuances.
We have issued options to acquire common stock at prices significantly
below the initial public offering price. To the extent outstanding options are
ultimately exercised, there will be further dilution to investors in this
offering.
12
<PAGE>
FORWARD-LOOKING STATEMENTS
We have made forward-looking statements in this prospectus. There are
risks and uncertainties relating to these statements, and there can be no
guarantee that these statements will prove to be correct. Forward-looking
statements include assumptions as to how we may perform in the future. When we
use words like "believe," "could," "may," "will," "estimate," "continue,"
"seek," "anticipate," "intend," "expect," "predict," "potential," and "plan" or
similar expressions, we are making forward-looking statements.
We have based these statements on our current expectations about future
events. Although we believe that the expectations reflected in our forward-
looking statements are reasonable, we cannot guarantee that these expectations
actually will be achieved. In evaluating these statements, you should consider
various factors, including the risks set forth in the section entitled "Risk
Factors" beginning on page 6. These risk factors may cause actual results to
differ materially from any forward-looking statements.
USE OF PROCEEDS
Assuming an initial public offering price of $11.00 per share, we will
receive net proceeds of approximately $44.5 million from the sale of 4,500,000
shares of common stock in this offering, or approximately $51.4 million if the
underwriters exercise their over-allotment of 675,000 shares in full, after
deducting the estimated underwriting discounts and commissions and estimated
offering expenses payable by us.
The principal purposes of this offering are to increase our working
capital, create a public market for our common stock, facilitate our future
access to the public capital markets and increase our visibility in our
marketplace. We intend to use the net proceeds of this offering for general
corporate purposes, including capital expenditures for new equipment and
facilities and operational expenses, such as personnel and sales and marketing.
We cannot at this time assign any particular amount to a specific use. The
amounts and timing of our actual expenditures will depend on numerous factors,
including the status of our marketing and branding activities, the need to hire
new employees and the amount of cash generated or used by our operations. We
may use some of the proceeds in connection with relocating our northern
California communications center operations to a new facility in mid-2000 and
opening a new communications center in late 2000 or early 2001. We do not
currently have any commitments for capital equipment or other costs related to
these new facilities. In addition, we may, if appropriate opportunities arise,
use an undetermined portion of the net proceeds to acquire or invest in
companies offering services or products complementary to ours. However, we
currently have no commitments or agreements with any third party regarding any
such potential acquisition or investment. Pending such uses, we will invest the
net proceeds in investment grade, interest-bearing securities.
DIVIDEND POLICY
We have never paid or declared cash dividends on our common stock. We
currently intend to retain any future earnings to fund the development and
growth of our business. We do not currently anticipate paying any cash
dividends in the foreseeable future.
13
<PAGE>
CAPITALIZATION
The following table shows our capitalization at December 31, 1999:
. on an actual basis;
. on an unaudited pro forma basis giving effect to the automatic
conversion upon the closing of this offering of all outstanding shares
of preferred stock into 9,560,188 shares of common stock and the
issuance of 1,333,433 shares of common stock to holders of our
preferred stock as payment-in-kind dividends accrued through December
31, 1999; and
. on an unaudited pro forma basis as adjusted to reflect the issuance of
4,500,000 shares of common stock in this offering and the receipt by
us of net proceeds of approximately $44.5 million assuming an initial
public offering price of $11.00 per share, after deducting the
estimated underwriting discounts and commissions and estimated
offering expense, and the issuance of 721,124 additional shares of
common stock to holders of our Series F preferred stock assuming the
sale of shares in this offering at an initial offering price of $11.00
per share. See "Related Party Transactions-Securities Issuances and
Loans."
<TABLE>
<CAPTION>
December 31, 1999
---------------------------------------
Pro forma
as
Actual Pro forma adjusted
----------- ------------ ------------
(unaudited)
(in thousands, except share data)
<S> <C> <C> <C>
Long-term borrowings, net of current
portion.............................. $ 1,722 $ 1,722 $ 1,722
----------- ----------- -----------
Convertible Preferred Stock, subject
to mandatory redemption; 79,000,000
shares authorized, 35,255,741 shares
issued and outstanding actual;
convertible into 10,893,621 common
shares; no shares issued and
outstanding pro forma and pro forma
as adjusted.......................... 59,408 -- --
----------- ----------- -----------
Stockholders' equity (deficit):
Common stock, 170,000,000 shares
authorized, 1,881,444 shares issued
and outstanding, actual; 100,000,000
shares authorized, pro forma and pro
forma as adjusted; 12,775,065 shares
issued and outstanding, pro forma;
17,996,189 shares issued and
outstanding, pro forma as adjusted
.................................... 1 2 2
Additional paid-in capital........... -- 59,407 103,942
Unearned compensation................ (1,266) (1,266) (1,266)
Accumulated deficit.................. (40,732) (40,732) (40,732)
----------- ----------- -----------
Total stockholders' equity
(deficit)........................ (41,997) 17,411 61,946
----------- ----------- -----------
Total capitalization.............. $ 19,133 $ 19,133 $ 63,668
=========== =========== ===========
</TABLE>
The outstanding share information shown in the table above excludes:
. options to purchase 2,330,563 shares of common stock granted under our
1997 and 1998 Stock Option Plans at a weighted average exercise price
of $6.28 per share;
. 6,437,611 shares of common stock available for future issuance under
our 1997 and 1998 Stock Option Plans, 2000 Stock Incentive Plan and
2000 Employee Stock Purchase Plan;
. a warrant to purchase 181,250 shares of common stock issued to Sony
Electronics Inc. at an exercise price of $8.52 per share; and
. 527,778 shares reserved for contingent future issuance to the former
stockholders of Acorn.
An additional 140,195 shares of common stock will be issued to the holders
of preferred stock as payment-in-kind dividends subsequent to December 31, 1999
through February 29, 2000.
For additional information about our stock plans, see "Employee Benefit
Plans," and for information about the warrant issued to Sony Electronics, see
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
14
<PAGE>
DILUTION
The unaudited pro forma net tangible book value of our common stock at
December 31, 1999 was approximately $14.6 million, or $1.08 per share of common
stock. The unaudited pro forma net tangible book value per share represents the
amount of our total tangible assets less total liabilities, divided by
13,496,189 shares of common stock outstanding after giving effect to:
. the conversion of all outstanding shares of preferred stock into
9,560,188 shares of common stock upon the closing of this offering;
. the issuance of 1,333,433 shares of common stock to holders of our
preferred stock as payment-in-kind dividends accrued through December 31,
1999; and
. the issuance of 721,124 additional shares of common stock to holders of
our Series F preferred stock assuming the sale of shares in this offering
at an initial offering price of $11.00 per share.
It does not include shares that we may issue in connection with the
acquisition of Acorn upon Acorn's achievement of specified contingencies. See
"Related Party Transactions - Securities Issuances and Loans" for additional
information about our preferred stock issuances.
After giving effect to the issuance of 4,500,000 shares in this offering
and the receipt of approximately $44.5 million of net proceeds from this
offering, based on an assumed initial public offering price of $11.00 per share
and after deducting the estimated underwriting discounts and commissions and
estimated offering expenses, our unaudited pro forma as adjusted net tangible
book value at December 31, 1999 would have been approximately $59.1 million, or
$3.29 per share. This amount represents an immediate increase in pro forma net
tangible book value of $2.21 per share to existing stockholders and an
immediate dilution of $7.71 per share to purchasers of common stock in this
offering. Dilution is determined by subtracting unaudited pro forma as adjusted
net tangible book value per share after this offering from the amount of cash
paid by a new investor for a share of common stock. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $11.00
Unaudited pro forma net tangible book value per share at
December 31, 1999.......................................... $1.08
Increase in unaudited pro forma net tangible book value per
share attributable to new investors........................ 2.21
-----
Unaudited pro forma as adjusted net tangible book value per
share after this offering.................................. 3.29
------
Dilution per share to new investors........................... $ 7.71
======
</TABLE>
15
<PAGE>
The following table summarizes as of December 31, 1999, on the unaudited
pro forma as adjusted basis described above, the number of shares of common
stock purchased from us, the total consideration paid to us, and the average
price per share paid by existing stockholders and by new investors who purchase
shares of common stock in this offering, before deducting the estimated
underwriting discounts and commissions and estimated offering expenses:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)..... 13,496,189 75% $55,819,000 53% $4.14
New investors(1)............. 4,500,000 25% 49,500,000 47% 11.00
---------- --- ------------ ---
Total...................... 17,996,189 100% $105,319,000 100%
========== === ============ ===
</TABLE>
- ------------------
(1) If the underwriters' over-allotment option is exercised in full, sales in
this offering will reduce the number of shares of common stock held by the
existing stockholders to approximately 72% of the total shares of common
stock outstanding after the offering and will increase the number of shares
held by new investors to 5,175,000, or approximately 28% of the total
shares of common stock outstanding after the offering. See "Plan of
Distribution."
The above table assumes no exercise of any outstanding stock options or
warrants. As of December 31, 1999, there were options outstanding to purchase a
total of 2,330,563 shares of common stock with a weighted average exercise
price of $6.28 per share. In January 2000, we issued a warrant to Sony
Electronics to purchase 181,250 shares at $8.52 per share. If any of these
options or the warrant are exercised, there will be further dilution to new
public investors. Please see "Capitalization," "Management's Discussion and
Analysis of Financial Condition and Results of Operations," "Employee Benefit
Plans," and Notes 10 and 13 of Notes to Consolidated Financial Statements for
additional information about the outstanding options and warrant.
16
<PAGE>
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
You should read the following selected financial data in conjunction with
our financial statements and related notes, "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Unaudited Pro
Forma Condensed Financial Information," included elsewhere in this prospectus.
In particular, please see the information under the subheading "Overview" and
the subheading "Pro Forma Results of Operations" for a discussion of the
effects of our acquisitions of Protocall New Business Specialists Inc. and
Acorn and our spin-off of Spider.
Historical Presentation
The historical statements of operations data set forth below are derived
from and qualified by reference to our financial statements included elsewhere
in this prospectus. The historical periods are not necessarily indicative of
results to be expected in any future period.
Pro Forma Presentation
The pro forma financial data have been derived from our unaudited pro
forma condensed financial information which was prepared to illustrate the
effects of certain transactions and events and the receipt of the net proceeds
from this offering. The unaudited pro forma consolidated statements of
operations data for the year ended December 31, 1999 give effect to our
acquisition of Acorn and the spin-off of Spider as if those transactions had
occurred on January 1, 1999. The unaudited pro forma consolidated balance sheet
data give effect to the sale of 4,500,000 shares in this offering at an assumed
initial public offering price of $11.00 per share, after deducting the
estimated underwriting discounts and commissions and estimated offering
expenses, as if this offering had occurred on December 31, 1999. The following
transactions are assumed to have occurred on January 1, 1999 in the pro forma
as adjusted per share data in the consolidated statements of operations and on
December 31, 1999 in the unaudited pro forma as adjusted consolidated balance
sheet data:
. the issuance of 4,500,000 shares in this offering at an assumed
initial public offering price of $11.00 per share, after deducting the
estimated underwriting discounts and commissions and estimated
offering expenses;
. the automatic conversion of all shares of preferred stock outstanding
as of December 31, 1999 into 9,560,188 shares of common stock;
. the issuance of 1,333,433 shares of common stock to the holders of our
preferred stock as payment-in-kind dividends accrued through December
31, 1999; and
. the issuance of 721,124 additional shares of common stock to the
holders of our Series F preferred stock assuming the sale of shares in
this offering at an initial offering price of $11.00 per share. See
"Related Party Transactions - Securities Issuances and Loans."
An additional 140,195 shares of common stock will be issued to the holders
of preferred stock as payment-in-kind dividends subsequent to December 31, 1999
through February 29, 2000.
17
<PAGE>
<TABLE>
<CAPTION>
Period from
March 6, 1996
(inception) Years Ended December 31,
to December 31, ------------------------------------------------
1996 1997 1998 1999
--------------- ---------- ---------- ------------------------
Pro forma
Actual as adjusted
----------- -----------
(unaudited)
(in thousands, except share data)
<S> <C> <C> <C> <C> <C>
Consolidated Statements
of Operations Data:
Revenue................. $ 480 $ 9,546 $ 17,664 $ 24,699 $ 26,707
Direct cost of servic-
es..................... (211) (7,767) (13,209) (16,986) (17,964)
---------- ---------- ---------- ----------- -----------
Gross profit............ 269 1,779 4,455 7,713 8,743
Operating expenses:
Selling, general and
administrative........ 2,046 10,464 9,312 15,020 15,129
Depreciation and amor-
tization.............. 25 2,941 3,755 3,533 3,933
Research and develop-
ment.................. -- 458 897 1,079 278
---------- ---------- ---------- ----------- -----------
Total operating ex-
penses................ 2,071 13,863 13,964 19,632 19,340
---------- ---------- ---------- ----------- -----------
Loss from operations.... (1,802) (12,084) (9,509) (11,919) (10,597)
---------- ---------- ---------- ----------- -----------
Other (expenses) income:
Loss from Spider....... -- -- -- (1,055) (3,320)
Interest income........ 11 245 266 134 134
Interest expense....... (16) (30) (17) (150) (194)
Loss on disposal of
equipment and other... (2) (26) (270) (20) (20)
---------- ---------- ---------- ----------- -----------
(7) 189 (21) (1,091) (3,400)
---------- ---------- ---------- ----------- -----------
Net loss................ $ (1,809) $ (11,895) $ (9,530) $ (13,010) $ (13,997)
========== ========== ========== =========== ===========
Net loss applicable to
common stockholders:
Net loss............... $ (1,809) $ (11,895) $ (9,530) $ (13,010) $ (13,997)
Accretion of mandatorily
redeemable convertible
preferred stock........ (90) (469) (864) --
Cummulative dividends to
preferred
stockholders........... -- -- -- (11,361) --
Loss on repurchase of
Series A preferred
stock.................. -- (1,241) -- -- --
Loss on Series C pre-
ferred stock........... -- -- (1,465) -- --
---------- ---------- ---------- ----------- -----------
Net loss applicable to
common stockholders.... $ (1,809) $ (13,226) $ (11,464) $ (25,235) $ (13,997)
========== ========== ========== =========== ===========
Basic and diluted net
loss per share......... $ (1.07) $ (7.09) $ (6.14) $ (13.50) $ (0.90)
---------- ---------- ---------- ----------- -----------
Weighted average common
shares outstanding--ba-
sic and diluted........ 1,697,417 1,866,585 1,867,941 1,869,803 15,596,317
========== ========== ========== =========== ===========
Pro forma net loss per
share, assuming conver-
sion of preferred stock
and accrued dividends:
Basic and diluted net
loss per share........ $ (1.26)
===========
Weighted average common
shares outstanding--
basic and diluted..... 10,364,936
===========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------
1996 1997 1998 1999
------- -------- -------- ---------------------
Pro forma
Actual as adjusted
-------- -----------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheet
Data:
Cash and cash equivalents.. $ 441 $ 2,235 $ 3,752 $ 6,204 $52,239
Working capital............ 268 1,897 7,082 7,533 52,719
Total assets............... 1,296 17,086 18,644 26,378 71,762
Long-term borrowings, net
of current portion........ 47 20 7 1,722 1,722
Total stockholders' equity
(deficit)................. (1,219) (12,920) (22,990) (41,997) 61,946
</TABLE>
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and
results of operations should be read in conjunction with Selected Historical
and Pro Forma Financial Data and the financial statements and notes appearing
elsewhere in this prospectus. This discussion and analysis contains forward-
looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those anticipated in these forward-
looking statements as a result of several factors, including, but not limited
to, those stated in the Risk Factors section and elsewhere in this prospectus.
Overview
We provide an integrated set of strategic, technological, operational and
analytical solutions that takes our clients from concept to launch and
operation of their e-commerce and other direct-to-customer sales and marketing
initiatives. Our clients are typically Fortune 1000 and emerging Web-based
companies that sell complex products or employ complicated sales processes, and
require sophisticated outsourced service providers to help them conduct their
direct-to-customer initiatives. Our services enable our clients to rapidly
capitalize on market opportunities, access sophisticated technology, use the
services of highly-trained personnel and improve operating efficiencies.
We incorporated in Colorado in March 1996 and reincorporated in Delaware
in August 1996. Through February 1997, our operating activities consisted
primarily of hiring personnel, setting up our Denver headquarters and San Diego
facilities, developing our Web-based software and establishing client
relationships. Our revenue during this period was derived primarily from
technology development services.
In February 1997, we acquired Protocall, a customer support company that
had a communications center in Livermore, California. The net purchase price of
Protocall after assumption of liabilities was approximately $6.7 million. We
recorded an intangible asset of $3.0 million for acquired customer
relationships and $3.6 million as goodwill. We are amortizing the customer
relationship intangible amount over three years and the goodwill amount over
five years. Following the Protocall acquisition, we expanded our communications
center services. We opened our Denver communications center in April 1997 and
our Hayward, California communications center in May 1997.
We grew our business significantly in 1998. This growth came primarily
from expanding our communications center and technology development services to
existing clients and adding new clients. During 1999, we continued to expand
our e-Operations services, which include our communications center operations,
and our Technology Solutions services, as we increased services to our major
clients and, to a lesser extent, added new clients. We opened a large
communications center in Fort Scott, Kansas in June 1999 to support this growth
and planned future growth.
In October 1999, we acquired Acorn, which provides strategic consulting
and data analytic services to its clients. The initial purchase price for Acorn
after assumption of outstanding borrowings was approximately $2.0 million.
Approximately $493,000 of the purchase price was allocated to acquired goodwill
and $950,000 to acquired intangibles. Goodwill will be amortized on a straight-
line basis over five years and intangibles will be amortized on a straight-line
basis over three years. We also agreed to make significant future cash and
stock payments to the former stockholders of Acorn if Acorn meets specified
earnings targets over the next three years. The non-cash amortization of this
additional purchase consideration could significantly affect our earnings over
the next five years.
Effective October 1, 1999, we transferred the rights to the proprietary
software that we had developed and that is used in our EtinuumWebDirect System
to a newly-formed subsidiary, Spider. We then distributed the stock of Spider
to our stockholders. Fifteen of our technical personnel and four sales
personnel became employees of Spider. Spider is now primarily responsible for
research and development
19
<PAGE>
efforts with respect to the transferred software. As a result, our research and
development expenses for the fourth quarter of 1999 and on a pro forma basis
for 1999 were, and are expected to be for the foreseeable future, lower than
historical levels.
For federal income tax purposes, the distribution of the Spider shares to
our stockholders was a taxable event to us. The taxable gain was determined
based upon an independent valuation of Spider after applying minority and
liquidity discounts. This value and our capital gain for federal income tax
purposes was $4.5 million, which was offset by 1999 tax losses which exceeded
that amount. To the extent the IRS requires the valuation of Spider to be
increased and the taxable gain exceeds the tax operating loss for 1999, we
would owe alternative minimum taxes, the payment of which would adversely
affect our cash flow. Any increase in the valuation would also decrease our net
operating loss carryforward.
In connection with the spin-off, we distributed $1 million to Spider. We
also agreed to share some facilities, supplies and personnel with Spider, for
which it agreed to pay us specified fees. During the fourth quarter of 1999,
Spider's share of these expenses was approximately $525,000, which we paid. In
addition, we paid salaries for Spider's employees of approximately $530,000
during that quarter. We are continuing to pay all of these expenses on behalf
of Spider. We have accounted for the $1 million distribution as a long-term
receivable, which is to be repaid out of Spider's minimum royalty obligation of
$1.45 million. We are accounting for the other amounts due us as current
receivables. A valuation allowance has been recognized by a charge to
operations reducing these current receivables to zero. If Spider is unable to
generate sufficient revenue to pay its obligations, we may not be able to
recover the $1 million long-term receivable or the costs incurred or to be
incurred on its behalf pursuant to agreements entered into in connection with
the spin-off. This would have a negative effect on our results of operations in
the period in which the losses are recognized.
To date, a substantial majority of our revenue has come from our e-
Operations services and nearly all of the remainder has been from Technology
Solutions services. In the fourth quarter of 1999, we began billing for our
Strategic Consulting services, which we had previously provided primarily as a
way to attract new clients for Technology Solutions and e-Operations services.
We also significantly enhanced our database marketing and analysis services in
the fourth quarter through our acquisition of Acorn. These types of
professional services traditionally have higher gross margins than our e-
Operations services.
Substantially all of our revenue to date has been based on time and
expenses as incurred. Recently we entered into a long-term contract with a
major client under which our revenues will be based primarily upon a percentage
of the client's revenues generated from our operation of its direct-to-customer
initiative. We may enter into additional contracts with similar terms in the
future. In addition, we have recently entered into fixed-price agreements for
Strategic Consulting services. To date, revenue under these fixed-price
agreements has been immaterial.
Direct cost of services consists primarily of compensation and benefits to
our employees engaged in the direct delivery of professional services related
to the development, implementation and support of programs for our clients.
Direct cost of services also includes materials, training, telecommunications
expenses and equipment necessary for execution of our clients' programs. Under
our agreements with Spider, we are not required to pay license fees for
transferred software until November 2002, which will have a positive effect on
our direct cost of services until that time.
Research and development expenses consist of charges, including labor and
materials, related to the development and enhancement of software and
technology platforms used in providing services to our clients.
Selling, general and administrative expenses consist primarily of
salaries, commissions, benefits, and related expenses for personnel engaged in
sales and client support; salaries and related expenses of executive
management, human resources, finance and administrative personnel; expenses
related to our facilities; marketing and branding expenses, including trade
shows and promotional events; and other general corporate expenses.
20
<PAGE>
In January 2000, we issued a warrant to purchase 181,250 shares of common
stock to Sony Electronics, following discussions with Sony that had begun in
early 1999 to further strengthen our strategic relationship with Sony. The
value of this warrant is approximately $1.1 million which will be charged to
operations in the first quarter of 2000. Sony has been an important client
since late 1997 and our development of the EtinuumWebDirect system was funded
in part by revenue from our work for Sony.
Depreciation and amortization expenses consist of the depreciation of
equipment used in our operations, including phone switches and computer
equipment at our facilities.
Interest income is earned on cash balances in our bank accounts and short-
term investments. Interest expense is incurred on our debt and capital lease
obligations.
The terms of the Series F preferred stock financing provide that the price
per share paid for the Series F preferred will not be more than one-half the
initial price per share in this offering. If it is, we must issue additional
shares of common stock to the Series F preferred holders so that the price of
the Series F preferred when converted to common stock effectively equals one-
half of the price paid by the public in this offering. In addition, a charge
will be recorded of $13.9 million to net loss applicable to common stockholders
in the quarter in which the closing occurs due to this beneficial conversion
feature.
Pro Forma Results of Operations
The pro forma information takes into account the acquistion of Acorn and
the spin-off of Spider as if those transactions had occurred on January 1,
1999. On a pro forma basis, Acorn contributed $2.9 million in revenue during
1999. In addition, on a pro forma basis, Acorn contributed $1.5 million in
gross profit, while incurring $2.1 million in operating expenses, resulting in
a loss for the year of $0.7 million.
During the first nine months of 1999, on a pro forma basis, Spider
incurred $1.2 million in expenses related to support services such as
accounting, payroll, human resources and insurance. Spider also incurred $1.1
million in research and development expenses related to the continued
development of the EtinuumWebDirect System. On a going-forward basis, research
and development expenses will not include the effect of Spider. For the full
year 1999, Spider's operating expenses on a pro forma basis were $3.3 million.
21
<PAGE>
Historical Results of Operations
The following table sets forth for the periods presented data from our
consolidated statements of operations as a percentage of revenues. This data,
other than the pro forma financial information, has been derived from our
audited financial statements and should be read in conjunction with the
financial statements and notes included elsewhere in this prospectus.
<TABLE>
<CAPTION>
Period from
March 6, 1996
(inception) Years Ended December 31,
to December 31, ---------------------------------
1996 1997 1998 1999
--------------- ---- ---- -------------------
Pro forma
Actual as adjusted
------- -----------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue....................... 100% 100% 100% 100% 100%
Direct cost of services....... (44) (81) (75) (69) (67)
---- ---- --- ---- ----
Gross profit.................. 56 19 25 31 33
Operating expenses:
Selling, general and
administrative............. 426 110 53 61 57
Depreciation and
amortization............... 5 31 21 14 13
Research and development.... -- 5 5 4 1
---- ---- --- ---- ----
Total operating expenses.. 431 146 79 79 72
---- ---- --- ---- ----
Loss from operations.......... (375) (127) (54) (48) (40)
---- ---- --- ---- ----
Other (expense) income:
Loss from Spider............ -- -- -- (4) (12)
Interest income............. 2 3 2 1 1
Interest expense............ (3) -- -- (1) (1)
Loss on disposal of
equipment and other........ -- -- (2) -- --
---- ---- --- ---- ----
Net loss...................... (376)% (124)% (54)% (53)% (52)%
==== ==== === ==== ====
</TABLE>
Comparison of Years Ended December 31, 1997, 1998 and 1999
Revenue. Revenue increased 39.5% to $24.7 million in 1999, from $17.7
million in 1998. Over half of the increase was due to growth in initiatives for
major existing clients. We also increased revenue by adding new clients and, to
a lesser extent, through a change in the mix of our clients, which resulted in
higher average billing rates. Furthermore, our acquisition of Acorn contributed
an additional $0.9 million during the fourth quarter of 1999. In 1999, we
discontinued working with some clients whose initiatives did not require the
types of services on which we are focusing. Revenue increased 86.3% to $17.7
million in 1998 from $9.5 million in 1997. Slightly more than half of this
increase was due to a full year of revenue from our three largest clients,
which we had added in late 1997. The balance came from the addition of new
clients and the expansion of our Technology Solutions services.
Direct cost of services. Direct cost of services in 1999 was $17.0
million, or 68.8% of revenue, as compared to $13.2 million, or 74.8% of
revenue, in 1998. On a dollar basis, the increase in direct cost of services
was due to the increase in activities related to providing our services. Direct
cost of services in 1998 was $13.2 million, or 74.8% of revenue, compared to
$7.8 million, or 81.4% of revenue, in 1997. This dollar increase resulted from
costs related to increased services to new and existing clients. The
improvements as a percentage of revenue in 1999 and 1998 over the respective
prior years were related primarily to allocating fixed direct costs against
increased revenue.
Selling, general and administrative expenses. Selling, general and
administrative expenses were $15.0 million, or 60.8% of revenue, in 1999
compared to $9.3 million, or 52.7% of revenue, in 1998. A
22
<PAGE>
substantial majority of this growth in selling, general and administrative
expenses resulted from hiring additional management and support personnel. We
also incurred expenses in connection with opening a new communications center
in Fort Scott, Kansas and moving our headquarters facility in June 1999. Our
acquisition of Acorn in October 1999 resulted in additional selling, general
and administrative expenses of $0.3 million. In addition, we incurred $0.4
million in compensation expense related to incentive stock options. Selling,
general and administrative expenses in 1998 were $9.3 million, or 52.7% of
revenue, compared to $10.5 million, or 109.6% of revenue, in 1997. This
decrease was primarily a result of the termination of several management
personnel acquired in the Protocall acquisition.
Depreciation and amortization expenses. Depreciation and amortization
expenses in 1999 were $3.5 million compared to $3.8 million in 1998. The
decrease in depreciation and amortization expenses was a result of the disposal
or full depreciation of most equipment from the acquisition of Protocall.
Depreciation and amortization expenses in 1998 were $3.8 million compared to
$2.9 million in 1997. The increase of $0.8 million in 1998 compared to 1997
resulted from the depreciation of equipment in our Hayward facility for a full
year and new equipment added during the year.
Research and development expenses. Research and development expenses in
1999 were $1.1 million compared to $0.9 million in 1998. The increase in
research and development expenses was a result of continued development and
support of the EtinuumWebDirect System. In October 1999, we transferred the
rights to the software used in the EtinuumWebDirect System to Spider and we
then distributed all of the stock of Spider to our stockholders. Consequently,
research and development expenses in the fourth quarter of 1999 were
negligible. Research and development expenses increased in 1998 to $0.9 million
from $0.5 million in 1997 due to the continued development and support of the
EtinuumWebDirect System.
Interest income. Interest income in 1999 was $0.1 million compared to $0.3
million in 1998 and $0.2 million in 1997. Fluctuations from year to year were
due to preferred stock financings and the investment of the proceeds in short-
term financial instruments.
Interest expense. Interest expense in 1999 was $0.2 million. Interest
expense in 1998 and 1997 was negligible. Interest expense in 1999 resulted from
our borrowings against our lines of credit and leases for office equipment and
furniture.
Loss on disposal of equipment and other expense. In early 1998, we
disposed of telecommunications equipment we considered no longer useful in our
operations. The result was a $0.3 million loss.
23
<PAGE>
Selected Unaudited Historical Quarterly Financial Data
The following table sets forth certain unaudited consolidated statements
of operations data for the eight quarters ended December 31, 1999. In our
opinion, the quarterly data include all adjustments, consisting only of normal
recurring adjustments, considered necessary for a fair presentation of such
information. Operating results for any quarter are not necessarily indicative
of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------------------------
Mar. 31, June 30, Sept. 30, Dec. 31, Mar. 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998 1999 1999 1999 1999
-------- -------- --------- -------- -------- -------- --------- --------
(unaudited)
(in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ 3,402 $ 3,646 $ 4,989 $ 5,627 $ 5,432 $ 4,879 $ 5,567 $ 8,821
Direct cost of
services............... (3,086) (2,688) (3,404) (4,031) (3,638) (3,420) (4,296) (5,632)
------- ------- ------- ------- ------- ------- ------- -------
Gross profit............ 316 958 1,585 1,596 1,794 1,459 1,271 3,189
Operating expenses:
Selling, general and
administrative........ 2,213 2,143 2,445 2,511 2,911 3,182 3,864 5,063
Depreciation and
amortization.......... 1,070 1,056 770 859 765 775 875 1,118
Research and
development........... 154 189 224 330 328 344 389 18
------- ------- ------- ------- ------- ------- ------- -------
Total operating
expenses.............. 3,437 3,388 3,439 3,700 4,004 4,301 5,128 6,199
------- ------- ------- ------- ------- ------- ------- -------
Loss from operations.... (3,121) (2,430) (1,854) (2,104) (2,210) (2,842) (3,857) (3,010)
------- ------- ------- ------- ------- ------- ------- -------
Other (expense) income:
Loss from Spider....... -- -- -- -- -- -- -- (1,055)
Interest (income)...... (26) (87) (108) (45) (14) (45) (23) (52)
Interest expense....... 1 13 1 1 5 6 8 131
Loss on disposal of
equipment and other... 269 1 -- 1 -- 1 11 8
------- ------- ------- ------- ------- ------- ------- -------
Net loss................ $(3,365) $(2,357) $(1,747) $(2,061) $(2,201) $(2,804) $(3,853) $(4,152)
======= ======= ======= ======= ======= ======= ======= =======
Basic and diluted net
loss per common share.. $ (1.86) $ (2.11) $ (1.00) $ (1.17) $ (1.25) $ (1.57) $ (2.13) $(8.55)(1)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
(1) Of this loss per share, $6.06 is attributable to the charge for cumulative
payment-in-kind dividends accrued to the preferred stockholders.
Liquidity and Capital Resources
We have raised $51.0 million of equity capital to date from the sale of
common and preferred stock, net of offering expenses.
Cash and cash equivalents at the end of 1997, 1998 and 1999 were $2.2
million, $3.8 million, and $6.2 million, respectively. The increases in cash
were primarily from the net proceeds from the issuance of convertible
preferred stock of $22.8 million in 1997, $11.8 million in 1998 and $14.5
million in 1999. The proceeds were used primarily to fund operating
activities, capital expenditures and acquisitions.
Cash used in operations for 1997, 1998 and 1999 was $9.5 million, $9.0
million and $6.6 million, respectively. Our negative operating cash flow
resulted primarily from our net losses experienced over these periods. During
these periods we continued to develop our communications centers, hire key
management and other personnel and expand our technology infrastructure to
support our growth.
Cash used in investing activities was $9.0 million, $1.2 million and $7.4
million for 1997, 1998 and 1999, respectively. We have invested in
communications centers, expanded our technology resources and enhanced our
support infrastructure. In 1997, we acquired Protocall for $6.7 million, of
which $3.3 million was in cash. We also spent $5.6 million for computer and
communications equipment and facilities expansion, including the opening of
communications centers in Denver and Hayward, California. During 1999, we
opened a communications center in Fort Scott, Kansas and moved our
headquarters operations, which resulted in capital investments in computer
systems, facility expansion, furniture and fixtures. Effective October 1,
1999, we purchased Acorn for initial consideration of $ 2.0 million, of which
$0.6 million was in cash.
24
<PAGE>
Our financing activities have generated cash of $20.3 million, $11.7
million and $16.5 million for 1997, 1998 and 1999, respectively. Net proceeds
from the sale of preferred equity have generated cash of $22.8 million, $11.8
million and $14.5 million for 1997, 1998 and 1999, respectively. In June 1999,
we obtained a two-year revolving line of credit from Silicon Valley Bank.
Borrowings under this secured line of credit bear interest at the bank's prime
rate plus 1.5%. The credit limit is based on 80% of the eligible accounts
receivable balance up to a maximum credit limit of $5.0 million. In September
1999, we obtained a 30-month, $2.5 million credit facility secured by the
capital assets at the Fort Scott communications center and a junior lien on
most of our other assets. In the fourth quarter of 1999, we drew $2.5 million
against this line to purchase equipment for use in the Fort Scott facility.
In March 1999, we received an $800,000 grant from the Kansas Department of
Commerce and Housing to offset costs for instruction, curriculum development,
training equipment, facilities and other expenses associated with our Fort
Scott facility. Under the terms of the grant, we are required to maintain
specified employee and wage levels in our Fort Scott facility until the third
quarter of 2001. We have earned $336,000 from this grant, of which the State of
Kansas has paid us $151,000. If there are insufficient funds available to fund
this grant in the future, we may not be reimbursed for expenses covered by the
grant until funds become available, if at all.
In addition, in April 1999, we received a $400,000 loan from the Kansas
Department of Commerce and Housing under the Kansas Economic Opportunity
Initiatives Fund. The loan is interest free and will be forgiven in equal
amounts over a five-year period provided that we meet and maintain specified
employee and wage levels and do not vacate our Fort Scott facility during this
period. If we fail to meet these requirements, or otherwise breach the
agreement, we must repay all or part of the amount of the loan plus 12%
interest.
We believe that the proceeds from this offering together with our cash and
borrowing capacity will be sufficient to fund our activities for at least the
next 12 months.
If the offering is not completed in a timely manner, we will need to
decrease our planned business expansion efforts or raise additional capital
through debt or private equity placements to fund our expansion efforts over
this period. There is no assurance that such alternative financing will be
available on terms acceptable to us, if at all. In addition, although there are
no commitments or agreements with any third party with respect to any
acquisition of other businesses, products or technologies, we may, from time to
time, evaluate potential acquisitions of other businesses, products or
technologies. In order to consummate potential acquisitions, we may need to
issue equity or debt securities and these issuances may be dilutive to existing
investors.
Without the proceeds from this offering, management believes that current
cash on hand, funds available under a current bank line of credit and other
sources of liquidity are sufficient to fund our operations through December 31,
2000. To fund our operations beyond December 31, 2000 without this offering, we
would be required to raise additional capital through debt or private equity
financings, consistent with our prior practices.
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS No.133,
"Accounting for Derivative Instruments and Hedging Activities". The Company is
required to adopt SFAS No. 133, as amended by SFAS No. 137, in 2001. SFAS No.
133 establishes methods of accounting for derivative financial instruments and
hedging activities related to those instruments, as well as other hedging
activities. Etinuum has not entered into any derivative financial instruments
or hedging activities. As a result, management believes adoption of SFAS No.
133 will not have a material impact on the financial statements.
25
<PAGE>
In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition."
SAB No. 101 provides guidance on the measurement and timing of revenue
recognition in financial statements of public companies. Changes in accounting
policies to apply the guidance of SAB No. 101 must be adopted by recording the
cumulative effect of the change in the fiscal quarter ending March 31, 2000.
Management has not yet determined the effect SAB No. 101 will have, if any, on
its accounting policies or the amount of the cumulative effect to be recorded
from adopting SAB No. 101.
Quantitative and Qualitative Disclosures about Market Risks
Market risks represent the risk of loss that may impact our financial
position, operating results or cash flows due to adverse changes in financial
market prices and rates. We are exposed to market risks from changes in United
States interest rates. Historically, and as of December 31, 1999, we have not
used derivative instruments or engaged in hedging activities.
We had long-term borrowings, including current maturities, of $3.2 million
as of December 31, 1999. Of this amount, $2.3 million bears interest at a fixed
rate of 13.9%. The fair value of the fixed-rate debt would change approximately
$10,000 for a 0.50% change in the level of interest rates.
We temporarily invest our excess cash in money market funds. Changes in
interest rates would not significantly affect the fair value of these temporary
cash investments because they are repriced on a daily basis.
Inflation
As a result of the relatively low levels of inflation during the last
three years, inflation did not have a significant impact on our results of
operations for those periods.
Income Taxes
We have historically concluded that there exists substantial doubt as to
the recoverability of our deferred tax assets. As a result, we have recorded a
valuation allowance of $9.5 million against those deferred tax assets. Our view
as to the ultimate recoverability of our deferred tax assets may change in the
near term based principally upon the successful execution of our business plan.
Year 2000 Issue
The "Year 2000" issue has been a general term used to describe the various
problems that may result from the improper processing of dates and date-
sensitive calculations by computers and other machinery after December 31,
1999. These problems arise from the inability of hardware and software to
distinguish dates in the "2000s" from dates in the "1900s" and from other
sources such as the use of special codes and conventions in software that make
use of a date field. We have not experienced any significant disruptions from
the Year 2000 rollover; however, we recognize the need to continue to ensure
that our operations will not be adversely affected by still undiscovered Year
2000 software failures.
To date, we have not incurred any material costs directly associated with
Year 2000 compliance efforts. We do not expect the total cost of Year 2000
problems to be material to our business, financial condition or operating
results. We will continue to evaluate any new software and hardware systems
that we may acquire to determine whether they are Year 2000 compliant. Despite
our current assessment, we may not identify and correct all significant Year
2000 problems on a timely basis. If the representations made by our various
vendors regarding Year 2000 compliance are inaccurate, additional Year 2000
compliance efforts may involve significant time and expense, and unremedied
problems could harm our business.
In addition, the software and hardware systems of our clients, third-party
service companies and others outside of our control may not be Year 2000
compliant. If these systems are not Year 2000 compliant, a systemic failure
beyond our control could result, including Internet, telecommunications or
general electrical failure. These type of failures would significantly
interfere with our ability to provide our services to our clients. If these
failures were prolonged, our business would be harmed.
26
<PAGE>
BUSINESS
Overview
Etinuum provides an integrated set of solutions that takes our clients
from concept to launch and operation of their e-commerce and other direct-to-
customer initiatives. Our services allow both traditional and Web-based
companies to more effectively market and sell to their customers and to support
new and existing customers while reducing the investments they may otherwise
have to make in technology, facilities and personnel infrastructure. Our
comprehensive range of services includes:
. Strategic Consulting. We provide strategic program design, specifying
the necessary technology platforms, customer communications processes,
data requirements and personnel skills necessary for the client's
initiative;
. Technology Solutions. We design and implement the software and
hardware components needed to rapidly deploy our clients' initiatives
and to link our customized technology platforms with the clients' and
their vendors' systems;
. e-Operations. We operate technology systems and provide high-level
customer support personnel and communications services on behalf of
our clients, conducting sophisticated transactions with their
customers via voice, e-mail, fax and real-time online communications;
and
. Customer Knowledge. We collect and analyze data to help our clients
improve their marketing efforts and customer relationships through a
better understanding of their customers' buying processes and
behaviors.
We enable our clients to implement their e-commerce strategies and
introduce new products and services by providing comprehensive direct-to-
customer services that are integrated with our clients' systems and transparent
to their customers.
Industry Background
The acceptance and rapid growth of the Internet has dramatically changed
the way businesses and consumers communicate, obtain information, purchase
goods and services, and conduct business. International Data Corporation, or
IDC, estimates that the number of users who make purchases over the Web will
increase from nearly 31 million in 1998 to more than 182 million in 2003, and
that the amount of worldwide e-commerce conducted over the Web will increase
from $50 billion in 1998 to about $1.3 trillion in 2003. Both new Web-based
companies and traditional providers of goods and services are transforming
their business processes into e-commerce processes in an effort to lower costs,
improve customer service and increase productivity.
Increasing use of e-commerce and associated direct-to-customer
initiatives. Emerging Web-based companies established to take advantage of
Internet sales opportunities are proliferating. To meet competitive pressures
from these companies, traditional businesses are reevaluating their sales and
marketing methods and increasingly seeking to sell directly to customers
through e-commerce and associated direct-to-customer initiatives rather than
relying solely on intermediaries, such as wholesalers and retailers. Direct-to-
customer initiatives use a combination of Web sites, e-mail and other Internet-
based communications, telephone communications, fax and mail. Clients and
customers may transition among communications methods over time, or even during
single purchases. A customer may, for example, receive a product offer through
direct mail, access the company Web site for product information, call a toll-
free number to order products and receive an e-mail confirming shipment.
Direct-to-customer initiatives generally result in lower distribution
costs and better control over the customer experience than does selling through
intermediaries, and also provide the basis for future targeted marketing
efforts. Direct sales can also provide companies with valuable end-user
customer information,
27
<PAGE>
including buying patterns, feature and function preferences and customer
support requirements. This information can be used to design better products,
enhance marketing programs and improve overall customer satisfaction.
Increasing complexity of direct-to-customer initiatives. The process of
establishing e-commerce and other direct-to-customer initiatives is becoming
more complex as a result of the increasing sophistication of the products and
services being offered and, in many cases, the need to integrate the
initiatives into the existing business models of large traditional companies.
Comprehensive Internet strategies must include strategic and technological
solutions that combine e-commerce and other direct-to-customer support
initiatives. Additionally, most direct-to-customer initiatives require several
alternative points of contact between a company and its customers, including
voice, e-mail, fax, real-time online communications and mail. Companies are
recognizing that the task of quickly and effectively designing, building and
operating these initiatives requires a specialized range and level of skills,
technology and infrastructure.
Growing trend to outsource. Many companies, whether implementing new or
expanding existing e-commerce and other associated direct-to-customer programs,
often lack sufficient expertise, resources or the technical infrastructure to
move rapidly from concept to launch and operation. The skills and
infrastructure required to create and implement these initiatives are in short
supply, and the complexity of these efforts is increasing. This complexity, the
rapid pace of technological change and the difficulty of building in-house
resources are driving companies to outsource the development of their e-
commerce programs. IDC forecasts that the worldwide Internet services market
will grow from $7.8 billion in 1998 to $78.5 billion in 2003, representing a
five year compounded annual growth rate of 59%.
Typically, outsourcing service providers focus on only a subset of the
complete range of services required to take an e-commerce or other direct-to-
customer initiative from concept to launch and operation. As a growing number
of companies offer more complex products and services online, we believe that
demand has increased for more sophisticated outsourced service providers. These
companies are seeking service providers that can offer an integrated approach
to the technological and personnel services required to rapidly capitalize on
market opportunities.
The Etinuum Solution
We design, build and operate direct-to-customer solutions that integrate
and coordinate sophisticated e-commerce initiatives encompassing online and
offline components. Our services consist of Strategic Consulting, Technology
Solutions, e-Operations and Customer Knowledge. We typically initiate our
services with a strategic consulting engagement involving a team of our
management and technical personnel working with the client to plan its e-
commerce and other direct-to-customer initiatives. Based upon the specific
client's strategy, internal capabilities and existing systems and
infrastructure, we will define a program to use all or some of our services to
meet their specific needs. We believe our comprehensive integrated services
approach allows our clients to:
Quickly capitalize on direct-to-customer market opportunities. Our
approach and services enable our clients to rapidly implement their e-commerce
and other direct-to-customer initiatives and take advantage of market
opportunities without lengthy start-up and in-house integration efforts. We
believe the expertise and infrastructure we have developed allow us to rapidly
and cost-effectively integrate new e-commerce initiatives and traditional
direct-to-customer programs. This integration creates an initiative that is
consistent across the various customer contact points and that is linked across
our, our client's and its vendors' systems. We also believe our experience
working with companies offering sophisticated products, such as financial
instruments and computer and electronic equipment, and using complicated sales
processes, such as those found in regulated industries and business-to-business
transactions, provides our clients with a competitive advantage as they
implement direct-to-customer initiatives. We believe that our ability to
improve time-to-market is particularly important for our target market of large
traditional and new Web-based companies that face urgent competitive needs to
establish direct-to-customer initiatives.
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Access sophisticated technology. We use advanced software technology and
an infrastructure developed specifically for e-commerce and other direct-to-
customer initiatives to provide our integrated services to clients. Our
EtinuumWebDirect System enables effective transaction processing and customer
support across multiple communications channels, and provides personalization,
routing and management of customer interactions. It allows us and our clients
to rapidly deploy and maintain the technology across multiple geographic
locations, company divisions and hardware platforms. Our infrastructure
includes advanced networking technology that provides intra- and inter-company
communications, distribution of the EtinuumWebDirect System, and hosting and
data warehousing capabilities. The systems and infrastructure have been
developed to be scalable to meet our existing and potential clients' growth
needs.
Improve the customer experience. We enable our clients to provide their
customers with a positive consumer experience, thereby maintaining and
promoting brand loyalty. Through our use of advanced technology, we can
communicate directly with our clients' customers by voice, fax, e-mail, and
real-time online communications. Our personnel educate customers about, and
assist them in obtaining, our clients' products and services. We believe we
offer our clients a superior level of service, including availability of 24
hour, seven day a week communications center services.
Access the services of highly-trained personnel. We train our personnel to
deal with our clients' complex products and complicated sales processes, which
we believe creates the basis for long-term client relationships. Some of our
clients work in regulated industries and therefore our personnel often must be
licensed by federal, state or other regulatory agencies in order to serve those
clients' customers. For example, our employees who work with some financial
services products must be licensed by federal and state authorities to act as a
securities broker/dealer and must have Series 6, 7 and 63 licenses from the
NASD. We believe that providing these high-level services allows us to capture
sensitive aspects of business that have not traditionally been outsourced.
Reduce investment and improve operating efficiencies. We have made
significant investments in operations infrastructure, including technology
platforms, systems hardware, communications systems and highly-trained
personnel. This infrastructure provides clients with access to our economies of
scale and expertise to rapidly grow their direct-to-customer business while
limiting their additional fixed costs that may otherwise be necessary to create
and maintain their own infrastructure. Our clients have the flexibility to
scale their growth and to evolve the range of their direct-to-customer
initiatives, on a variable cost basis, preserving scarce capital resources for
other business-critical purposes.
The Etinuum Strategy
Our goal is to be a leading integrated services provider to companies
developing e-commerce and other direct-to-customer initiatives involving
complex products or sales techniques. Our strategies to achieve that goal are:
Target clients that provide substantial growth opportunities. We target
clients that we believe provide significant opportunities for growth. We direct
our marketing efforts toward Fortune 1000 and new Web-based companies with
which we can develop long-term relationships. We believe that our current
clients generally are, or are positioned to be, among the leaders in their
industries. We look to grow our business with our clients by offering them
additional services as their direct-to-customer initiatives grow and by
offering them new services as our capabilities expand.
Pursue clients in specialized markets that require sophisticated
services. We intend to focus our sales efforts on businesses in markets that
require complex solutions and skilled personnel. We believe our expertise with
sophisticated products, such as financial instruments, and with complicated
sales programs, such as those found in regulated industries, gives us a
competitive advantage in marketing to clients with similar products and
programs. In addition, we intend to use our expertise to target clients in
specific industries, such as financial services.
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Promote our brand through expanded marketing efforts. We believe that
building brand awareness and our reputation as a leading e-commerce solutions
provider is critical for attracting and retaining clients. We believe that no
existing company has established a prominent brand presence as a provider of
integrated services to companies developing e-commerce and other direct-to-
customer initiatives and that there exists a market opportunity to establish
our brand as a leading provider in that market. We intend to build our brand
awareness through targeted branding efforts that are focused on decision makers
in various vertical markets. We also plan to develop additional relationships
with management consulting, accounting, marketing and other professional firms
that work with potential clients.
Broaden and continue to strengthen our service offerings. We plan to meet
the evolving needs of businesses using e-commerce and other direct-to-customer
initiatives by adding to and improving our services through internal
development and strategic acquisitions. We believe we currently offer a range
of services, from planning through operating direct-to-customer initiatives,
and a level of expertise in complex products and sales processes that
differentiates us from our competitors. Our focus will continue to be on
providing high value-added services. For example, we acquired the database
marketing and analysis firm Acorn in October 1999 to complement our existing
service offerings. We will continue to evaluate selected acquisitions to
complement our service offerings and seek the personnel required to develop and
implement comprehensive e-commerce direct-to-customer initiatives.
Continue to hire, train and retain talented people. Our business involves
the delivery of sophisticated services that require consultants, technical
personnel and other highly-trained people. We believe that attracting and
retaining outstanding personnel is essential to our growth. We seek management,
marketing and technical personnel with expertise that will enhance our
operations and growth opportunities. In addition, we provide significant
training for our new and existing employees to allow them to increase their
skills and responsibilities.
Etinuum's Services
We provide an integrated service offering to companies that have or wish
to implement e-commerce and other direct-to-customer initiatives. We offer our
services on an outsourced basis using our technical and personnel resources to
deliver added value to our clients. Our services consist of Strategic
Consulting, Technology Solutions, e-Operations and Customer Knowledge. In each
of these areas, we provide a combination of Internet-related services and
traditional services for direct-to-customer initiatives. For example, in
providing Strategic Consulting and Technology Solutions services, we work with
our clients to plan and implement their Web sites as well as the telephone, fax
and mail aspects of their sales and marketing initiatives. We consult with our
clients to select appropriate third-party vendors for other services, such as
handling product distribution and some creative aspects of direct-to-customer
initiatives. At our clients' request, we will coordinate the activities of the
third-party vendors to enhance the smooth operation of our clients'
initiatives. We continually evaluate which services we wish to offer on an
outsourced basis to most effectively serve our clients. Our current range of
integrated services consists of:
Strategic Consulting. Our Strategic Consulting services are focused on
helping our clients increase sales and reduce costs, maintain customer loyalty
and develop better business processes. Strategic consulting during the initial
phase of a client engagement gives us the opportunity to develop a close, long-
term relationship with the client and provides the opportunity to work with the
client from inception to launch and operation of its initiative. Through our
strategic consulting, we determine the clients' needs and objectives, then work
with the clients to establish an overall program structure and to determine how
the technology platforms, customer communications, data requirements and
necessary personnel will work together. Steps in this process include:
. generating strategic options that address the complete range of issues
involved in establishing direct-to-customer initiatives, including
channels, branding, partnerships, pricing, technology deployment and
customer strategies;
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. assessing the strategic options against the market opportunities, the
competitive environment, the client's overall business strategy, its
existing business processes and systems, available resources and
technologies, and timing requirements;
. determining the optimal client-specific strategic solution, including
the scope of the initiative and related initiatives, broad technical
requirements, timing and the parties responsible for each segment of
the initiative; and
. designing the overall initiative, including all deployment plans for
technology solutions, communications center operations and customer
data analysis. The planning includes implementation schedules, revenue
and cost structures, personnel requirements, technical partnerships
and operations management.
Our personnel also work with clients and third-party marketing experts to
design the clients' product launches and marketing campaigns. For some clients,
we may provide specialized consulting services regarding regulatory issues that
are applicable to the client's direct-to-customer initiative. For example, we
consult with clients in the financial services business regarding compliance
with federal and state regulations.
Technology Solutions. We provide comprehensive technology design and
implementation services to facilitate e-commerce and other direct-to-customer
initiatives. Our solutions enable our clients to do business directly with
their customers via voice, e-mail, fax and real-time online communications.
Most of our technology solutions include implementation of our EtinuumWebDirect
System, which incorporates a Web-based software solution that we initially
developed and now license from Spider on a long-term basis. See "Related Party
Transactions - Spin-Off of Spider Technologies" for additional information
about our license arrangement. Our EtinuumWebDirect System is specifically
designed to facilitate direct-to-customer initiatives using a modular design
approach that permits flexible and rapid implementation to meet a client's
specific needs. Our Technology Solutions services include:
. evaluating technology platforms to meet the clients' specific
requirements;
. installing, customizing and integrating the EtinuumWebDirect System or
other technology platforms;
. designing the creative aspects of our EtinuumWebDirect System user
interfaces;
. customizing and configuring applications, such as customer interfaces,
order entry systems and customer information systems;
. integrating the direct-to-customer technology platform with the
clients' existing systems and, in most cases, to the clients' vendors'
systems;
. testing and documenting the systems; and
. providing on-going enhancements and optimization of the comprehensive
technical solution.
e-Operations. We use our customer representatives and communications
services to operate our clients' e-commerce and other direct-to-customer
initiatives. We have made significant investments in our infrastructure, such
as technology platforms, systems hardware, communications systems and highly-
trained personnel. We have designed our infrastructure specifically for
efficient and reliable operations with complex products and sales processes.
Our e-Operations services include:
. managing the operations of our clients' direct-to-customer systems and
customer databases from our communications centers;
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. communicating with our clients' customers through voice, e-mail, fax
and real-time online communications;
. providing hosting and data warehousing for our clients;
. coordinating the activities of third-party vendors; and
. conducting one-to-one marketing programs that we design as part of our
Customer Knowledge services, including the upfront customer data
acquisition and subsequent program execution.
Our communications centers provide a full range of interaction between our
clients and their customers with a focus on services that require high levels
of skills, expertise and technology. Our communications center personnel are
assigned to specific clients' initiatives and are given extensive training in
the client's products and services in order to provide sales assistance and
technical support to our clients' customers. By using highly-trained personnel,
we are able to provide added value to our clients, and we become an integral
part of their businesses.
For our largest clients, we have personnel at two or more communications
centers to assure coverage, redundancy and reliability. In addition, some
clients have their own personnel at our communications centers to provide
assistance for complex programs and to increase client coordination. We operate
computer servers in our Colorado, California and Kansas facilities. The
availability of multiple servers provides data redundancy and back-up to our
clients.
Customer Knowledge. We offer sophisticated database marketing and analysis
services that are focused on understanding customers' buying processes and
behaviors to help our clients improve their marketing efforts and customer
relationships. Our Customer Knowledge services include:
. using analytical methods to define and identify the target population
for clients, and to advise clients about capturing key customer
information and using external data sources to support detailed
profiles of their customers;
. analyzing the clients' customer and prospective customer information
to find patterns of purchasing behavior and tying them into the
clients' marketing objectives of improving sales effectiveness,
building customer loyalty or acquiring new customers;
. implementing a relationship marketing system for clients, using a
combination of a proprietary technology platform and off-the-shelf
tools. This system accepts customer contact marketing from all
channels, including Internet, e-mail, Web forms, business reply cards
and calls to communications centers, and integrates this data into a
single view of the customer;
. analyzing the effectiveness of the marketing channels and the
conversion rates so that adjustments can be made to improve sales and
marketing programs; and
. building meaningful and actionable reports that are accessible over
the Internet through secured interfaces to enable clients to have
real-time access to the entire marketing campaign lifecycle and make
the appropriate marketing decisions.
Our Clients
We have provided Strategic Consulting, Technology Solutions, e-Operations
and Customer Knowledge services to clients in various industries. These clients
are generally either large established companies or emerging Web-based
companies. Set forth below is a representative list of our clients and the
types of services we have performed or are contracted to perform for them.
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<TABLE>
<CAPTION>
Types Of Services
--------------------------------------------
Strategic Technology Customer
Client Name Consulting Solutions e-Operations Knowledge
- ----------- ---------- ---------- ------------ ---------
<S> <C> <C> <C> <C>
American Classic Voyages* X X
American Express X X X
Autoweb.com X X X
Pitney-Bowes* X X
Rx Remedy* X
Safeway X X X
Sega X X X
Sony X X X
</TABLE>
- ------------------
* These companies were initially Acorn clients.
Described below are examples of work we have performed for clients in each
of our service offerings areas.
Strategic Consulting. We assisted a client in establishing a Web-based
direct-to-customer marketing and sales program by:
. working with the client and a third-party vendor to expand and improve
the client's Web site for the new initiative;
. advising the client on the appropriate communications channels to
provide to potential customers for obtaining additional information;
and
. helping the client select suppliers in various geographic areas to
participate in the initiative.
Technology Solutions. We designed and implemented a transaction processing
system for a consumer products company that:
. provides online reference materials, product specifications and
specific customer histories for our customer representatives; and
. integrates software applications to handle various functions,
including credit card verification and fraud prevention, and to
provide customer and product information to the client's fulfillment
operations.
e-Operations. We manage a major direct-to-customer initiative for an
electronic products manufacturer, including:
. hosting the transaction processing software applications on our
servers; and
. handling their customer's purchases, including helping to configure
the product, cross-selling other products or accessories, and
processing credit card payments or establishing leases.
Customer Knowledge. We have provided a range of database management and
analytic services to a client in the pharmaceutical industry, including:
. designing, building and maintaining a large database of detailed
customer-submitted information; and
. using advanced analytical techniques to effectively segment the
customer base for targeted marketing campaigns.
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During the past two years, we have derived a substantial majority of our
revenue from ongoing business with a few significant clients. For 1999, Sony
accounted for approximately 27% of our revenue, Sega accounted for 12% and our
next two largest clients, American Express and Safeway, accounted for an
aggregate of approximately 18%. The same four clients accounted for
approximately 54% of our revenue in 1998. We anticipate that a significant
portion of our revenue will remain concentrated with a few clients, but will
vary among clients from period to period.
Generally our work is performed and clients are charged based on time and
expenses according to the terms of written agreements. Recently we entered into
a contract with a major client under which our revenue will be based primarily
upon a percentage of the client's revenues generated by our operation of their
direct-to-customer initiatives. In addition, we have recently entered into
fixed-price agreements for some strategic consulting services. In some
instances, we will perform work for a client following expiration of a contract
or while the terms of a letter of intent, new contract or contract extension
are being negotiated. In those cases, we would not have a binding agreement to
rely on should a dispute arise with a client regarding delivery of or payment
for our services. Our contracts are generally terminable by the client on 30-
days' written notice with little or no penalty.
Sales and Marketing
We market our brand and integrated service offering to large companies
that are establishing or expanding their direct-to-customer initiatives and to
new companies formed to take advantage of commerce opportunities on the
Internet. Our marketing efforts will be focused on two primary objectives:
. educating potential clients and third-party influencers on e-commerce
and other direct-to-customer strategies, the effective application of
technology to direct-to-customer initiatives and the role of
electronic services and operations in meeting direct-to-customer
business objectives; and
. positioning our company and brand as an acknowledged leader in
designing, building and operating e-commerce initiatives for complex
products and sales processes.
We believe the importance of our brand and reputation will increase as new
competitors enter our market. We also believe that no existing company has
established a prominent brand presence as a provider of our range of integrated
services to companies developing sophisticated e-commerce and other direct-to-
customer initiatives and that there exists a market opportunity to establish
our brand as a leader in that market. We intend to build our brand awareness
through marketing that is focused on decision makers in various vertical
markets, with an emphasis on specific vertical markets where our experience and
services provide special value-added benefits to our clients. We have recently
established a core group of sales and marketing personnel to concentrate on the
financial services industry, in which we have substantial expertise.
Our efforts will include vertically-targeted direct campaigns utilizing
database marketing, advertisements in selected publications, an interactive and
educational Web site, information pieces published for industry forums and
educational seminars for high-level decision makers. We will promote our
expertise in trade forums and publications, and directly to prospective
clients.
We also plan to develop additional relationships with management
consulting, accounting, marketing and other professional firms that work with
potential clients. We have existing relationships with many of these firms
through our management team, board of directors and investors. We intend to
bring greater focus to accessing these contacts and exploring a range of
partnerships, alliances and other formal relationships.
To expand our efforts in both sales and marketing, we have recently put in
place dedicated resources consisting of a head of sales and a head of
marketing, as well as two sales professionals. We intend to hire
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several additional sales professionals over the next few months and to
strengthen the sales process. Prior to establishing this organization, our
sales efforts had been made primarily by senior management and key technical
personnel. These people will continue to be an important part of our sales and
marketing efforts.
We anticipate incurring significant additional sales and marketing
expenses in the foreseeable future. These increased expenses may not be offset
by increased revenues, causing an adverse affect on our financial results.
Competition
We compete in the growing market of companies that support businesses
involved in e-commerce and other direct-to-customer initiatives. Many companies
offer, on an individual basis, one or more of the same services we do. Our
primary potential competitors in the areas in which we provide services include
the following:
. Strategic Consulting: consulting firms such as AnswerThink, Diamond
Technology Partners, Luminant, Mitchell Madison and the consulting
arms of the Big Five accounting firms;
. Technology Solutions: technology integrators, such as Andersen
Consulting, Cambridge Technology, iXL, Octane, Razorfish, Sapient,
Scient, Seibel, SilkNet, USWeb/CKS and Viant;
. e-Operations: customer support service companies, such as EDS, Perot
Systems, PFSWeb, Stream and Teletech; and
. Customer Knowledge: data mining and analytics firms, such as Axciom,
Centrobe, Experian and Harte Hanks.
We believe that the principal competitive factor in our market is the
ability to provide a comprehensive range of high-end services to clients
quickly and cost effectively. We believe that the other competitive factors in
our market are operating performance and reliability, ease of implementation
and integration, and price. We believe that we compete favorably with respect
to these factors.
We anticipate that competition in our market will increase substantially.
There are relatively few barriers preventing competition from entering our
market. We have no patents that preclude or inhibit others from offering the
same services that we do. Many of the companies with which we compete today in
limited areas, and other companies that may enter our market, have
significantly greater name recognition and marketing, technical and financial
resources than we have. If they or any other company were to offer comparable
services on a more cost-effective or timely basis than we do, our business and
financial results could suffer. We also face competition from the in-house
capabilities of existing or potential clients, which could increase if economic
conditions decline and companies take or keep programs in-house to avoid
layoffs.
Technology
We provide our integrated services using Web-based software technology and
an infrastructure developed specifically for e-commerce and other direct-to-
customer initiatives. Our infrastructure incorporates advanced networking
technology that provides intra- and inter-company communications, including
hosting and distribution of our software technologies. We assure a high degree
of reliability through multiple Internet services and telecommunications
providers, redundant Web servers, back-up power supplies, multiple
communications centers and other measures.
Our technology solutions include our sophisticated EtinuumWebDirect System
that provides personalization, routing and management of customer interactions
across multiple channels including voice, e-mail, fax and real-time online
communications. The EtinuumWebDirect System supports most
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standardized services, protocols and interfaces for integration into our
clients' and their vendors' existing systems. Our Web-based platform includes
three primary components:
. a Web site interface for customers and our customer representatives
that provides product, company and customer information as well as
other data sources available through the Web to dynamically build
context-relevant information screens;
. software applications to electronically process transactions with
custom links to our clients' and their vendors' existing systems in
order to handle order entry, inventory control, payment management,
product configuration, fulfillment and shipping, and similar
functions; and
. a customer database segment that maintains client and customer
information for transaction requirements and is structured to support
personalized marketing initiatives.
The EtinuumWebDirect System incorporates software code that was
transferred to Spider. We have a 20-year non-exclusive license to use the
software and, in general, to sublicense it to our clients. Spider now controls
the development of this software and has the right to license it to third
parties, which could expand its market acceptance but eliminates our advantage
of being the sole provider of this technology to the marketplace. See "Related
Party Transactions-Spin-off of Spider Technologies" for more information about
the spin-off of Spider.
Our Customer Knowledge group uses sophisticated technologies and
analytical methods to enable our clients to maximize their marketing and
customer retention programs. The group has designed and developed database
marketing software in Java on an Oracle platform. In addition, the group
employs various analytical techniques that have been shown to be more effective
than standard methods.
Personnel and Training
At December 31, 1999, we had 704 full-time employees. Of these, 35 were in
executive, finance, sales and marketing, human resources and other
administrative positions in the Denver headquarters office; 62 were in the
technology, communications and consulting facility in San Diego; and 580 were
in communications center operations in Northern California, Denver and Fort
Scott, Kansas. Approximately 20% of the employees in our communications centers
are management and technical personnel. We also now have 27 employees in our
Shelton, Connecticut office, principally engaged in delivering our Customer
Knowledge and Strategic Consulting services. In addition, at any given time we
may have at our communications centers a substantial number of people from
temporary agencies. These people generally become our full-time employees
following a period of training and temporary employment with us.
Many of our employees are highly trained, not only in various
technologies, but in important aspects of our clients' businesses. For example,
some of our senior personnel who consult with financial services institutions
have previously worked in that industry. In addition, we provide training to
our communications center personnel specifically related to a client's product
or services. This training is generally covered by our agreements with the
client and generally takes two to five weeks to complete. Using the same
financial services institutions example, the training may entail obtaining a
Series 6, 7 or 63 license from the NASD. In some cases, we may cross-train
personnel to cover different clients' programs to provide back-up. Because our
communications center personnel are highly trained, we generally pay them more
and bill their services at higher rates than do traditional call center
employers.
Our success depends on our ability to continue to attract, retain and
motivate intelligent, skilled employees. Competition for these people,
especially those with technical and management capabilities, is particularly
intense now because of the strong economy and resulting growth of business
opportunities. We are adopting a stock purchase plan and will be expanding our
stock option program to provide additional
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incentives to our employees. None of our employees is represented by any
collective bargaining unit, and we have never had a work stoppage. We believe
our relations with our employees are good.
Facilities
Our headquarters are located in approximately 15,700 square feet of leased
office space in Englewood, Colorado. This space is used by our executive,
financial, marketing and human resources personnel. The lease extends through
June 2005. Our San Diego personnel are located in a leased facility comprising
12,600 square feet, approximately 40% of which we are sub-leasing to Spider.
The lease for this facility expires in August 2003 and may be renewed for five
years. Our Shelton, Connecticut personnel are located in a 7,200 square foot
office under a lease that expires in April 2003.
We operate communications centers in Hayward and Livermore, California,
Denver and Fort Scott, Kansas. The lease for our 7,565 square foot Hayward
facility expires in May 2000 and the lease for our 12,424 square foot Livermore
facility expires in April 2000. We plan to consolidate our Northern California
operations in another facility in the near future. We have signed a new lease,
with an eight-year term commencing on completion of the building, for a 21,254
square foot building in Livermore but intend to sublease it and lease another
facility. Until that facility is available, we are extending our existing
Livermore lease on a month-to-month basis. Our Denver communications center is
in a 21,600 square foot leased facility. The lease on this facility expires in
January 2001. In June 1999, we opened our new 35,000 square foot communications
center in Fort Scott, Kansas. The construction was financed by the City of Fort
Scott and leased to us through June 2005. Based upon our experience in Fort
Scott, we believe that we can furnish and staff a new communications center in
approximately 120 days.
Regulatory Matters
We provide services to companies in the financial services, insurance and
mortgage lending industries. These industries are extensively regulated by
federal, state and other agencies. Although compliance with many of these
regulations is generally the responsibility of our clients, we and our
employees must also meet some registration and licensing requirements.
Our customer communications for these clients include responding to
inquiries from our clients' existing or potential customers about the clients'
products or services, developing leads for product sales based on criteria
established by our clients and collecting data from our clients' customers.
Regulations that may affect these activities for our clients may be adopted or
changed at any time. In addition, as the content and geographical scope of our
clients' initiatives change from time to time, regulations that previously did
not apply may become applicable. We attempt to monitor these changes and to
obtain licenses or make filings as necessary. In many cases, however, it is
unclear whether a regulation or license requirement applies to a client's
programs. In those instances, we seek clarification from the regulating agency.
We have not always had all of the licenses we needed. We cannot assure you that
we will be in compliance with all applicable regulations at all times in the
future. Enforcement or private actions could be brought against us for failure
to obtain necessary licenses.
Financial services. We provide assistance in marketing various mutual
funds and other financial products through a wholly-owned subsidiary. For
example, one of our clients has a direct-to-customer program for investment
funds that it markets through its Web site, direct mail and traditional
advertising. Our representatives work with our client's customers to help them
select appropriate funds based upon the customers' specific criteria. We also
coordinate with the client to assure that the appropriate prospectuses are
forwarded to the customers. This subsidiary and some of its employees must be
registered with the SEC and licensed by the NASD and state securities
commissions. Some of our employees who assist in the sales of financial
products must pass a series of exams and meet continuing education requirements
in order to maintain their licenses. We believe that we and our employees
engaged in these activities are currently registered and licensed as required.
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Insurance services. We provide assistance in the marketing of insurance
products through a wholly-owned subsidiary. For example, we have worked with
customers responding to a client's direct mail program for medical insurance to
provide information on our client's various policies, help the customers assess
their insurance needs and set appointments for our client to meet with its
potential insureds. We currently have a client that is marketing medical
supplement insurance products in one state. In the past, we have assisted in
marketing annuity products in a number of states. We and our employees who
assist in the sales of insurance products are required to be licensed by
various state insurance commissions for the particular type of insurance
product to be sold and to participate in regular continuing education programs
which are currently paid for by us. Our subsidiary and its employees are
currently licensed in the states in which we are marketing insurance products.
We may not have held all necessary licenses at all times in the past.
Mortgage broker services. We provide assistance in the marketing of
mortgage lenders' products through a wholly-owned subsidiary. For example, we
have worked with a client's potential customers to screen for qualified
candidates for refinancing and debt consolidation products. We then refer
qualified candidates to our client for loan approval and completing needed
documentation. Although we are not currently providing mortgage broker
services, in the past, we have provided assistance to clients that marketed
their mortgage lender products in a number of states. Most states have laws and
regulations governing the registration or licensing and conduct of persons who,
among other things, directly or indirectly solicit, accept or offer to accept
an application for a mortgage loan. Some states may require that we have a
local office or an employee who has experience in mortgage brokerage activities
or has completed the state's exam or both. We are currently licensed or exempt
from license requirements in a number of states, and are in the process of
renewing or applying for licenses in other states. Enforcement or private
actions could be brought against us for failure to obtain a mortgage broker or
lender license in states in which we assist in the marketing of mortgage-
related products.
Business qualification laws. Because it is often a condition to obtaining
various licenses and because we often provide services for our clients to
customers located throughout the United States, we and our subsidiaries have
registered to do business as a foreign corporation in each state in which the
conduct of our or their business requires registration. Failure to maintain
registration in a jurisdiction in which it is required could expose us or our
subsidiaries to taxes and penalties and limit our or their ability to conduct
litigation in those states.
Telephone contacts. Some of our communications center activities relating
to telephone calls to residential telephone subscribers and telemarketing
practices are regulated by the FCC, FTC and state agencies. Some states require
us to register under their telemarketing statutes. We believe we are currently
licensed, exempt from license requirements or in the process of obtaining a
license in those states that regulate our telemarketing activities.
Internet use. There is an increasing number of laws and regulations
pertaining to the Internet. In addition, a number of legislative and regulatory
proposals are under consideration by federal, state and foreign governments and
agencies. The requirement that we or our clients comply with any new
legislation or regulation, such as those requiring notice to Internet users
that personal data is being captured, or any unanticipated application or
interpretation of existing laws, may decrease the growth in the use of the
Internet, which could in turn decrease the demand for our or our clients'
products and services, increase our cost of doing business or otherwise have a
negative effect on our business, results of operations and financial condition.
In addition, applicability to the Internet of existing laws governing issues
such as property ownership, copyrights and other intellectual property issues,
taxation, libel, obscenity and personal privacy is uncertain.
Legal Proceedings
From time to time, we may be involved in litigation incidental to the
conduct of our business. We are not currently party to any material legal
proceedings.
38
<PAGE>
MANAGEMENT
Executive Officers and Directors
Our executive officers and our board of directors, as the board will be
comprised upon the closing of this offering, are as follows:
<TABLE>
<CAPTION>
Name Age(1) Position(s)
- ---- ------ -----------
<S> <C> <C>
Timothy C. O'Crowley(2)...... 44 Chairman of the Board, Chief Executive
Officer and President
G. Daniel Adams, Jr. ........ 41 Executive Vice President - Corporate
Operations
Sunil Gupta, Ph.D............ 45 Managing Director - Strategic Consulting
Steven Q. Hansen............. 35 Chief Financial Officer and Senior Vice
President
Timothy S. Hardin............ 47 President - e-Operations
Donald P. Hearn.............. 54 President - Financial Services Division
Jay D. Kirksey............... 43 Senior Vice President - Human Resources
Peter H. Kowalchuk........... 50 Senior Vice President - Marketing and
Communications
Shoba Murali................. 43 President - Customer Knowledge
James F. "Pat" O'Crowley..... 46 Executive Vice President - Corporate
Development
Patrick F. O'Neal............ 53 Managing Director - Sales
Jerry L. Parker.............. 56 Chief Operations Officer - Technology
Solutions
Raja Ramnarayan, Ph.D........ 44 Vice President - Customer Knowledge
Venkat V. Sharma............. 45 Chief Executive Officer - Customer
Knowledge
Paul A. Tartre............... 40 President - Technology Solutions and Chief
Information Officer
Jonathan H. Yellen........... 32 Executive Vice President - Corporate
Strategy and General Counsel
Stephen S. Hyde(3)........... 52 Director
Steven F. Piaker(3).......... 37 Director
Harold W. Pote(2)............ 53 Director
Rick L. Weller(2)............ 42 Director
Eric R. Wilkinson(3)......... 43 Director
</TABLE>
- ------------------
(1) As of December 31, 1999
(2) Member of Compensation Committee
(3) Member of Audit Committee
Timothy C. O'Crowley founded Etinuum in 1996 and has been our chairman,
chief executive officer and president since that date. From 1994 to 1996, Mr.
O'Crowley was chief executive officer and a director of FundMark Investment
Company Services, Inc., a consulting firm to the institutional asset management
industry, and managing director of Eden Financial Group, a consulting firm to
the financial products distribution industry. Before joining these firms, Mr.
O'Crowley was employed by E. F. Hutton and Company in numerous senior
management positions. He serves as a director of our subsidiary Acorn, chairman
of the board of directors of and a consultant to Spider, and a director of
Northern Trust Bank of Colorado. See "Related Party Transactions - Spin-off of
Spider Technologies" for a description of Mr. O'Crowley's consulting agreement
with Spider.
G. Daniel Adams, Jr. joined Etinuum in November 1999 as executive vice
president - corporate operations . Mr. Adams was chief operations officer from
1997 to 1999 and chief financial officer from 1996 to 1997 for Switch
Manufacturing, a consumer recreational products manufacturer and marketer where
he
39
<PAGE>
managed all aspects of the company's operations and strategic alliances with
partners. From 1994 to 1996, Mr. Adams was senior director - operations with
Kenetech Corp., a publicly-traded energy provider and capital equipment
manufacturer. Prior to 1994, Mr. Adams was an executive with Black & Decker, a
management consultant with McKinsey & Company and an engineer at Schlumberger.
Sunil Gupta, Ph.D., joined Etinuum in October 1999 as vice president -
Customer Knowledge in conjunction with our acquisition of Acorn and became
managing director - Strategic Consulting in January 2000. Dr. Gupta was vice
president - interactive and analytical services for Acorn from July 1998 to
October 1999. He was a professor of marketing at the University of Michigan
Business School from 1990 to 1998 and at Columbia University's Graduate School
of Business from 1983 to 1990. Dr. Gupta has also consulted with several
companies, most recently in the area of Internet marketing.
Steven Q. Hansen joined Etinuum in November 1999 as senior vice president
and chief financial officer. Mr. Hansen was vice president and acting chief
financial officer from August to October 1999, vice president - finance from
November 1998 to October 1999, and senior director - financial planning and
analysis from March 1997 to November 1998 for Convergent Communications, Inc.,
a publicly-traded integrated communications provider. From 1996 to 1997, he was
a director of finance for ICG Communications, Inc., a public competitive local
exchange carrier. From 1994 to 1996, Mr. Hansen was manager of financial
operations - Rocky Mountain division, for Pepsi Cola Company.
Timothy S. Hardin joined Etinuum in June 1997 as senior vice president -
client services and became president - e-Operations in October 1999. From 1989
to 1997, Mr. Hardin was a co-founder and president of Telelink Systems, a
teleservices company. From 1993 to 1995, he was a co-founder and director of
marketing for Market Reach Ltd. in London, England, a sister teleservices
company to Telelink.
Donald P. Hearn joined Etinuum in April 1999 as president - financial
services division. From 1995 to January 1999, Mr. Hearn was chairman and chief
executive officer of Chase Global Funds Services Company, a subsidiary of Chase
Manhattan Bank. From 1990 to 1995, he was an executive vice president with U.S.
Trust of New York in their mutual funds division. Prior to 1994, Mr. Hearn held
senior positions with First Data Investor Services, the Boston Company and
Dalbar.
Jay D. Kirksey joined Etinuum in November 1997 as senior vice president -
human resources. From 1994 to 1997, Mr. Kirksey was vice president of human
resources for ADT Security Services, Inc., a residential and commercial
security company. From 1993 to 1994, he was director of human resources for
Alert Centre, Inc., and from 1989 to 1993, he was director of human resources
for United Technologies Corporation.
Peter H. Kowalchuk joined Etinuum in July 1999 as senior vice president -
marketing and communications. From 1993 to July 1999, Mr. Kowalchuk was
director of international communications for Otis Elevator Company, a
subsidiary of United Technologies Corporation.
Shoba Murali joined Etinuum in October 1999 as president - Customer
Knowledge in conjunction with our acquisition of Acorn. Ms. Murali was
president of Acorn from September 1996 to October 1999. From January 1994 to
August 1996, she was co-founder, managing partner and a director of Equinox
Solutions Inc., a systems integration company. Prior to 1994, Ms. Shoba served
as artificial intelligence senior product manager for Digital Equipment and was
corporate accounts system integrations manager for financial services clients.
James F. "Pat" O'Crowley III joined Etinuum in May 1999 as executive vice
president - corporate development. From 1996 to May 1999, Mr. O'Crowley was a
founder and managing director of Coalter Group International, a business
consulting firm focused on improving clients' sales and profitability. From
January 1998 through May 1999, Mr. O'Crowley consulted with Etinuum on
strategic and operational matters. From 1993 to 1996, he served as vice
president international of HON Industries, a publicly-traded manufacturer of
office furniture and pre-fabricated fireplaces, and general manager of HON
Export Limited.
40
<PAGE>
Prior to 1993, he served as director of operations and finance and as general
manager for Latin American and Asian Operations for Tenneco's J. I. Case. Prior
to 1989, Mr. O'Crowley held a variety of senior finance, operations, marketing
and business development positions at International Harvester and its successor
company, Navistar.
Patrick F. O'Neal joined Etinuum as a managing director in September 1996
and was named managing director - sales in July 1999. He served as a member of
our board of directors from March 1996 to January 2000. Mr. O'Neal is also a
director of Spider and president of our subsidiaries, Intek Teleservices, Inc.,
Intek Insurance Agency, Inc. and Brokerage Administrators Corp. He has been an
officer and managing director for Eden Financial Group and FundMark Investment
Company Services, Inc. from 1982 to the present. Eden and Fundmark
substantially ceased operations in early 1996. Mr. O'Neal was a national
product manager at E. F. Hutton and Company from 1981 to 1982.
Jerry L. Parker joined Etinuum in May 1999 as chief operating officer -
Technology Solutions. From December 1998 to May 1999, Mr. Parker consulted
with us regarding computer systems and integration. From 1996 to December 1998,
Mr. Parker was chief executive officer of SSDS, Inc., a computer systems and
networking integration company. From 1993 to 1996, Mr. Parker was senior vice
president of the commercial division of BDM Technologies, now a part of TRW,
Inc., where he was responsible for a division that provided system integration,
networking and technology consulting to Fortune 1000 companies.
Raja Ramnarayan, Ph.D, joined Etinuum in November 1999 as vice president -
Customer Knowledge in conjunction with our acquisition of Acorn. Dr.
Ramnarayan has been chief technology officer for Acorn since January 1997. He
was a principal consultant for Microsoft Corporation from 1996 to 1997 and an
engineering fellow for Honeywell from 1983 to 1996.
Venkat V. Sharma joined Etinuum in October 1999 as chief executive
officer - Customer Knowledge in conjunction with our acquisition of Acorn. Mr.
Sharma founded and became chief executive officer of Acorn in 1994. Prior to
1994, he held positions at 3M and J. Walter Thompson. Additionally, he founded
and was president of C4 Information Services, a private market research company
for the cable television and communications industries, in 1994, and founded
and was president of VSA Technologies, a mainframe computer outsourcing
company, from 1990 to 1994.
Paul A. Tartre joined Etinuum in 1996 as a managing director and chief
information officer. Mr. Tartre was named president - Technology Solutions in
August 1999. From 1987 to 1996, Mr. Tartre was senior vice president and chief
information officer for Eden Financial Services and FundMark Investment Company
Services. From 1983 to 1986, he was a software developer at NCR, and from 1986
to 1987 he was director of software development at Apricorn, Inc. Effective
November 1999, Mr. Tartre began to devote 40% of his time to Spider. See
"Related Party Transactions - Spin-Off of Spider Technologies" for more
detailed information about Mr. Tartre's continuing role with Spider.
Jonathan H. Yellen joined Etinuum in March 2000 as executive vice
president-corporate strategy and general counsel. From 1998 to 2000, Mr. Yellen
was vice president, associate general counsel and assistant secretary for
Starwood Hotels & Resorts Worldwide, Inc., an international hotel chain. Prior
to joining Starwood, Mr. Yellen practiced law with Fried, Frank, Harris,
Shriver & Jacobson from 1996 to 1998 and with Latham & Watkins from 1994 to
1996.
Stephen S. Hyde has been a director since January 2000. Since September
1999, Mr. Hyde has been chairman of the board of DiabetesManager.Com, a
provider of diabetes management over the Internet. Since December 1986, he has
been chairman and president of IG Ventures, Ltd. From September 1978 to
December 1986, he was chairman of the board and chief executive officer of Peak
Health Care, Inc., a public HMO company that he founded. Prior to September
1978, Mr. Hyde was a financial advisor to the U.S. Department of Health and
Human Services, a consultant with the Health Management Group and a consultant
with Arthur Young & Company. He is a chairman of the board of Les Vergers du
Roi Corp., a privately-held argricultural production and sales business.
41
<PAGE>
Steven F. Piaker has been a director since May 1998. In 1994, Mr. Piaker
joined Conning & Company, an investment management and research firm focusing
on insurance and financial services industries, as vice president and became a
senior vice president in 1997, where he is responsible for helping to manage
all aspects of Conning's private equity business. Conning & Company is the
managing member of Conning Investment Partners V, LLC, which serves as the
general partner of Conning Capital Partners V, L.P. one of our major
stockholders. Since November 1999, Mr. Piaker has served as a director of
Spider.
Mr. Piaker is a director of Answer Financial, Inc., Clark Bardes Holdings,
Inc., Health Right Inc., Intersections, Inc., MedSpan, Inc. and Sterling
Autobody, Inc.
Harold W. Pote has been a director since February 1999. Since 1993, Mr.
Pote has been a general partner of The Beacon Group, a private investment,
strategic advisory and wealth management firm, which is affiliated with one of
our major stockholders, The Beacon Group III-Focus Value Fund, LP. From 1984 to
1988, he was Chief Executive Officer of First Fidelity Bancorporation and
Fidelcor, Inc., a predecessor company. Since November 1999, Mr. Pote has served
as a director of Spider. Mr. Pote is also a director of the American Craft
Museum, Drexel University, MCP Hahnemann School of Medicine, Norfolk Southern
Corp. and the President's Foreign Intelligence Advisory Board.
Rick L. Weller has been a director since May 1998. From October 1997 to
January 1999, Mr. Weller was our chief financial officer. Since November 1999,
he has been chief operating officer for Ionex Telecommunications, Inc., a
competitive local exchange carrier. Since November 1999, Mr. Weller has served
as a director of Spider. In April 1999, Mr. Weller formed Compass Partners to
develop a telecommunications company. Compass Partners was instrumental in the
formation of Ionex Telecommunications, Inc. From January 1999 to March 1999,
Mr. Weller was chief financial officer for USA Global Link, Inc., an
international telecom entity. From January 1990 to September 1997, Mr. Weller
was vice president of Sprint Communications Corporation, where he was
responsible for financial management.
Eric R. Wilkinson has been a director since February 1997. Since 1994, Mr.
Wilkinson has been employed by The Beacon Group, where he is responsible for
the management of The Beacon Group III - Focus Value Fund, LP. From 1989 to
1994, he was a partner of Apax Partners & Cie Ventures S.A., a European private
equity firm, where Mr. Wilkinson shared responsibility for the firm's principal
investments. Prior to 1989, he was a partner of Bain & Company, the strategic
consulting firm. Since November 1999, Mr. Wilkinson has served as a director of
Spider. He is also a director of Doctors Health, Inc., Eyeweb Inc.,
International Components Corporation, National Century Financial Enterprises,
Inc., OnCare, Inc., The Identity Group, Inc. and director and president of
Generac Portable Products, Inc.
Officers serve at the discretion of the board of directors. Timothy
O'Crowley and James F. O'Crowley III are brothers.
Board Composition
Upon the closing of this offering, our board of directors will consist of
three classes that serve staggered three-year terms as follows:
<TABLE>
<CAPTION>
Class Expiration Members
----- ---------- -------
<S> <C> <C>
Class I...................... 2001 Stephen Hyde and Eric Wilkinson
Class II..................... 2002 Rick Weller and Steven Piaker
Class III.................... 2003 Timothy O'Crowley and Harold Pote
</TABLE>
42
<PAGE>
Board Committees
Following the offering, our audit committee will consist of Stephen Hyde,
Steven Piaker and Eric Wilkinson and our compensation committee will consist of
Timothy O'Crowley, Harold Pote and Rick Weller.
The audit committee will select the independent public accountants to
audit our annual financial statements and will establish the scope of and
oversee the annual audit. It will review our internal accounting procedures and
review other services provided by our independent accountants. The compensation
committee will establish and review general policies relating to compensation
and determine the compensation for all officers of Etinuum, except for Mr.
O'Crowley's compensation which will be determined by the board of directors,
and any other employee that the compensation committee may designate from time
to time. It will approve and administer our stock option plans, except with
respect to persons covered by Section 16 under the Securities Exchange Act of
1934, and our employee stock purchase plan. Our board may establish other
committees from time to time to facilitate the management of the business and
affairs of our company.
Director Compensation
Our directors have not received cash or stock compensation for their
services as directors in the past. Our directors have been and will be
reimbursed for all reasonable expenses incurred in connection with their
attendance at meetings of our board and committee meetings of the board. After
the closing of this offering, directors who are not officers or employees of
Etinuum or any of our subsidiaries will receive options for board service under
our 2000 Stock Incentive Plan. Upon the effectiveness of the registration
statement of which this prospectus is a part, each eligible director will
receive an option to purchase 10,000 shares of common stock. In the future,
each eligible director will receive an option to purchase 10,000 shares
immediately upon his or her initial election as a director. We will also grant
to each eligible director, immediately following each annual meeting of
stockholders, an additional option to purchase 5,000 shares of common stock if
that director has served continuously as a member of our board since the prior
annual meeting. The options have ten year terms. They will terminate one year
after the director ceases to provide services to us either as a director or
consultant. The initial 10,000 share options will vest immediately and the
annual 5,000 share options will vest one year after the date of grant. Options
will stop vesting if a director ceases to provide services to us either as a
director or a consultant. Option grants to directors are automatic and
nondiscretionary, and the exercise price of the options must equal the fair
market value of our common stock on the date of grant.
Compensation Committee Interlocks and Insider Participation
Before this offering, our board of directors did not have a compensation
committee and all compensation decisions were made by the full board. Timothy
O'Crowley and Harold Pote served as a committee authorized to make limited
grants of stock options. Timothy O'Crowley participated in deliberations of the
board of directors concerning executive compensation during 1999. After this
offering, our compensation committee will make all compensation decisions,
except that our board of directors will make compensation decisions with
respect to Timothy O'Crowley. Mr. O'Crowley is chairman of the board of, and a
consultant to, Spider and was its chief executive officer from October 1999 to
January 2000. Mr. Pote is a member of Spider's board. Spider does not have a
compensation committee. In addition, Steven Piaker and Eric Wilkinson are
members of both our and Spider's boards of directors. No other interlocking
relationship exists between our board of directors or compensation committee
and the board of directors or compensation committee of any other company.
43
<PAGE>
Executive Compensation
Summary Compensation Table
The following table shows all compensation for services rendered to us in
all capacities that was awarded to, earned by, or paid to, our chief executive
officer and our four next most highly compensated executive officers whose
total annual salary and bonus exceeded $100,000 during 1999, whom we refer to
in this prospectus collectively as the "Named Executive Officers." We have
entered into agreements relating to the employment of the Named Executive
Officers that provide in some circumstances for severance payments upon
termination, other than for cause, of their employment and for the acceleration
of the vesting of their stock options upon a change in control.
<TABLE>
<CAPTION>
Long-Term
Compensation
Annual Compensation Awards
-------------------- -------------
Number of
Securities
Underlying
Name and Principal Options
Positions Salary Bonus Granted All Other Compensation
- ------------------ ---------- --------- ------------- ----------------------
<S> <C> <C> <C> <C>
Timothy O'Crowley ...... $ 216,000 $ 35,000 137,500 $50,560(1)
Chairman of the Board,
Chief Executive Officer
and President
Paul Tartre ............ $ 190,000 $ 45,000 0 $ 4,967(2)
Chief Information Offi-
cer
and President - Tech-
nology Solutions
Frank Richards(3)....... $ 165,000 $ 58,875 75,000(4) $ 3,224(5)
Chief Operating Officer
Timothy Hardin ......... $ 156,875 $ 20,000 42,500 $ 2,266(2)
President - e-Opera-
tions
Patrick O'Neal ......... $ 160,000 $ 15,000 75,000 $ 4,540(2)
Managing Director -
Sales
</TABLE>
- ------------------
(1) Includes life insurance premiums of $1,730 paid for the benefit of Mr.
O'Crowley and $3,830 in matching 401(k) contributions made by us. In
addition, during 1999, Mr. O'Crowley received $45,000 as chief executive
officer of Spider. Mr. O'Crowley resigned as chief executive officer of
Spider in January 2000.
(2) Represents matching 401(k) contributions made by us.
(3) On January 13, 2000, Mr. Richards' responsibilities with us changed and he
resigned as an officer and director.
(4) These options were canceled in January 2000 as part of an amendment to Mr.
Richards' employment agreement.
(5) Represents life insurance premiums of $1,064 paid for the benefit of Mr.
Richards and $2,160 in matching 401(k) contributions made by us.
44
<PAGE>
Option Grants in 1999
The following table sets forth information regarding stock options granted
to the Named Executive Officers during 1999. All of these stock options were
granted under our 1998 option plan.
<TABLE>
<CAPTION>
Percent of
Total Potential Realizable Value
Number of Options Fair at Assumed Annual Rates
Securities Granted to Exercise Market of Stock Appreciation for
Underlying Employees Price Value on Option Term
Options During Per Grant Expiration --------------------------
Name Granted Period Share Date Date 0% (1) 5%(2) 10%(2)
---- ---------- ---------- -------- -------- ---------- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Timothy O'Crowley....... 93,750(3) 8.44% $6.44 $8.52 07/27/02 $195,000 $320,903 $459,386
43,750(3) 3.94% $6.44 $8.52 10/27/04 $ 91,000 $193,984 $318,568
Frank Richards.......... 75,000(4) 6.75% $6.44 $8.52 01/01/00 $156,000 -- --
Paul Tartre............. -- -- -- -- -- -- -- --
Timothy Hardin.......... 42,500 3.83% $5.44 $7.68 10/27/00 $ 95,200 $111,520 $127,840
Patrick O'Neal.......... 75,000(3) 6.75% $6.44 $8.52 10/27/00 $156,000 $187,950 $219,900
</TABLE>
- ------------------
(1) The 0% assumed annual rate of stock appreciation reflects the difference
between the exercise price per share and the fair market value of our
common stock on the date of grant.
(2) These are hypothetical values using assumed annual rates of stock price
appreciation prescribed by the rules of the SEC.
(3) Vested on date of grant.
(4) These options were canceled in January 2000 as part of an amendment to Mr.
Richards' employment agreement.
Aggregate Option Exercises and Option Values
The following table sets forth information with respect to the Named
Executive Officers concerning option exercises for 1999, and exercisable and
unexercisable options held at December 31, 1999:
<TABLE>
<CAPTION>
Number of
Securities Underlying Value of Unexercised
Unexercised Options at In-the-Money Options at
December 31, 1999 December 31, 1999(1)
-------------------------- -------------------------
Shares
Acquired on Value
Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable
---- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Timothy O'Crowley....... -- -- 435,692(2) 36,809 $1,830,241 $148,559
Frank Richards.......... -- -- 109,263 109,487 891,654 607,121
Paul Tartre............. -- -- 232,008(3) 32,992 1,111,705 182,495
Timothy Hardin.......... -- -- 22,594 44,906 9,846 226,454
Patrick O'Neal.......... -- -- 152,649 122,351 771,146 602,454
</TABLE>
- ------------------
(1) The value of in-the-money options is based on an assumed initial public
offering price of $11.00 per share, less the per share exercise price,
multiplied by the number of shares underlying the option.
(2) Excludes 65,000 shares underlying options granted by Mr. O'Crowley to Mr.
Tartre on January 12, 1998.
(3) Includes 65,000 shares underlying options granted by Mr. O'Crowley to Mr.
Tartre on January 12, 1998.
45
<PAGE>
Employment Agreements
We entered into an employment agreement with Timothy O'Crowley dated
August 2, 1996, which was amended as of October 1, 1999, that provides for an
annual salary of $240,000 until August 1, 2002. After that date, the agreement
continues on a month-to-month basis. The base salary may be increased by the
board of directors. Mr. O'Crowley may terminate his employment voluntarily upon
100 days' notice to us or immediately for cause if we violate a material term
of the agreement or move our headquarters from the Denver metropolitan area. We
may terminate his employment at any time without cause upon 20 days' notice or
immediately for cause. If Mr. O'Crowley is terminated without cause or if he
terminates the agreement for cause, he is entitled to receive monthly payments
equal to his last base salary for a period of 18 months. The payments are not
reduced by compensation Mr. O'Crowley may receive from other sources. In
addition, some unexercised options vest and become exercisable by Mr. O'Crowley
on the date of termination by us without cause. The options remain exercisable
for the lesser of the maximum length of time the option is exercisable and one
year after the date of termination. We also pay for life insurance on Mr.
O'Crowley's life in the amount of $20 million, of which up to $10 million is to
be used to repurchase Etinuum stock from Mr. O'Crowley's estate and the
balance, if any, will be payable to his beneficiaries and $10 million will be
payable to us, and an automobile allowance of $6,000 per year. Pursuant to the
agreement, the options to purchase 400,000 shares of common stock granted on
February 14, 1997, will vest six months and one day after the effective date of
this offering. Mr. O'Crowley has a non-compete agreement covering a period of
18 months following termination of his employment unless he is terminated
without cause.
We entered into an employment agreement with Frank Richards dated February
14, 1997, which was amended as of October 1, 1999. On January 13, 2000, we
entered into a new amendment that supersedes the prior agreements. Under this
amendment, we agree to pay Mr. Richards a salary of $13,750 per month from
January 1, 2000 through September 30, 2000. In the event we have not completed
our public offering by September 30, 2000, Mr. Richards shall remain our
employee for three additional months and receive a salary of $13,750 per month
until December 31, 2000. If Mr. Richards is terminated without cause, or if Mr.
Richards terminates the agreement due to our actions, he is entitled to receive
his full salary for the remainder of the term of the agreement. The payments
are not reduced by compensation Mr. Richards may receive from other sources.
Mr. Richards has relinquished his options to purchase 75,000 shares of our
common stock that were granted on October 1, 1999 but retains his options to
purchase 143,750 shares of our common stock.
We entered into a letter agreement with Timothy Hardin dated April 18,
1997, governing his employment with us. Under the agreement, we agreed to pay
Mr. Hardin an initial annual salary of $125,000 and to grant him stock options
to purchase 25,000 shares of our common stock at an exercise price of $13.92
per share. The options vest over a three-year period beginning April 1998. If
Mr. Hardin is terminated without cause, he is entitled to receive salary and
full benefits for six months from the date of termination.
46
<PAGE>
EMPLOYEE BENEFIT PLANS
1997 Stock Option Plan. In February 1997, our board of directors adopted
and our stockholders approved our 1997 Stock Option Plan. We reserved a total
of 1,243,052 shares for issuance under the 1997 plan. We increased this number
to 1,368,052 in August 1997, to 1,505,552 in May 1998, to 1,755,552 in October
1999 and to 2,455,552 in February 2000. As of December 31, 1999, options to
purchase 1,795 shares of our common stock had been exercised, options to
purchase 1,283,625 shares were outstanding with a weighted average exercise
price of $5.94, and 1,170,132 shares were available for future option grants.
Following the closing of this offering, no additional options will be granted
under the 1997 plan.
1998 Stock Option Plan. In May 1998, our board of directors adopted and
our stockholders approved our 1998 Stock Option Plan. We reserved a total of
864,417 shares for issuance under the 1998 plan. We increased this number to
1,564,417 in October 1999. As of December 31, 1999, no options to purchase
shares of our common stock had been exercised, options to purchase 1,046,938
shares were outstanding with a weighted average exercise price of $6.66, and
517,479 shares were available for future option grants. Following the closing
of this offering, no additional options will be granted under the 1998 plan.
2000 Stock Incentive Plan. In January 2000, our board of directors adopted
and our stockholders approved our 2000 Stock Incentive Plan. We have reserved a
total of 2,750,000 shares for issuance under the 2000 Stock Incentive Plan. No
options have been granted under the 2000 plan as of March 1, 2000.
Our 1997, 1998 and 2000 option plans provide for the grant of both
incentive stock options that qualify under Section 422 of the Internal Revenue
Code and nonqualified stock options. We can grant incentive stock options only
to our employees. We can grant nonqualified stock options to employees,
directors and consultants. The exercise price of incentive stock options must
be at least equal to the fair market value of our common stock on the date of
grant or, in the case of incentive stock options granted to holders of more
than 10% of our voting stock, not less than 110% of the fair market value. The
exercise price of nonqualified stock options must be equal to 85% of the fair
market value of our common stock on the date of grant under the 1997 plan, 50%
of the fair market value under the 1998 plan and 85% of the fair market value
under the 2000 plan. Options generally have a term of ten years from date of
grant, but incentive stock options granted to stockholders holding 10% or more
of our stock have a term of five years. The maximum term of options granted
under our option plans is ten years. Options granted under our option plans
generally expire three months after the termination of the optionee's
employment or service. However, in the case of death or disability, the options
generally may be exercised up to 12 months following the date of death or
disability. Options will generally terminate immediately upon termination of
employment or service for cause.
Under our 1997 and 1998 plans, in the event of a major corporate
transaction such as a merger, share exchange or sale, or disposition of all or
substantially all of our assets, the vesting schedules of all options that
would have vested within 12 months after the major corporate transaction will
be accelerated and immediately exercisable. Our board has the option to
accelerate the vesting of all other options prior to a major corporate
transaction. Instead of allowing an optionee to exercise his or her options,
the board may, in its discretion, require some or all of the plan participants
to accept a cash payment in consideration for the termination of the person's
option. All stock options will be automatically accelerated if a person's
employment is terminated without cause within one year following a change of
control transaction. This offering does not constitute a change of control as
defined in our option plans.
Under the 2000 plan, in the event of a change in control, including a
merger, sale of all or substantially all of our assets, share exchange, or a
change in the majority of the incumbent board, the vesting schedules of options
that would have vested within 12 months after the change in control will be
accelerated and immediately exercisable. Our board has discretion to accelerate
all other options prior to the change in control. In addition, the board may
cancel outstanding options and require participants to accept cash payment for
their canceled options at the price per share to be received in the change in
control event.
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<PAGE>
The 2000 Stock Incentive Plan for some matters will be administered by the
Compensation Committee of the board of directors consisting of two or more
"outside directors" as defined under section 162(m) of the Internal Revenue
Code. The 2000 plan also provides for the automatic grant of options to non-
employee directors as discussed under "Management - Director Compensation."
2000 Employee Stock Purchase Plan. Our 2000 Employee Stock Purchase Plan
was adopted in January 2000 and will be effective upon the closing of this
offering. The 2000 Employee Stock Purchase Plan provides our employees with an
opportunity to purchase our common stock through accumulated payroll
deductions. A total of 2,000,000 shares of common stock have been reserved for
issuance under the purchase plan, none of which have been issued to date.
Our board of directors or a committee appointed by our board will
administer the purchase plan. The purchase plan will permit eligible employees
to purchase common stock through payroll deductions of up to 10% of an
employee's base compensation on each pay day during the offering period,
provided that no employee may purchase more than 1,500 shares or $25,000 worth
of stock in one calendar year. Any employee employed by us on a given
enrollment date is eligible to participate during that offering period,
provided that they remain employed by us for the duration of that offering
period, and if immediately after the grant, the employee will not own 5% or
more of our stock. Unless the board of directors or its committee determines
otherwise, the purchase plan will be implemented in a series of offering
periods, each approximately six months in duration. Offering periods will begin
on the first trading day on or after January 1 and June 1 of each year and
terminate on the last trading day in the period six months later. However, the
first offering period shall commence on the closing of this offering and
terminate on the last trading day of May 2000. The price at which common stock
will be purchased under the purchase plan is equal to 85% of the fair market
value of the common stock on the first or last day of the applicable offering
period, whichever is lower. Employees may end their participation in the
offering period at any time, and participation automatically ends on
termination of employment. The board of directors may amend, modify or
terminate the purchase plan at any time as long as the amendment, modification
or termination does not impair vesting rights of plan participants. The
purchase plan will terminate on December 31, 2003, unless terminated earlier in
accordance with its provisions.
401(k) Plan. We sponsor a plan intended to qualify under Section 401 of
the Internal Revenue Code. All employees who are at least 21 years old are
eligible to make contributions to the 401(k) plan beginning the first day of
the month after the month they are hired. Participants may make pre-tax
contributions of up to 15% of their eligible earnings, not to exceed a
statutorily prescribed annual limit. After an employee has been with us for one
year, we may make matching contributions on the basis of $.50 for every $1
contributed by the employee, up to 6% of the employee's annual salary. Each
participant is fully vested in his or her contributions, any of our matching
contributions and the investment earnings on either. Contributions by the
participants or us to the 401(k) plan, and the income earned on these
contributions, are generally not taxable to the participants until withdrawn.
Contributions by us, if any, will generally be deductible by us when made.
Contributions by us and the participants are held in trust, as required by law.
Individual participants may direct the 401(k) plan's trustee to invest their
accounts in authorized investment alternatives.
48
<PAGE>
RELATED PARTY TRANSACTIONS
Since our inception in February 1996, there has not been, nor is there
currently proposed, any transaction or series of similar transactions to which
we were or are to be party in which the amount involved exceeds $60,000, and in
which any director, executive officer, holder of more than 5% of our common
stock, or any member of the immediate family of any of the foregoing persons
had or will have a direct or indirect material interest other than compensation
agreements and other arrangements which are described in "Management" and the
transactions described below. We believe the terms of the agreements and loans
discussed in this section are as fair to us as we could have obtained from
unrelated third parties in arms-length negotiations.
Securities Issuances and Loans
In March 1996, we sold 1,582,143 shares of our common stock to Timothy
O'Crowley for $40,000 at $.025 per share. In August 1996, we sold 50,000 shares
of common stock to Patrick F. O'Neal, a Named Executive Officer, for $100,000
at $2.00 per share.
In August 1996, we sold 20,000 shares of Series A preferred stock for
$2,000,000 at $100 per share to Resource Bancshares Corporation. Resource
Bancshares sold 5,000 of these shares back to us for $1,741,000 at $348.20 per
share as part of the Series B preferred financing in February 1997 and
distributed 250 shares to affiliated persons. We issued warrants in connection
with this offering to Timothy O'Crowley and Resource Bancshares that were
cancelled as part of the Series B financing described below. As part of the
Series A transaction, Resource Bancshares was given the right to appoint two
directors, which was subsequently reduced to the right to appoint one director.
This right will terminate upon the closing of this offering. The 15,000
outstanding shares of Series A preferred stock will be converted into 750,000
shares of common stock on the closing of this offering.
Between February and April 1997, we sold 10,475,898 shares of Series B
preferred stock for $18.2 million at $1.741 per share, of which Beacon
purchased 9,615,738 shares and Stephen Hyde, a director, purchased 86,157
shares. Part of the consideration for Beacon's purchase was the retirement of a
$800,000 promissory note evidencing its loan to us in February 1997. A portion
of the proceeds were used to repurchase the shares of Series A preferred stock
from Resource Bancshares. As part of the Series B transaction, Beacon was given
the right to appoint two directors. This right will terminate upon the closing
of this offering. Beacon will be a holder of more than 5% of our common stock
upon the closing of this offering. In February 1997, we also issued 1,863,270
shares of Series B preferred stock having a fair value of $3.2 million to the
shareholders of Protocall as part of the Protocall acquisition. Frank Richards,
a Named Executive Officer, acquired 748,168 of these shares and an incentive
stock option to purchase 143,750 shares of our common stock at $2.72 per share.
During 1998 and 1999, 21,539 and 11,488 shares of Series B preferred stock were
returned to us by the former shareholders of Protocall as adjustments for the
price paid for Protocall in 1997. The 12,306,141 outstanding shares of Series B
preferred stock will be converted into 3,076,535 shares of common stock upon
the closing of this offering.
In November 1997, Beacon loaned us $1 million for an unsecured note
payable on demand and bearing interest at 15% per year. In December 1997,
Beacon loaned us $2 million for an unsecured note payable on demand and bearing
interest at 15% per year.
In December 1997, we sold 2,871,913 shares of Series C preferred stock to
Beacon for $5 million at $1.741 per share. A part of the proceeds were used to
repay the $3.0 million in loans made to us by Beacon plus accrued interest of
$16,000. Beacon also received a warrant to purchase up to 875,000 shares of our
common stock at $6.96 per share and a Series B anti-dilution warrant for the
purchase of an indeterminable number of Series B preferred shares. In May 1998,
as part of the Series D preferred stock financing, Beacon exchanged these
warrants for 3,500,000 shares of Series C preferred stock and a new anti-
dilution warrant, which will terminate upon the closing of this offering. The
6,371,913 outstanding shares of Series C preferred stock will be converted into
1,592,978 shares of common stock upon the closing of the offering.
49
<PAGE>
In December 1997, Timothy O'Crowley agreed to place into escrow 50,000
shares of his common stock. The shares were contingently transferable to
Resource Bancshares. The shares were to be returned to Mr. O'Crowley if, prior
to September 18, 1998, we received at least $15 million in net proceeds from
the sale of common stock at a price per share of at least $8.80. Since this
event did not occur, the shares were transferred to Resources Bancshares in
1998.
In January 1998, Timothy O'Crowley granted an option to purchase 62,500
shares of his common stock to Paul Tartre at an exercise price of $6.96 per
share for a term of 10 years.
In April 1998, Beacon loaned us $1.4 million and Timothy O'Crowley,
Patrick O'Neal and Rick Weller each loaned us $100,000 for unsecured notes
payable on demand and bearing interest at 15% per year.
In May 1998, we sold 8,841,911 shares of Series D preferred stock for $12
million at $1.36 per share, of which Conning Capital Partners V purchased
8,823,529 shares. As part of this transaction, Conning was given the right to
appoint two directors. This right will terminate upon the closing of this
offering. Conning will be a holder of more than 5% of our common stock upon the
closing of this offering. A part of the proceeds were used to repay the loans
aggregating $1.7 million made to us by Beacon and Messrs. O'Crowley, O'Neal and
Weller plus accrued interest of $12,082. In addition, Conning and Beacon were
each granted a right to purchase up to $3 million of additional Series D
preferred stock at $1.36 per share through April 1999, which were not
exercised. The 8,841,911 outstanding shares of Series D preferred stock will be
converted into 2,210,478 shares of common stock upon the closing of this
offering.
Between April and September 1999, we sold 2,510,691 shares of Series E
preferred stock to unaffiliated investors for $4.04 million at $1.61 per share.
The 2,510,691 outstanding shares of Series E preferred stock will be converted
into 627,671 shares of common stock upon the closing of this offering.
In November and December 1999, we sold 5,210,093 shares of Series F
preferred stock for $11,097,501 at $2.13 per share, of which Brinson Partners
purchased 3,755,869 shares. Brinson will hold more than 5% of our common stock
after the closing of this offering. The 5,210,093 outstanding shares of Series
F preferred stock will be converted into 1,302,523 shares of common stock upon
the closing of this offering, assuming no adjustment of the Series F preferred
stock conversion price. The conversion price, however, may be adjusted
depending on the public offering price per share of our common stock. The
following table sets forth the effect of the adjustment to the conversion price
on the number of additional shares of common stock to be issued based upon the
high, mid and low prices within the estimated public offering price range set
forth on the cover of this prospectus:
<TABLE>
<CAPTION>
Public
Offering Number of Additional Shares of Common Stock
Price to be Issued Upon Conversion
-------- -------------------------------------------
<S> <C>
$10.00 924,567
$11.00 721,124
$12.00 551,588
</TABLE>
Each series of preferred stock provides for the accrual of payment-in-kind
dividends from the date of issuance through February 29, 2000, assuming that
this offering closes by April 15, 2000. The following numbers of shares of
common stock will be issued as payment-in-kind dividends on the various series
of preferred stock:
<TABLE>
<CAPTION>
Name of Series Number of Shares
-------------- ----------------
<S> <C>
Series A................................................... 128,072
Series B................................................... 551,777
Series C................................................... 285,701
Series D................................................... 396,449
Series E................................................... 83,480
Series F................................................... 28,149
---------
Total.................................................... 1,473,628
=========
</TABLE>
50
<PAGE>
On December 31, 1996, Venkat Sharma loaned Acorn $92,000 for a promissory
note payable on demand and bearing interest at an annual rate of 10%. Mr.
Sharma made an additional loan of $28,000 on December 31, 1997 on the same
terms as the prior note. Acorn has made no payments on these notes as of
December 31, 1999.
In November 1998, we loaned Frank Richards $29,028 bearing interest at 8%
per year. The note is unsecured and is due and payable on the earlier of
November 20, 2003 or whenever he may sell his stock under Rule 144 in an amount
equal to or greater than the principal balance. Mr. Richards may pay the note
with shares of our stock valued at the fair market value at the date of
payment.
In October 1999, we loaned $28,700 to Timothy O'Crowley and $33,000 to
Frank Richards to assist them in paying personal taxes incurred by each of them
as a result of their receipt of Spider stock in the spin-off. Each loan bears
interest at 7.75%. Mr. O'Crowley's loan is due in full on September 1, 2001 and
provides that one half of the loan is forgiven on each of September 1, 2000 and
2001 if he is still employed at those times. Mr. Richard's loan is due on the
earlier of November 30, 2003 or whenever he may sell his stock under Rule 144
in an amount equal to or greater than the principal balance.
On November 23, 1999, we loaned $600,000 to Timothy O'Crowley, our CEO.
The loan is a full recourse note secured by 150,000 shares of Mr. O'Crowley's
common stock. The loan bears fixed interest at 10.5%. The loan was made to Mr.
O'Crowley for his personal business and family expenditures and was approved by
the Board as being more beneficial to Etinuum than having Mr. O'Crowley reduce
his equity interest in Etinuum by selling stock. The loan is due and payable in
full on November 23, 2000.
Spin-Off of Spider Technologies
In October 1999, we transferred the proprietary software that is used in
our EtinuumWebDirect System to a newly-formed subsidiary named Spider
Technologies, Inc. We contributed $1 million in cash and some other assets,
primarily consisting of equipment recorded at less than $10,000, to Spider and
distributed 45,183,371 shares of Spider common and preferred stock pro-ratably,
on an as-converted to common basis, to our stockholders. We also exercised a
warrant for 1,000,000 shares of common stock of Spider that we paid to the
former Acorn stockholders. See "Acquisition of Acorn Information Services". The
spin-off was taxable to us, and the spin-off and its tax effects are shown in
our 1999 financial statements.
We had begun discussions regarding a possible spin-off in late 1998 and we
and counsel to Spider commenced serious negotiations in early 1999. An
independent valuation of Spider was completed in May 1999 and again as of
November 1999 at the time the spin-off was completed. The valuation was
performed to determine a "fair market value" of the capital stock of Spider. It
was not an asset-based valuation and, therefore, we did not receive an
individual valuation for the proprietary software. We believe that the
proprietary software is the core asset and value of Spider. The valuation
process resulted in a "fair market value" of the capital stock of Spider on a
non-marketable minority interest basis of $4.5 million. The term "fair market
value" was defined as the amount at which the capital stock would change hands
between a willing buyer and a willing seller, each having reasonable knowledge
of all relevant facts, neither being under any compulsion to act, with equity
to both. The value was based on an analysis of a number of factors including:
. interviews with some senior management members of Etinuum and Spider;
. site visits of facilities and business offices of Spider;
. reviews of forecasts and projections prepared by our management with
respect to Spider for the years ended March 31, 2000 through March 31,
2004;
. reviews of other publicly available financial data for some companies
comparable to Spider; and
. performance of other studies, analyses and inquiries.
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<PAGE>
The general purpose of the spin-off was to allow Spider to be an
independent software development and licensing business. We retained the
professional services business that integrates the software with our clients'
and their vendors' systems for their direct-to-customer initiatives. We
incurred out-of-pocket costs of approximately $380,000 in the spin-off of
Spider. We believed we and Etinuum's stockholders at that time would benefit
from the spin-off by creating a separate company that would focus solely on
software development, allowing us to focus on our own core competencies. In
addition, we believed Spider would be in a better position to license to third
parties than we would be since we are an end user of the software and might be
perceived as a competitor by third parties, thus leading to higher quality
software because of possible increased revenue and user input to Spider. We
further believed the continuing development of the software would involve
significant expenses and negatively affect our financial results.
We entered into several agreements with Spider as a part of the spin-off,
which are described below. In general, each agreement provides that each party
will indemnify the other party if it violates the agreement. All of our
agreements with Spider were made in the context of a parent-subsidiary
relationship and were negotiated in the overall context of the spin-off. Spider
was represented by its own counsel in connection with these negotiations.
Although we generally believe that the terms of these agreements are arms-
length and consistent with fair market values, we cannot assure you that the
prices charged to or by us under these agreements are not higher or lower than
the prices that may be charged to or by unaffiliated third parties for similar
services or goods or that the other terms are the same as those that would be
agreed upon by unaffiliated parties.
We have set forth below a summary description of the material terms of the
agreements involved in the spin-off. You should read the full text of these
agreements, which have been filed with the SEC as exhibits to the registration
statement of which this prospectus is a part.
Software Ownership. We transferred to Spider ownership of the
EtinuumWebDirect software code and related documentation, copyrights and
intellectual property rights. The source code and related documentation is from
time to time to be delivered to an independent escrow agent for delivery to us
if Spider breaches the agreement, goes out of business or abandons the
software. Abandonment exists if Spider:
. significantly fails to fulfill its maintenance and support obligations,
as explained below, for a period of 30 sequential days;
. is notified by us of a major error in the software that substantially
impairs the operation of the software, the problem continues for more
than one hour after we notify Spider, this occurs 25 days in a calendar
year, and it adversely affects us;
. substantially reduces the level of support for the software it develops
by not providing necessary error corrections so as to adversely affect
us; or
. announces it is going to discontinue developing, supporting or
maintaining the software.
If there is an abandonment, we can use the source code to provide direct-
to-customer outsourced services and, if the abandonment is of the third or
fourth type described above or Spider goes out of business, we can use the
source code for any purpose. In addition, we have the right to retain a copy of
the source code and documentation until May 2001 to allow us to make
corrections to the software. We lose this right if a competitor of Spider or
other entity that would jeopardize the confidentiality of the software acquires
control of us. We also have a security interest in current and future versions
of the software and related rights on which we can foreclose if Spider breaches
its agreements with us or fails to pay us royalties for 20 days.
If Spider wishes to sell the software or related rights prior to November
4, 2002, it must first offer them to us. It also cannot, prior to that date,
assign title or grant an exclusive license to the software to a competitor of
ours or voluntarily allow a competitor of ours to control it.
52
<PAGE>
It is also a breach if a competitor involuntarily controls Spider. Spider
has further recently agreed for two years not to significantly engage in the
business of providing live human interaction, via e-mail, fax or telephone, on
behalf of a client and its customers who purchase goods or services of the
client. We will pay Spider $75,000 for this further agreement.
Control for these purposes means the direct or indirect ownership of 45%
or more of the party's outstanding stock or, in our case only, the power to
appoint a majority of our board.
License Arrangements. We have a 20-year worldwide, non-exclusive license
to use and integrate the object and source code of current and future versions
of the software. During that time, we can use the source code to develop
interfaces with hardware or other software and integrate the object code with
our and our clients' systems. Until November 4, 2000, we can generally
sublicense the software to our clients unless Spider wishes to directly license
to them, or those clients previously breached a license with Spider for the
software, or the country where the client is located or will use the software
is not a member of the Berne Convention.
We do not pay Spider a license fee to use either the version of the
software we transferred to it or, until November 4, 2002, any new versions.
After that time, we will pay a "most favored nations" license fee for new
versions.
In general, Spider owns all modifications to the software made by us or
our sublicensees.
Maintenance and Support Services. Spider will provide us with maintenance
and support, technical support, installation and training services until
November 5, 2002. For maintenance and support services, we pay Spider an amount
to compensate Spider for services it provides to us or to our clients that
exceed those the Spider group provided to us prior to the spin-off. For
technical support services, we pay Spider its full employee costs plus 20%.
After November 5, 2002, Spider will provide maintenance and support on its
usual customer terms and may elect, at our request, to provide technical
support services.
In addition, at our request, Spider will host on its servers until
November 5, 2001, current and future versions of the software for operation by
us and our clients. For that service, we pay Spider what our clients existing
on November 5, 1999, pay us for the service, and for new customers after that
date we pay Spider its out-of-pocket costs for operating the server. After
November 5, 2001, Spider may continue to provide us and our clients with
hosting services at Spider's then current rates.
Spider may provide other maintenance and support services to our clients.
Royalty. Spider agreed to pay us royalties totaling $1.45 million plus
interest of 8% per year on the unpaid amount. The royalty rate equals 4% of
Spider's net revenues from the distribution and licensing of current and future
versions of the software. Spider does not have to pay us a royalty until it has
total net revenues of $5.5 million or receives $7.5 million from the sale of
equity or convertible debt securities, whichever occurs first. In any event,
the $1.45 million plus interest is due on the earlier of November 4, 2004, or
the sale of all or substantially all Spider's assets.
Shared Personnel and Resources. Under various agreements, we have
committed to share some of our personnel and resources with Spider for limited
periods of time. Paul Tartre, our President - Technology Solutions, and his
administrative assistant will spend 40% of their time on Spider matters, for
which we will be paid $124,080 a year. Our officers Timothy Hardin and Patrick
O'Neal will spend 5% and 20%, respectively, of their time on Spider business,
and Spider will reimburse us monthly for those percentages of our costs of
their employment. In addition, we expect that Timothy O'Crowley will remain
chairman of the board of Spider, and he will be a consultant to Spider for
strategic planning and financing advice for which he will be paid $90,000 per
year for two years. In general, other than Paul Tartre, neither we nor Spider
may solicit each others' employees for approximately one year.
53
<PAGE>
We have also agreed to provide administrative services to Spider for
$10,417 a month, as well as to sublease 40% of our office space in San Diego
for 40% of our rent and other occupancy costs. Spider also pays us for
equipment and supplies it uses in that office. These agreements generally
terminate between October 2000 and August 2003.
Referrals. We have agreed to refer to Spider those of our clients that
wish to license current or future versions of the software, and Spider will
refer to us companies that might wish to use our outsourced communications
center services. These arrangements are for three years and are non-exclusive.
We will pay each other industry-standard commissions on the revenues generated
by any referrals, and Spider will charge our clients standard license fees.
Infringement. In general, we are liable to Spider if we know the software
and documentation we delivered to Spider, or if a modification we made to the
software, infringes the rights of others or is not owned by us. In general,
Spider is liable to us if the software and documentation it develops infringes
the rights of others or is not owned by Spider, or if at any time a client of
ours makes a claim against us involving work done by Spider. The claims of each
party against the other are generally limited to a maximum of $5 million, and
no claim can be made for the first $500,000 of claims. However, this limitation
does not apply to claims for indemnification regarding infringement or
misappropriation or, in Spider's case, claims our clients make against us based
on Spider's work.
Taxes. If in the future our or Spider's tax liability increases pursuant
to Section 482 of the Internal Revenue Code of 1986, the other party will pay
to the party whose liability was increased an amount equal to the reduction in
tax liability payable by the other party. No payment needs to be made until the
tax benefit actually results in a recognized tax savings to the other party on
a specific amount of tax then currently due and payable.
Termination. Spider can terminate the agreements, including the licenses,
and seek damages from us upon notice to us if we breach our obligations and
fail to materially cure such breach within specified time periods. We have the
right to foreclose on our security interest in the software and related rights,
terminate the agreement and seek recovery of damages from Spider upon notice to
Spider if:
. Spider willfully, recklessly or negligently, with the approval or
prior actual knowledge of senior management of Spider, breaches its
confidentiality obligations; or
. materially breaches any other provision of the agreement with the
exception of maintenance, support and hosting services, and fails to
cure a breach within specified time periods. If Spider materially
breaches its obligations regarding maintenance, support and hosting
services and does not cure the breach after notice, we have the right
to contract with a third party to obtain those services, seek recovery
of damages from Spider and terminate the agreement.
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<PAGE>
Stock Ownership and Board Representation. In connection with the spin-off
of Spider, the following executive officers, directors and principal
stockholders received shares of common stock or preferred stock of Spider:
<TABLE>
<CAPTION>
Number of Number of
Shares of Shares of
Common Preferred Percentage
Name Stock Stock Owned(1)
---- ---------- ---------- ----------
<S> <C> <C> <C>
Timothy O'Crowley.......................... 7,715,328 -- 15.2%
Paul Tartre................................ 3,000,000 -- 5.9
Frank Richards............................. 500,000 841,467 2.6
Patrick O'Neal............................. 700,000 -- 1.4
Venkat Sharma.............................. 388,155 -- *
Shoba Murali............................... 304,095 -- *
Raja Ramnarayan............................ 185,250 -- *
Sunil Gupta................................ 100,000 -- *
Stephen Hyde............................... -- 98,650 *
The Beacon Group III -
Focus Value Fund, L.P. ................... -- 18,305,860 28.2
Conning Capital Partners V, L.P. .......... -- 10,102,941 19.9
---------- ---------- ----
Total.................................... 12,892,828 25,341,418 75.3%
========== ========== ====
</TABLE>
- ------------------
* Less than one percent
(1) The total shares of common stock and preferred stock outstanding at
November 6, 1999, the date of distribution, was 50,783,371 shares.
In addition, Timothy O'Crowley, Steven Piaker, Harold Pote, Rick Weller
and Eric Wilkinson, who are members of our board, and Patrick O'Neal and Paul
Tartre, two of our executive officers, are members of the board of Spider and
represent seven of the ten members of Spider's board.
Acquisition of Acorn Information Services
Effective October 1, 1999, we acquired all of the capital stock of Acorn
Information Services, Inc., a Delaware corporation based in Connecticut that
provides strategic consulting and data analytic services to help their clients
enhance their marketing efforts. Four of the five former Acorn stockholders
became executives of Acorn and us following the acquisition. Timothy O'Crowley
is currently the sole director of Acorn. In connection with the Acorn
transaction, we paid $100,000 of the fee incurred by the Acorn stockholders for
services provided by their investment banker Prospero LLC by issuing 11,737
shares of our common stock to Prospero. A summary of the acquisition and the
agreements executed in connection with the acquisition is provided below. We
strongly urge you to read the entire agreements, which have been filed with the
SEC as exhibits to the registration statement of which this prospectus is a
part.
Stock Purchase and Contingent Earn-Out Provisions. The purchase price for
all of the outstanding Acorn capital stock was $950,000 at closing, including
acquisition costs of $100,000. In addition, we must make specified contingent
payments of cash and our common stock if Acorn meets at least 75% of specified
minimum earnings targets as of November 30, 2000, 2001 or 2002. During this
three year earn-out period, the cash portion of the contingent payments will be
made at the end of each anniversary date of the agreement and the common stock
portion will be issued at the end of the third anniversary date of the
agreement. The former Acorn stockholders will receive an aggregate amount of up
to $1.9 million in cash and 527,778 shares of our common stock.
The contingent earn-out consideration payable to the former Acorn
stockholders who are also employees of Acorn may not be received under some
circumstances if their employment ends before Acorn meets specified earnings
targets. When Acorn achieves these earnings targets, however, up to two of
these employees may leave Acorn. In addition, if Acorn sells substantially all
of its assets or stock to a third party, or if we become insolvent, the former
Acorn stockholders have a right of first refusal to purchase the stock or
assets of Acorn.
55
<PAGE>
In connection with the Acorn transaction, we exercised our warrant to
purchase 1,000,000 shares of Spider common stock and delivered these shares to
the former Acorn stockholders. The shares must be returned to us if the earnout
conditions are not met. Each former Acorn stockholder is entitled to retain
four times the number of Spider shares as the number of shares of our common
stock that he or she is entitled to receive for the first year of the earn-out
period. We have the right to repurchase all of the forfeited Spider common
stock for $.013 per share. Further, if an employee stockholder's employment
terminates prior to the expiration of the earn-out period, we will have the
right to repurchase all of that stockholder's forfeited or unforfeited Spider
common stock at $.013 per share.
In addition, we agreed to make up to a total of $10.9 million of
economically justified, in our determination, capital contributions to Acorn
over the earn-out period to fund growth and ongoing business operations of
Acorn and to facilitate Acorn's achievement of the earnings targets. If Acorn
does not meet 100% of its earnings targets, our capital contributions will be
adjusted downward proportionately. If Acorn does not meet 75% of its targets,
we are not required to make any capital contribution. We have the final
determination as to the amount of our capital contributions.
In the event of a change in control of our capital stock during the earn-
out period, payment of the contingent earn-out earned for any annual periods
ending prior to the change in control and for the year in which a change in
control occurs will be accelerated. After the closing of this offering, the
cash and stock portions of the earn-out consideration payable in the first year
of the earn-out period will be paid within 30 days of our determination of
earn-out consideration payable for this period.
Employment Agreements. Each of the former Acorn stockholders who prior to
the transaction were Acorn employees entered into an employment agreement with
us and Acorn to provide services to us and Acorn. The employment agreements are
for an initial term of three years and provide for the assignment to Acorn of
all works and inventions developed on behalf of Acorn. With limited exceptions,
for not less than one year after a former Acorn stockholder's employment is
terminated, he or she cannot work for or provide services to a company that
competes with us or solicit other Acorn employees to leave Acorn's employ. The
employee stockholders, other than Mr. Sharma, will not be entitled to more than
12 months of severance pay upon termination of employment by the employee for
cause or by us without cause. Mr. Sharma will be entitled to 12 months of
severance pay plus, under some circumstances, up to an additional 12 months of
severance pay upon termination by him for cause or by us without cause.
Registration Rights Agreement. To mitigate the tax liability of the former
Acorn stockholders for their receipt of our common stock at the end of the
three year earn-out period, we agreed to provide the former Acorn stockholders
with:
. a loan equal to 25% of the value of our common stock held by the
former Acorn stockholders;
. an offer to repurchase 25% of our common stock held by the former
Acorn stockholders; or
. one demand registration for up to 50% of our stock held by the former
Acorn stockholders. The right of the former Acorn stockholders to
demand registration of a portion of their shares arises only if we
elect not to provide a loan or to repurchase shares of our common
stock.
Commercial Agreements
During 1996, we entered into transactions with Eden Financial Group, Inc.
or its subsidiaries. Timothy O'Crowley, Patrick O'Neal and Paul Tartre,
executive officers of Etinuum, are stockholders of Eden Financial Group, Inc.
We paid a total of $115,000 for software applications developed by Eden
Financial Group, Inc. in the form of a note payable. The note was paid on
December 15, 1997. We received $80,000 from Eden Financial Group, Inc. in
return for assuming various lease obligations of Eden Financial Group, Inc.
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<PAGE>
During 1997, we leased an aircraft from Mt. Evans Consulting, LLC, a
company partially-owned by Timothy O'Crowley. Rental payments were based upon
our usage of the aircraft. Amounts paid or accrued by us under the lease during
the year ended December 31, 1997, were $165,000. During 1998, the lease was
terminated.
From January 1998 through May 1999, Mr. Pat O'Crowley, our executive vice
president - corporate development and the brother of Timothy O'Crowley,
consulted with us on strategic planning and operational matters, through his
firm, Coalter Group International. In 1999, Coalter Group International was
paid $80,000 for these services.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table shows specified information with respect to beneficial
ownership of our common stock as of December 31, 1999, by each stockholder
known to us to be the beneficial owner of more than 5% of our common stock,
each of our directors, each of our Named Executive Officers and all executive
officers and directors as a group. The number of shares and percentages in the
table includes the shares issuable as payment-in-kind (PIK) dividends through
February 29, 2000.
Beneficial ownership is determined in accordance with the rules of the SEC
and represents sole or shared voting or sole or shared investment power with
respect to securities. Unless otherwise indicated below, the person and
entities named in the following table have sole voting and sole investment
power with respect to all shares beneficially owned, except for applicable
community property laws. Shares of common stock underlying options that are
currently exercisable or exercisable within 60 days of December 31, 1999, are
deemed to be outstanding and to be beneficially owned by the person holding the
options for the purpose of computing the percentage ownership of that person,
but are not treated as outstanding for the purpose of computing the percentage
ownership of any other person.
The following table assumes that the underwriters do not exercise their
over-allotment option to purchase up to 675,000 shares from us.
<TABLE>
<CAPTION>
Percent Owned
-----------------
Number Before After
Name and Address of Beneficial Owners of Shares Offering Offering
- ------------------------------------- --------- -------- --------
<S> <C> <C> <C>
The Beacon Group III - Focus Value Fund,
L.P. ....................................... 4,713,759(1) 34.6% 26.0%
399 Park Avenue
New York, NY 10022
Conning Capital Partners V, L.P. ............ 2,601,507(2) 19.1% 14.3%
CityPlace II, 9th Floor
185 Asylum Street
Hartford, CT 06103
Timothy O'Crowley............................ 2,001,333(3) 14.2% 11.1%
Etinuum, Inc.
5619 DTC Parkway, 12th Floor
Englewood, CO 80111-3017
Brinson Partners, Inc. ...................... 1,680,680(4) 12.3% 9.3%
209 South LaSalle Street
Chicago, IL 60604-1295
Frank Richards............................... 297,328(5) 2.2% 1.6%
Paul Tartre.................................. 243,888(6) 1.8% 1.0%
Patrick O'Neal............................... 222,016(7) 1.6% 1.2%
Timothy Hardin............................... 25,753(8) * *
Stephen Hyde................................. 25,402 * *
Steven Piaker................................ -- (9)
Harold Pote.................................. -- (10)
Rick Weller.................................. --
Eric Wilkinson............................... -- (11)
All officers and directors as a group, 21
persons..................................... 2,647,782(12) 17.9% 13.7%
</TABLE>
58
<PAGE>
- ------------------
* Less than 1%.
(1) Includes 716,847 shares issuable as a PIK dividend.
(2) Includes 395,625 shares issuable as a PIK dividend.
(3) Includes 472,501 shares underlying options that are exercisable within 60
days from December 31, 1999 and excludes 65,000 shares underlying options
Mr. O'Crowley granted to Mr. Tartre on January 12, 1998. Mr. O'Crowley is
our Chief Executive Officer.
(4) Includes 20,589 shares issuable as a PIK dividend and 721,124 shares
issuable with respect to our Series F preferred stock assuming an initial
offering price of $11.00 per share. Brinson Partners, Inc. is the managing
member of Brinson Venture Management LLC, the investment advisor to BVCF
III, L.P., which has sole voting and investment power over BVCF III,
L.P.'s shares. The address of BVCF III L.P. is c/o Brinson Partners, Inc.
(5) Includes 80,650 shares underlying options that are exercisable within 60
days from December 31, 1999 and 32,951 shares issuable as a PIK dividend.
(6) Includes shares underlying options that are exercisable within 60 days
from December 31, 1999 and 65,000 shares underlying options Mr. O'Crowley
granted to Mr. Tartre on January 12, 1998.
(7) Includes 172,016 shares underlying options that are exercisable within 60
days from December 31, 1999.
(8) Represents shares underlying options that are exercisable within 60 days
from December 31, 1999.
(9) Does not include 2,601,507 shares held of record by Conning Capital
Partners V, L.P. Mr. Piaker is senior vice president of Conning & Conning.
Conning & Conning is the managing member of Conning Investment Partners V,
LLC, which serves as the general partner of Conning Capital Partners V,
L.P. Mr. Piaker disclaims beneficial ownership of the shares owned by
Conning Capital Partners V, L.P.
(10) Does not include 4,713,759 shares held of record by The Beacon Group III -
Focus Value Fund, L.P. The Beacon Group has voting and investment power
over shares owned of record by The Beacon Group III - Focus Value Fund,
L.P. Mr. Pote is a general partner of The Beacon Group and as such may be
deemed to be a beneficial owner of the shares shown as beneficially owned
by The Beacon Group III - Focus Value Fund, L.P. Mr. Pote disclaims
beneficial ownership of the shares owned by The Beacon Group III - Focus
Value Fund, L.P., and, accordingly, such shares are excluded from the
information in the table with respect to Mr. Pote.
(11) Does not include 4,713,759 shares held of record by The Beacon Group III -
Focus Value Fund, L.P. Mr. Wilkinson is employed by The Beacon Group. Mr.
Wilkinson disclaims beneficial ownership of the shares owned by The Beacon
Group III - Focus Value Fund, L.P.
(12) Includes 1,144,600 shares underlying options held by executive officers
and directors that are exercisable within 60 days from December 31, 1999.
59
<PAGE>
DESCRIPTION OF CAPITAL STOCK
General
We are authorized to issue 170,000,000 shares of common stock and
79,000,000 shares of undesignated preferred stock. Upon the closing of this
offering, we will be authorized to issue 100,000,000 shares of common stock and
10,000,000 shares of undesignated preferred stock. The following description of
our capital stock is qualified in its entirety by our certificate of
incorporation and bylaws, which are included as exhibits to the registration
statement of which this prospectus is a part, and by the provisions of
applicable Delaware law.
Common Stock
As of December 31, 1999, there were 13,496,189 shares of common stock
outstanding, as adjusted to reflect
. the automatic conversion of all outstanding shares of preferred stock
into 9,560,188 shares of common stock;
. the issuance of 1,333,433 shares of common stock to the holders of our
preferred stock as payment-in-kind dividends; and
. the issuance of an additional 721,124 shares of common stock to the
holders of our Series F preferred stock assuming the sale of shares in
this offering at an initial offering price of $11.00 per share.
As of December 31, 1999, we had approximately 32 stockholders of record.
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. The holders of common stock are
entitled to receive ratably any dividends our board of directors may declare
from time to time out of funds legally available for that purpose after payment
of preferential dividends to the holders of preferred stock, if any. See
"Dividend Policy." If we liquidate, dissolve or wind up our business, the
holders of common stock are entitled to share ratably in all assets remaining
after payment of liabilities and the distribution rights of the preferred
stock, if any. The common stock has no preemptive or conversion rights or other
subscription rights. There are no redemption or sinking fund provisions
applicable to the common stock.
Preferred Stock
The board of directors has the authority, without action by the
stockholders, to designate and issue preferred stock in one or more series, and
to designate the rights, preferences and privileges of each series, any or all
of which may be greater than the rights of the common stock. We cannot state
the actual effect of the issuance of any shares of preferred stock upon the
rights of holders of the common stock until the board of directors determines
the specific rights of the holders of the preferred stock. However, the effects
might include, among other things, restricting dividends on the common stock,
diluting the voting power of the common stock, reducing the market price of the
common stock, or impairing the liquidation rights of the common stock, without
further action by the stockholders. We could issue preferred stock quickly with
terms calculated to delay or prevent a change in control or make removal of
management more difficult. We have no present plans to issue any shares of
preferred stock.
Delaware Anti-Takeover Law and Charter and Bylaw Provisions
Specific provisions of Delaware law and our certificate of incorporation
and bylaws could make it more difficult or prevent a change in control that a
stockholder might consider favorable by a tender offer, a proxy contest or
otherwise, and to remove incumbent officers and directors. These provisions are
intended to discourage coercive takeover practices and inadequate takeover bids
and to encourage persons seeking to acquire control of us to first negotiate
with us. We believe that the benefits of increased protection of our potential
ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us outweigh the disadvantages of
discouraging takeover or acquisition proposals because, among other things,
negotiation of these proposals could result in an improvement of their terms.
60
<PAGE>
Section 203 of the Delaware General Corporation Law prohibits us from
engaging in a "business combination" with an "interested stockholder" for a
period of three years following the date the person became an interested
stockholder, unless, with some exceptions, the "business combination" or the
transaction in which the person became an interested stockholder is approved in
a prescribed manner. A "business combination" includes a merger, a sale of 10%
or more of our assets or stock, or other transactions resulting in a financial
benefit to the interested stockholder. Generally, an "interested stockholder"
is a person who, together with affiliates and associates, owns, or within three
years prior to the determination of interested stockholder status, did own, 15%
or more of a corporation's voting stock. Section 203 does not restrict a
transaction by us with a person who owned stock before this public offering.
Section 203 permits companies to opt out of this provision, but we have elected
not to opt out. The applicability of this provision could prevent or delay a
takeover that you might consider favorable by an interested stockholder in a
transaction that the board of directors has not approved in advance, including
takeovers that might result in a premium over the market price for the shares
of common stock held by stockholders.
Our certificate of incorporation and bylaws, effective upon the closing
date of this offering, contain provisions that are intended to deter hostile
takeover attempts. Our certificate of incorporation and bylaws require that any
action to be taken by our stockholders must be taken at a duly called annual or
special meeting of the stockholders and may not be taken by a consent in
writing. In addition, special meetings of our stockholders may be called only
by the board of directors. Our certificate of incorporation and bylaws also
provide that, beginning upon the closing of this offering, our board of
directors will be divided into three classes, with each class serving staggered
three-year terms so that approximately one-third of the directors are elected
each year. Staggering the terms of our directors delays the time it would take
stockholders to replace a majority of the incumbent directors. Some amendments
of the certificate of incorporation and of the bylaws require the approval of
holders of at least 66 2/3% or 80% of the voting power of all outstanding
stock. In addition, our directors may only be removed with or without cause by
a vote of 80% of the stockholders. Our stockholders must give notice of
nominations or other business to be conducted at a stockholders meeting at
least 120 days before the date of our proxy statement sent to stockholders for
the prior year's annual meeting. These provisions may have the effect of
discouraging takeovers and tactics used in proxy fights or delaying changes in
control or our management.
Limitations on Directors' Liability and Indemnification
Our certificate of incorporation limits the personal liability of our
directors to us and our stockholders to the maximum extent permitted by
Delaware law. Delaware law provides that directors of a corporation will not be
personally liable for monetary damages for breach of their fiduciary duties as
directors, except liability for:
. any breach of their duty of loyalty to the corporation or its
stockholders;
. acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
. unlawful payments of dividends or unlawful stock repurchases or
redemptions; or
. any transaction from which the director derived an improper personal
benefit.
The limitation of liability does not apply to liabilities of our directors
arising under the federal securities laws and does not affect the availability
of equitable remedies such as injunctive relief or rescission.
Our certificate of incorporation and bylaws also provide that we will
indemnify our directors and officers and may indemnify our employees and other
agents to the fullest extent permitted by law. We believe that indemnification
under our bylaws applies to negligent and grossly negligent acts of indemnified
parties. Our bylaws also permit us to secure insurance on behalf of any
officer, director, employee or other
61
<PAGE>
agent for any liability arising out of his or her actions in their capacity as
an officer, director, employee or other agent, regardless of whether the
certificate of incorporation or bylaws would permit indemnification. The
indemnification provisions in our bylaws and certificate of incorporation are
not exclusive of other rights of indemnification that may be available to our
directors or officers under any agreement or vote of stockholders or
disinterested directors.
In addition to the provisions in our bylaws, we have entered into
agreements to indemnify our directors, executive officers and some employees.
These agreements, among other things, indemnify our directors, executive
officers and these employees for judgments, fines, settlement amounts and
specified expenses, including attorneys' fees, incurred by them in any action
or proceeding, including any action by or on behalf of the company, arising
out of the person's services as a director, executive officer or controller of
us, any of our subsidiaries or any other company or enterprise to which the
person provides services at our request. We believe that these provisions and
agreements are necessary to attract and retain qualified persons as directors
and executive officers.
The limited liability and indemnification provisions in our certificate
of incorporation and bylaws may discourage stockholders from bringing a
derivative claim or other lawsuit against our directors or officers for breach
of their fiduciary duty, even though a derivative action, if successful, might
otherwise benefit us and our stockholders. In addition, the value of your
investment in our stock may decline to the extent we pay the costs of
settlement or damage awards against our directors and officers under these
indemnification provisions.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees in which indemnification is sought, nor
are we aware of any threatened litigation that may result in claims for
indemnification.
Registration Rights
After this offering, the holders of approximately 11,738,549 shares of
outstanding common stock and the former stockholders of Acorn who may receive
up to 527,778 shares of our common stock in the future, or their permitted
transferees, are entitled to rights to register those shares under the
Securities Act of 1933 at any time after 12 months following the closing of
this offering.
We have entered into an agreement that will be effective upon the closing
of this offering with Beacon, Conning, Brinson, Frank Richards, Timothy
O'Crowley and some other holders of our preferred stock. Under the agreement,
these stockholders, or their permitted transferees, may require, on three
occasions, and Brinson on one additional occasion, at any time one year after
this offering, that we file a registration statement at our expense under the
Securities Act with respect to the shares of common stock they acquire upon
conversion of their preferred stock, provided that the anticipated amount
offered would be at least $5 million. In addition, these stockholders and
their permitted transferees may, at any time one year after this offering,
require that we register their shares for public resale on Form S-3 or similar
short-form registration, provided that the value of the securities to be
registered is at least $2.5 million.
In addition, the stockholders whose shares are covered by this agreement
have piggyback registration rights. If we propose to register any of our
common stock under the Securities Act, other than under employee benefit plans
or for acquisitions, these stockholders may require us to include all or a
portion of their stock in the registration. However, the managing underwriter,
if any, of the offering has rights to limit the amount of stock to be sold by
those stockholders.
We have also entered into a registration rights agreement with the former
stockholders of Acorn in connection with the acquisition of Acorn. Please see
"Related Party Transactions - Acquisition of Acorn Information Services" for
more information about the terms of this agreement.
All registration expenses incurred in connection with the above
registrations will be borne by us.
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<PAGE>
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American
Securities Transfer & Trust Company, Denver, Colorado.
SHARES ELIGIBLE FOR FUTURE SALE
General
The 4,500,000 shares of our common stock sold in this offering, or
5,175,000 shares if the underwriters exercise their over-allotment option in
full, will be freely tradable without restriction under the Securities Act,
except for any shares that may be acquired by an "affiliate" of ours as that
term is defined in Rule 144 under the Securities Act. Shares owned by our
affiliates will remain covered by the resale limitations of Rule 144.
The 13,496,189 shares of our common stock that will continue to be held by
existing stockholders after this offering constitute "restricted securities"
within the meaning of Rule 144 and will be eligible for sale in the open market
after this offering, to the extent permitted by contractual lockup provisions
and the applicable requirements of Rule 144, both of which are described below.
We have granted registration rights to some of our stockholders. See
"Description of Capital Stock-Registration Rights."
Generally, Rule 144 provides that a person who has beneficially owned
"restricted" shares for at least one year will be entitled to sell on the open
market in brokers' transactions within any three-month period a number of
shares that does not exceed the greater of:
. 1% of the then outstanding shares of common stock; and
. the average weekly trading volume in the common stock on the open
market during the four calendar weeks preceding such sale.
Sales under Rule 144 must also comply with post-sale notice requirements
and, in some cases, requirements regarding the availability of current public
information about us.
In the event that any person who is deemed to be an affiliate purchases
shares of our common stock pursuant to this offering or acquires shares of our
common stock pursuant to one of our employee benefit plans, the shares held by
such person are required under Rule 144 to be sold in brokers' transactions and
sales must comply with the volume limitations described above. Shares properly
sold in reliance upon Rule 144 to persons who are not affiliates are thereafter
freely tradable without restriction.
Sales of substantial amounts of our common stock in the open market, or
the availability of such shares for sale, could adversely affect the price of
our common stock.
Our directors, executive officers and almost all of our stockholders have
agreed that, without the prior written consent of Chase Securities Inc. on
behalf of the underwriters, they will not, with some exceptions, during the
period ending 180 days after the date of this prospectus, sell or otherwise
dispose of any shares of common stock. See "Plan of Distribution."
An aggregate of 8,768,174 shares of our common stock are reserved for
issuance under our stock option and employee stock purchase plans and options
to purchase 1,795 shares have been exercised. We intend to file a registration
statement on Form S-8 covering the issuance of shares of our common stock
pursuant to these plans. Accordingly, the shares issued pursuant to these stock
option plans will be freely tradable, except for the restrictions on resale by
affiliates under Rule 144.
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<PAGE>
PLAN OF DISTRIBUTION
We have entered into an underwriting agreement with the underwriters named
below. Chase Securities Inc., Robertson Stephens, Inc., U.S. Bancorp Piper
Jaffray Inc. and SoundView Technology Group, Inc. are acting as representatives
of the underwriters.
The underwriting agreement provides for the purchase of a specific number
of shares of common stock by each of the underwriters. The underwriters'
obligations are several, which means that each underwriter is required to
purchase a specified number of shares but is not responsible for the commitment
of any other underwriter to purchase shares. Under the terms and conditions of
the underwriting agreement, each underwriter has severally agreed to purchase
the number of shares of common stock set forth opposite its name below.
<TABLE>
<CAPTION>
Number
Underwriters of Shares
------------ ---------
<S> <C>
Chase Securities Inc..............................................
Robertson Stephens, Inc. .........................................
U.S. Bancorp Piper Jaffray Inc. ..................................
SoundView Technology Group, Inc...................................
---------
Total............................................................. 4,500,000
=========
</TABLE>
This is a firm commitment underwriting. This means that the underwriters
have agreed to purchase all of the shares offered by this prospectus, other
than those covered by the over-allotment option described below, if any are
purchased. Under the underwriting agreement, if an underwriter defaults in its
commitment to purchase shares, the commitments of non-defaulting underwriters
may be increased or the underwriting agreement may be terminated, depending on
the circumstances. We have agreed to indemnify the underwriters against
specified civil liabilities under the Securities Act, or to contribute to
payments the underwriters may be required to make in respect of such
liabilities.
The representatives have advised us that the underwriters propose to offer
the shares directly to the public at the public offering price that appears on
the cover page of this prospectus. In addition, the representatives may offer
some of the shares to securities dealers at such price less a concession of
$ per share. The underwriters may also allow to dealers, and such dealers
may reallow, a concession not in excess of $ per share to other dealers.
After the shares are released for sale to the public, the representatives may
change the offering price and other selling terms at various times.
The underwriters have informed us that the underwriters will not allow
discretionary account sales of the shares of common stock offered by this
prospectus.
We have granted the underwriters an over-allotment option. This option,
which is exercisable for up to 30 days after the date of this prospectus,
permits the underwriters to purchase a maximum of 675,000
64
<PAGE>
additional shares from us to cover over-allotments. If the underwriters
exercise all or part of this option, they will purchase shares covered by the
option at the public offering price that appears on the cover page of this
prospectus, less the underwriting discount. If this option is exercised in
full, the total price to the public will be $56.9 million and the net proceeds
to us will be approximately $51.4 million assuming an offering price of $11.00
per share. The underwriters have severally agreed that, to the extent the over-
allotment option is exercised, they will each purchase a number of additional
shares proportionate to the underwriter's initial amount reflected in the above
table.
The following table provides information regarding the amount of the
discount to be paid to the underwriters by us. Such amount is shown assuming
both no exercise and full exercise of the underwriters' option to purchase
additional shares and assuming an offering price of $11.00.
<TABLE>
<CAPTION>
Paid by Us
-------------------------
No Exercise Full Exercise
----------- -------------
<S> <C> <C>
Per share......................................... $ 0.77 $ 0.77
Total............................................. $3,465,000 $3,984,750
</TABLE>
We estimate that the total expenses of the offering, excluding the
underwriting discount, will be approximately $1.5 million.
We have agreed to indemnify each underwriter against all liabilities to
which they may become subject under the federal securities laws or other law,
including reimbursement of expenses, arising out of:
. any untrue statement or alleged untrue statement of a material fact
contained in the registration statement, including the prospectus, or
the omission or alleged omission to state a material fact required to
be stated therein or necessary to make the statements not misleading,
except that there is no indemnification for specific information
furnished by the underwriters; and
. the directed share program under which the underwriters have reserved
for sale up to 225,000 shares for our officers, directors, employees
and associates.
This includes contribution to any payments that may be made by the underwriters
in the event that indemnification is not available.
Our executive officers and directors, and almost all of our stockholders
have agreed to a 180-day lock up with respect to 9,241,392 shares of common
stock that they beneficially own, including securities that are convertible
into shares of common stock and securities that are exchangeable or exercisable
for shares of common stock. This means that, with some exceptions, for a period
of 180 days following the date of this prospectus, such persons may not offer,
sell, pledge or otherwise dispose of these securities without the prior written
consent of Chase Securities Inc.
The underwriters have reserved for sale up to 225,000 shares for
employees, directors and some other persons associated with us. These reserved
shares will be sold at the public offering price that appears on the cover of
this prospectus. The number of shares available for sale to the general public
in the offering will be reduced to the extent reserved shares are purchased by
these persons. The underwriters will offer to the general public, on the same
terms as other shares offered by this prospectus, any reserved shares that are
not purchased by these persons.
Wit Capital Corporation, an affiliate of SoundView Technology Group, Inc.,
is administering the directed share program as it relates to our employees and
directors, and Chase Securities Inc. is administering the program as it relates
to other persons associated with us. We provided to Wit Capital Corporation and
Chase Securities Inc. a list of persons we would like to participate in the
directed share program. After reviewing the prospective list of participants,
Wit Capital Corporation and Chase Securities Inc. will distribute letters to
their prospective participants asking if those persons would like to submit
indications of interest to participate in the program. These communications
will be accompanied or proceeded by a prospectus that meets the requirements of
Section 10 of the Securities Act. If there are indications of interest by
prospective participants to purchase, in aggregate, more than the number of
shares allocated to the program, then we will determine who can participate and
to what extent.
65
<PAGE>
Prior to this offering, there has been no public market for the common
stock. Consequently the offering price for the common stock will be determined
by negotiations between us and the underwriters and will not necessarily be
related to our asset value, net worth or other established criteria of value.
The factors to be considered in such negotiations, in addition to prevailing
market conditions, will include the history of and prospects for the industry
in which we compete, an assessment of our management, our prospects, our
capital structure, prevailing market conditions, our results of operations in
recent periods and several other factors as may be deemed relevant.
Rules of the SEC may limit the ability of the underwriters to bid for or
purchase shares before the distribution the shares is completed. However, the
underwriters may engage in the following activities in accordance with the
rules:
. Stabilizing transactions. The representatives may make bids or
purchases for the purpose of pegging, fixing or maintaining the
price of the shares, so long as stabilizing bids do not exceed a
specified maximum.
. Over-allotments and syndicate covering transactions. The
underwriters may create a short position in the shares by selling
more shares than are set forth on the cover page of this
prospectus. If a short position is created in connection with the
offering, the representatives may engage in syndicate covering
transactions by purchasing shares in the open market. The
representatives may also elect to reduce any short position by
exercising all or part of the over-allotment option.
. Penalty bids. If the representatives purchase shares in the open
market in a stabilizing transaction or syndicate covering
transaction, they may reclaim a selling concession from the
underwriters and selling group members who sold those shares as
part of this offering.
Stabilization and syndicate covering transactions may cause the price of
the shares to be higher than it would be in the absence of such transactions.
The imposition of a penalty bid might also have an effect on the price of the
shares if it discourages resales of the shares.
Neither we nor the underwriters make any representation or prediction as
to the effect that the transactions described above may have on the price of
the shares. These transactions may occur on the Nasdaq National Market or
otherwise. If such transactions are commenced, they may be discontinued without
notice at any time.
One or more members of the underwriting selling group may make copies of
the preliminary prospectus available over the Internet to customers through its
or their Web sites. The representatives expect to allocate a limited number of
shares to such member or members of the selling group for sale to brokerage
account holders.
The Wallach Company, a member of the NASD, has advised us in connection
with this offering, for which we paid it $150,000. The Wallach Company also
acted as placement agent in connection with our Series F preferred stock
financing in November and December 1999, for which we paid it $537,375 in cash.
Market Street Partners, an investment partnership owned by the partners of The
Wallach Company, purchased 164,319 shares of our Series F preferred stock for
$349,999 at $2.13 per share.
A prospectus in electronic format is being made available on an Internet
Web site maintained by Wit Capital Corporation. In addition, other dealers
purchasing shares from SoundView Technology, Inc. in this offering have agreed
to make a prospectus in electronic format available on Web sites maintained by
each of these dealers. Other than the prospectus in electronic format, the
information on Wit Capital Corporation's Web site and any information contained
on any other Web site maintained by Wit Capital Corporation is not part of this
prospectus or the registration statement of which this prospectus forms a part,
has not been approved or endorsed by us or any underwriter in its capacity as
underwriter and should not be relied upon by investors.
66
<PAGE>
LEGAL MATTERS
Chrisman, Bynum & Johnson, P.C. of Boulder, Colorado, will pass upon the
validity of the shares of common stock offered by us. Davis Polk & Wardwell of
Menlo Park, California, will pass upon legal matters in connection with this
offering for the underwriters. A limited liability company composed of partners
of Chrisman, Bynum & Johnson, P.C. will own 18,011 shares of our common stock
upon conversion of the shares of Series F preferred stock purchased by it
assuming an offering price of $11.00 per share and the issuance of the payment-
in-kind dividend through February 29, 2000.
EXPERTS
The financial statements and schedules of Etinuum, Inc. included in this
prospectus and elsewhere in the registration statement have been audited by
Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in giving said reports.
The financial statements of Acorn Information Services, Inc. as of and for
the year ended December 31, 1998 included in this prospectus have been so
included in reliance on the report (which contains an explanatory paragraph
relating to Acorn's ability to continue as a going concern as described in Note
2 to the financial statements) of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission, Washington,
D.C. 20549, a registration statement on Form S-1 under the Securities Act of
1933, with respect to the common stock offered hereby. This prospectus does not
contain all of the information set forth in the registration statement and the
exhibits and schedules. Items are omitted in accordance with the rules and
regulations of the SEC. For further information with respect to us and our
common stock offered hereby, reference is made to the registration statement
and the exhibits and schedules filed as a part thereof. Statements contained in
this prospectus as to the contents of any contract or any other document
referred to are not necessarily complete, and, in each instance, if such
contract or document is filed as an exhibit, reference is made to the copy of
such contract or document filed as an exhibit to the registration statement,
each such statement being qualified in all respects by such reference to such
exhibit. The registration statement, including exhibits and schedules, may be
inspected without charge at the public reference facilities maintained by the
SEC in Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
SEC's regional offices located at the North Western Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661 and Seven World Trade
Center, 13th Floor, New York, NY 10048. You may obtain information about the
SEC's public reference facilities by calling the SEC at 1-800-SEC-0330. Copies
of all or any part of the registration statement may be obtained from such
office after payment of fees prescribed by the SEC. The SEC maintains a Web
site at http://www.sec.gov that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
As a result of this offering, we will have to comply with the full
informational requirements of the Securities Exchange Act of 1934. We will
fulfill our obligations with respect to such requirements by filing periodic
reports and other information with the SEC. We intend to furnish our
stockholders with annual reports containing consolidated financial statements
certified by an independent public accounting firm. We also maintain a Web site
at http://www.etinuum.com. Our Web site and the information contained on it or
connected to it shall not be deemed to be incorporated into this prospectus or
the registration statement of which it forms a part.
67
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Public Accountants.................................... F-2
Consolidated Financial Statements:
Audited Consolidated Balance Sheets at December 31, 1998 and 1999......... F-3
Audited Consolidated Statements of Operations for Each of the Three Years
in the Period Ended December 31, 1999.................................... F-4
Audited Consolidated Statements of Stockholders' Equity (Deficit) for Each
of the Three Years in the Period Ended December 31, 1999................. F-5
Audited Consolidated Statements of Cash Flows for Each of the Three Years
in the Period Ended December 31, 1999.................................... F-6
Notes to Consolidated Financial Statements.................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Etinuum, Inc.:
We have audited the accompanying consolidated balance sheets of ETINUUM,
INC., formerly known as Intek Information, Inc., (a Delaware corporation) and
subsidiaries at December 31, 1998 and 1999, and the related consolidated
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Etinuum,
Inc. and subsidiaries at December 31, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Denver, Colorado,
January 13, 2000.
F-2
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ 3,752 $ 6,204
Restricted certificates of deposit............ 135 407
Receivables, net of allowances of $411 and
$464, respectively--
Trade......................................... 4,375 5,218
Unbilled...................................... 1,689 1,108
Related party notes receivable................ -- 690
Prepaid expenses and other.................... 229 906
------- -------
Total current assets......................... 10,180 14,533
PROPERTY AND EQUIPMENT, net.................... 5,052 7,982
GOODWILL AND OTHER INTANGIBLES, net............ 3,314 2,808
OTHER ASSETS................................... 98 1,055
------- -------
Total assets................................. $18,644 $26,378
======= =======
<CAPTION>
Pro Forma
Stockholders'
December 31, Equity at
---------------- December 31,
1998 1999 1999
------- ------- -------------
(Unaudited)
(Note 2)
<S> <C> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. $ 1,410 $ 1,668
Accrued expenses.............................. 1,109 3,381
Customer deposits............................. 230 237
Deferred revenue.............................. 336 --
Current borrowings............................ 13 1,316
Due to former Acorn stockholders.............. -- 200
Related party notes payable................... -- 198
------- -------
Total current liabilities.................... 3,098 7,000
DEFERRED RENT.................................. 89 245
LONG-TERM BORROWINGS, net of current portion... 7 1,722
------- -------
Total liabilities............................ 3,194 8,967
------- -------
COMMITMENTS AND CONTINGENCIES
CONVERTIBLE PREFERRED STOCK SUBJECT TO
MANDATORY REDEMPTION, $.001 par value,
79,000,000 shares authorized (Note 9)......... 38,440 59,408 $ --
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, $.0001 par value, 170,000,000
shares authorized, 1,868,087, 1,881,444 and
12,775,065 (unaudited pro forma) shares
issued and outstanding....................... 1 1 1
Additional paid-in capital.................... 243 -- 59,408
Unearned compensation......................... -- (1,266) (1,266)
Accumulated deficit........................... (23,234) (40,732) (40,732)
------- ------- -------
Total stockholders' equity (deficit)......... (22,990) (41,997) $17,411
------- ------- =======
Total liabilities and stockholders' equity
(deficit)................................... $18,644 $26,378
======= =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated balance sheets.
F-3
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
1997 1998 1999
--------- --------- ----------
<S> <C> <C> <C>
REVENUE..................................... $ 9,546 $ 17,664 $ 24,699
DIRECT COST OF SERVICES..................... (7,767) (13,209) (16,986)
--------- --------- ----------
GROSS PROFIT................................ 1,779 4,455 7,713
--------- --------- ----------
OPERATING EXPENSES:
Selling, general and administrative....... 10,464 9,312 15,020
Depreciation and amortization............. 2,941 3,755 3,533
Research and development.................. 458 897 1,079
--------- --------- ----------
Total operating expenses................ 13,863 13,964 19,632
--------- --------- ----------
LOSS FROM OPERATIONS........................ (12,084) (9,509) (11,919)
--------- --------- ----------
OTHER (EXPENSES) INCOME:
Loss from Spider.......................... -- -- (1,055)
Interest income........................... 245 266 134
Interest expense.......................... (30) (17) (150)
Loss on disposal of equipment and other... (26) (270) (20)
--------- --------- ----------
189 (21) (1,091)
--------- --------- ----------
NET LOSS.................................... $ (11,895) $ (9,530) $ (13,010)
========= ========= ==========
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS:
Net loss.................................. $ (11,895) $ (9,530) $ (13,010)
Accretion of mandatorily redeemable
convertible preferred stock.............. (90) (469) (864)
Cumulative dividends to preferred
stockholders............................. -- -- (11,361)
Loss on repurchase of Series A preferred
stock.................................... (1,241) -- --
Loss on Series C preferred stock Exchange
Agreement................................ -- (1,465) --
--------- --------- ----------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS.. $ (13,226) $ (11,464) $ (25,235)
========= ========= ==========
BASIC AND DILUTED NET LOSS PER SHARE........ $ (7.09) $ (6.14) $ (13.50)
========= ========= ==========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING--
BASIC AND DILUTED......................... 1,866,585 1,867,941 1,869,803
========= ========= ==========
UNAUDITED PRO FORMA NET LOSS PER SHARE,
assuming conversion of preferred stock and
accrued dividends:
Basic and diluted net loss per share...... $ (1.26)
==========
Weighted average common shares
outstanding--basic and diluted........... 10,364,936
==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements.
F-4
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in thousands)
<TABLE>
<CAPTION>
Common Stock Additional
---------------- Paid-In Unearned Accumulated
Shares Amount Capital Compensation Deficit Total
--------- ------ ---------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, December 31,
1996................... 1,857,142 $ 1 $ 589 $ -- $ (1,809) $ (1,219)
Accretion of preferred
stock to liquidation
and redemption value.. -- -- (90) -- -- (90)
Loss on repurchase of
Series A preferred
stock................. -- -- (1,241) -- -- (1,241)
Issuance of common
stock as consulting
fee for Series B
preferred stock
offering.............. 10,770 -- 29 -- -- 29
Warrant for common
stock granted in
connection with the
Series C preferred
stock offering........ -- -- 1,496 -- -- 1,496
Net loss............... -- -- -- -- (11,895) (11,895)
--------- --- ------- ------- -------- --------
BALANCES, December 31,
1997................... 1,867,912 1 783 -- (13,704) (12,920)
Accretion of preferred
stock to liquidation
and redemption value.. -- -- (469) -- -- (469)
Loss on Series C
preferred stock
Exchange Agreement.... -- -- (1,465) -- -- (1,465)
Warrant granted in
connection with Series
C preferred stock
Exchange Agreement.... -- -- 1,235 -- -- 1,235
Deemed contribution
from majority common
stockholder........... -- -- 157 -- -- 157
Exercise of stock
options for cash...... 175 -- 2 -- -- 2
Net loss............... -- -- -- -- (9,530) (9,530)
--------- --- ------- ------- -------- --------
BALANCES, December 31,
1998................... 1,868,087 1 243 -- (23,234) (22,990)
Accretion of preferred
stock to liquidation
and redemption value.. -- -- (864) -- -- (864)
Exercise of stock
options for cash...... 1,620 -- 8 -- -- 8
Reduction of redemption
and liquidation
value ................ -- -- 3,098 -- -- 3,098
Beneficial conversion
feature............... -- -- 2,624 -- -- 2,624
Issuance of common
stock in connection
with Acorn
acquisition........... 11,737 -- 100 -- -- 100
Cumulative dividends to
preferred
stockholders.......... -- -- (6,873) -- (4,488) (11,361)
Unearned compensation.. -- -- 1,664 (1,664) -- --
Amortization of
unearned
compensation.......... -- -- -- 398 -- 398
Net loss............... -- -- -- -- (13,010) (13,010)
--------- --- ------- ------- -------- --------
BALANCES, December 31,
1999................... 1,881,444 $ 1 $ -- $(1,266) $(40,732) $(41,997)
========= === ======= ======= ======== ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements.
F-5
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
-------- ------- --------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss......................................... $(11,895) $(9,530) $(13,010)
Adjustments to reconcile net loss to net cash
used in operating activities--
Depreciation and amortization.................. 2,941 3,755 3,533
Provision for bad debts........................ 88 323 269
Loss from Spider............................... -- -- 1,055
Amortization of discount....................... -- -- 20
Loss on disposal of equipment.................. -- 269 --
Stock compensation expense..................... -- -- 398
Changes in assets and liabilities--
Receivables.................................. (1,442) (3,191) 127
Prepaids and other assets.................... (144) (67) (954)
Accounts payable............................. 130 (246) 19
Accrued expenses............................. 865 (654) 2,160
Other........................................ (48) 299 (228)
-------- ------- --------
Net cash used in operating activities............ (9,505) (9,042) (6,611)
-------- ------- --------
Cash flows from investing activities:
Purchase of property and equipment............... (5,550) (1,195) (4,352)
Payments made on behalf of Spider................ -- -- (1,055)
Restricted cash.................................. (125) (10) (272)
Cash paid in purchase of Protocall, net of cash
acquired and refunded........................... (3,315) 37 101
Cash paid in purchase of Acorn, net of cash
acquired........................................ -- -- (637)
Cash advanced to Acorn prior to acquisition...... -- -- (450)
Related party loans.............................. -- -- (690)
Software development costs....................... -- -- (66)
-------- ------- --------
Net cash used in investing activities............ (8,990) (1,168) (7,421)
-------- ------- --------
Cash flows from financing activities:
Proceeds from issuance of common stock........... -- 2 8
Proceeds from issuance of preferred stock, net of
offering costs.................................. 22,839 11,837 14,485
Repurchase of Series A preferred stock........... (1,741) -- --
Net borrowings on revolving line of credit....... 100 (100) --
Borrowings....................................... -- -- 2,513
Repayment of borrowings.......................... (769) (12) (271)
Proceeds from related party borrowings........... 3,000 1,700 --
Repayment of related party borrowings............ (3,140) (1,700) --
Proceeds from contingent grant................... -- -- 400
Deferred offering costs.......................... -- -- (651)
-------- ------- --------
Net cash provided by financing activities........ 20,289 11,727 16,484
-------- ------- --------
Net increase in cash and cash equivalents........ 1,794 1,517 2,452
Cash and cash equivalents, beginning of year..... 441 2,235 3,752
-------- ------- --------
Cash and cash equivalents, end of year........... $ 2,235 $ 3,752 $ 6,204
======== ======= ========
Supplemental disclosures of cash flow
information:
Cash paid for interest........................... $ 29 $ 17 $ 125
======== ======= ========
Property and equipment acquired through
incurrence of capital lease obligations......... $ 32 $ -- $ --
======== ======= ========
</TABLE>
The accompanying notes to financial statements
are an integral part of these consolidated statements.
F-6
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(1) Organization and Nature of Business
Etinuum, Inc. ("Etinuum" or the "Company"), formerly known as Intek
Information, Inc., is a provider of Strategic Consulting, Technology Solutions,
e-Operations and Customer Knowledge services in connection with e-commerce and
other direct-to-customer initiatives of business enterprises. The Company
operates communications centers in California, Colorado and Kansas, with
additional operations in Connecticut and headquarters in Englewood, Colorado.
Etinuum incorporated as a Colorado corporation on March 6, 1996 and
reincorporated as a Delaware corporation on August 2, 1996.
In February 1997, Etinuum acquired 100% of the common stock of Protocall
New Business Specialists, Inc. ("Protocall"). Protocall, a communications
center service operation, was located in Northern California. Following the
Protocall acquisition, the Company expanded its e-Operations, Technology
Solutions and Strategic Consulting services.
In March 1999, Etinuum formed a wholly-owned subsidiary, Spider
Technologies, Inc. ("Spider"). Spider was formed to pursue the development and
sales of a Web-based technology originally developed by Etinuum. Effective
October 1, 1999, Etinuum distributed all of the stock of Spider to Etinuum's
stockholders.
In October 1999, Etinuum acquired 100% of the common stock of Acorn
Information Services, Inc. ("Acorn"). Acorn is a data analytics company based
in Connecticut. As a result of the acquisition of Acorn, the Company's database
marketing and analysis services were enhanced.
Etinuum's business is subject to significant risks. Etinuum incurred net
losses of $36,244 for the period from inception, March 6, 1996, through
December 31, 1999, and projects that net losses will continue to be incurred
through 2000 or longer, while management pursues its plan to grow the business
and add clients and contracts with the goal of achieving profitability.
Etinuum's ability to achieve profitable operations is subject to significant
risks and uncertainties including, but not limited to, Etinuum's success in
marketing its services and managing its operations and competitive factors.
Etinuum's plans also include growth through acquisitions of complementary
companies. There is no guarantee that Etinuum will ever achieve profitable
operations, that it will be successful in identifying and consummating the
acquisition of desirable companies or that if acquired, Etinuum will
successfully assimilate those businesses into its operations. Etinuum's
operations are also subject to various forms of regulation.
(2) Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of Etinuum and
its subsidiaries, all of which are wholly-owned. All material intercompany
accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported
F-7
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenue and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
For the purposes of the statements of cash flows, Etinuum considers all
cash and investments with an original maturity of 90 days or less to be cash
equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject Etinuum to significant
concentrations of credit risk consist primarily of cash and cash equivalents,
accounts and notes receivable. Etinuum has no off-balance sheet concentrations
of credit risk. Etinuum maintains its cash balances in the form of bank demand
deposits and money market accounts with financial institutions that management
believes are creditworthy. Accounts receivable are typically unsecured and are
derived from transactions with and from customers located within the United
States. Etinuum performs ongoing credit evaluations of its customers and
maintains reserves for potential credit losses.
As discussed in Note 11, a significant portion of Etinuum's revenue is
derived from a limited number of customers. Additionally, those customers
account for a significant portion of billed and unbilled accounts receivable.
Intangible Assets
<TABLE>
<CAPTION>
December 31,
Estimated ---------------
Life 1998 1999
--------- ------- ------
<S> <C> <C> <C>
Customer relationships and intellectual property.... 3 years $ 3,000 $3,950
Goodwill............................................ 5 years 3,548 3,920
------- ------
6,548 7,870
Accumulated amortization............................ (3,234) (5,062)
------- ------
$ 3,314 $2,808
======= ======
</TABLE>
Amortization of goodwill and other intangibles was $1,509, $1,725 and
$1,828 for the years ended December 31, 1997, 1998 and 1999, respectively.
Property and Equipment
All additions, including betterments to existing facilities, are recorded
at cost. Maintenance and repairs are charged to expense as incurred. When
assets are retired or otherwise disposed of, the cost of the assets and the
related accumulated depreciation are removed from the accounts. Any gain or
loss is reflected in other income (expense) in the year of disposition.
Depreciation is computed on the straight-line method based on the
estimated useful lives of the assets, as follows:
<TABLE>
<S> <C>
Computer equipment and software................................ 1.5--5 years
Furniture and fixtures......................................... 1.5--7 years
</TABLE>
Leasehold improvements are amortized over the shorter of their economic
life or the remaining term of the related lease.
F-8
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Deferred Rent
Etinuum recognizes rent expense ratably over the life of the lease
regardless of the timing or amount of periodic payments.
Reverse Stock Split
Effective January 14, 2000, Etinuum declared a 4 for 1 reverse stock split
on Etinuum's common stock. Common stock amounts and per share amounts have been
adjusted retroactively to give effect to the stock split. The conversion price
for the preferred stock has been adjusted to reflect the 4 for 1 reverse stock
split.
Stock-Based Compensation
The Company accounts for its stock-based employee compensation agreements
using the intrinsic value method under which no compensation is generally
recognized for equity instruments granted to employees with an exercise price
equal to or greater than the fair market value of the underlying stock. Equity
instruments granted to non-employees are recorded at fair value on the date
they become non-forfeitable.
Comprehensive Income
Comprehensive income includes all changes in equity (net assets) during a
period from non-owner sources. Since inception, comprehensive loss has been the
same as net loss.
Revenue Recognition
Etinuum's revenues are derived principally from contracts for direct-to-
customer services and technology design and implementation projects billed at
negotiated rates. Etinuum recognizes revenue as services are performed for its
clients based on contractual arrangements for hours incurred and transactions
processed. Unbilled accounts receivable represents revenues earned for services
rendered that are typically billed to the customer in the following month.
Etinuum periodically enters into fixed fee contracts for Strategic
Consulting services that are accounted for under the percentage of completion
method. At December 31, 1998 and 1999, no such contracts were in-progress.
Direct Cost of Services
Direct cost of services includes payroll and benefits of employees for
time incurred for providing services for customers, telephone costs and other
variable costs associated with generating revenue. All other fixed expenses
incurred, including rent expense for communications centers, are included in
selling, general and administrative expenses in the accompanying consolidated
statements of operations. Depreciation of property and equipment used to
provide services to customers and amortization of goodwill and other
intangibles are shown as a separate line item within the accompanying
consolidated statements of operations.
Advertising Cost
Etinuum expenses advertising costs as incurred. For the years ended
December 31, 1997, 1998 and 1999, Etinuum had advertising expenses of $196,
$132 and $456, respectively.
F-9
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Advances to Spider
The Company records a valuation allowance and a corresponding charge to
income against the net assets distributed to Spider and receivables from Spider
for shared costs because realization of the advances are principally dependent
on the operating results of Spider. The amount of the charge is equal to the
net loss incurred by Spider subsequent to the spin-off. The Company will
continue to recognize a valuation allowance until the advances are written down
to zero. Net advances to Spider were zero at December 31, 1999. It is
reasonably possible that additional losses related to Spider will be incurred
in an amount equal to shared support costs to be incurred on Spider's behalf.
Asset Impairment
Etinuum reviews its long-lived assets held and used in operations for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. In performing the review
for recoverability, management estimates the future cash flows expected to
result from the use of the asset and its eventual disposition. If the sum of
the expected future cash flows (undiscounted and without interest charges) is
less than the carrying amount of the asset, the asset is reduced to its
estimated fair value by recognizing an impairment loss.
Capitalized Software Costs
Software development costs for new software products are expensed as
incurred until technological feasibility is established. Software development
costs incurred subsequent to the establishment of technological feasibility and
prior to general release are capitalized. During 1999, Etinuum capitalized $66
of software development costs. These costs will be amortized over a three-year
period. Amortization commences when the product is available for general
release to customers. Capitalized software costs are stated at the lower of
cost or net realizable value. There was no amortization expense incurred during
1999 as none of the products which had established technological feasibility
were available for general release to customers.
Income Taxes
The current provision for income taxes represents actual or estimated
amounts payable or refundable on tax returns filed or to be filed for each
year. Deferred tax assets and liabilities are recorded for the estimated future
tax effects of temporary differences between the tax basis of assets and
liabilities and amounts reported in the consolidated balance sheets. Deferred
tax assets are also recognized for net operating loss and tax credit
carryovers. The overall change in deferred tax assets and liabilities for the
period measures the deferred tax expense or benefit for the period. Effects of
changes in enacted tax laws on deferred tax assets and liabilities are
reflected as adjustments to tax expense in the period of enactment. The
measurement of deferred tax assets may be reduced by a valuation allowance
based on judgmental assessment of available evidence if deemed more likely than
not that some or all of the deferred tax assets will not be realized.
Net Loss Per Share
Basic net loss per share is computed by dividing net loss available to
common stockholders for the period by the weighted average number of common
shares outstanding for the period. Diluted net loss per share is computed by
dividing the net loss for the period by the weighted average number of common
and potential common shares outstanding during the period if the effect of the
potential common shares is dilutive. Etinuum has excluded the weighted average
effect (using the treasury stock method) of common
F-10
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
stock issuable upon conversion of all convertible preferred stock and stock
options from the computation of diluted earnings per share as the effect of all
such securities is anti-dilutive for all periods presented. The shares excluded
are as follows:
<TABLE>
<CAPTION>
Convertible
Preferred Stock
Stock Options
----------- -------
<S> <C> <C>
December 31,
1997.................................................. 13,288,043 --
1998.................................................. 26,202,683 95,840
1999.................................................. 33,962,909 355,755
</TABLE>
Pro Forma Stockholders' Equity (Unaudited)
Effective upon the closing of Etinuum's planned initial public offering,
the outstanding shares of all Etinuum's preferred stock will automatically
convert into 10,893,621 shares of common stock as of December 31, 1999,
including 1,333,433 shares for the preferred stock dividends accrued (Note 9).
The effects of these transactions have been reflected in unaudited pro forma
stockholders' equity on the balance sheet at December 31, 1999.
Pro Forma Net Loss Per Share (Unaudited)
Pro forma net loss per share for the year ended December 31, 1999 is
computed using the weighted average number of common shares outstanding, and
the pro forma effects of the assumed conversion of all Etinuum's convertible
preferred stock, including preferred stock dividends accrued, into shares of
Etinuum's common stock as if such conversion occurred on January 1, 1999, or at
the date of original issuance or declaration if later. The resulting pro forma
adjustments include an increase in the weighted average shares used to compute
basic and diluted net loss per share of 8,495,133 shares for the year ended
December 31, 1999, and the elimination of all charges to adjust net loss to net
loss applicable to common stockholders. The pro forma effects of these
transactions are unaudited.
Segment Information
Etinuum operates in one business segment and does not internally report
the results of operations of the different services it provides to its
customers. Additionally, the different services provided are typically under
one agreement and are not differentiated to the client.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts and notes
receivable, accounts payable and accrued liabilities approximate fair value due
to the short-term nature of these assets and liabilities. The interest rates on
Etinuum's variable rate borrowings are adjusted regularly to reflect current
market rates. The majority of the Company's fixed rate borrowings have been
funded within the last fiscal quarter of 1999 or recorded at fair value in
connection with the acquistion of Acorn. Accordingly, the carrying amounts of
Etinuum's borrowings approximate fair value. Financial instruments also consist
of convertible preferred stock subject to mandatory redemptions, whose fair
value at December 31, 1998 and 1999 approximated their redemption and
liquidation value, except for the Series F preferred stock issued in 1999. The
fair value of the Series F preferred stock is approximately $22 million because
of its beneficial conversion feature.
F-11
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." Etinuum is required to adopt SFAS No. 133,
as amended by SFAS No. 137, in fiscal 2001. SFAS No. 133 establishes methods of
accounting for derivative financial instruments and hedging activities related
to those instruments as well as other hedging activities. Etinuum has not
entered into any derivative financial instruments or hedging activities. As a
result, management believes adoption of SFAS No. 133 will not have a material
impact on the financial statements.
In December 1999, the staff of the Securities and Exchange Commission
issued its Staff Accounting Bulletin ("SAB") No. 101, "Revenue Recognition."
SAB No. 101 provides guidance on the measurement and timing of revenue
recognition in financial statements of public companies. Changes in accounting
policies to apply the guidance of SAB No. 101 must be adopted by recording the
cumulative effect of the change in the fiscal quarter ending March 31, 2000.
Mangagement has not yet determined the effect SAB No. 101 will have on its
accounting policies or the amount of the cumulative effect to be recorded from
adopting SAB No. 101, if any.
(3) Property and Equipment
Property and equipment consisted of the following at December 31, 1998 and
1999:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Computer equipment and software........................... $ 3,463 $ 4,672
Furniture and fixtures.................................... 1,352 2,300
Leasehold improvements.................................... 506 1,230
Telephone equipment....................................... 3,016 5,003
------- -------
8,337 13,205
Less-accumulated depreciation............................. (3,285) (5,223)
------- -------
$ 5,052 $ 7,982
======= =======
</TABLE>
Depreciation expense for the years ended December 31, 1997, 1998 and 1999,
was $1,432, $2,030 and $1,705, respectively.
(4) Acquisitions
Protocall
On February 14, 1997, Etinuum purchased all of the common stock of
Protocall for 1,863,270 shares of Series B preferred stock valued at $3,244,
cash of $3,239 and acquisition costs of $180. The acquisition was accounted for
under the purchase method of accounting.
The purchase price was allocated to the acquired assets and liabilities as
follows:
<TABLE>
<S> <C>
Current assets...................................................... $1,684
Property and equipment.............................................. 1,604
Goodwill and other intangibles...................................... 6,623
------
Total assets........................................................ 9,911
Current liabilities assumed......................................... (3,248)
------
$6,663
======
</TABLE>
F-12
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Subsequent to closing, Etinuum received a total of $196 in cash and stock
held in escrow from the former Protocall stockholders as a purchase price
adjustment which has been recorded as a reduction to goodwill and other
intangibles in the accompanying consolidated balance sheets.
The following unaudited pro forma information details the estimated effect
of the Protocall acquisition assuming it had occurred on January 1, 1997:
<TABLE>
<CAPTION>
Etinuum
Year Ended 1997
December 31, 1997 Pro Forma
----------------- -----------
(Unaudited)
<S> <C> <C>
Revenue...................................... $ 9,546 $ 11,009
Net loss applicable to common stockholders... $(13,226) $(13,520)
Basic and diluted net loss per share......... $ (7.09) $ (7.24)
</TABLE>
The pro forma financial data presented above does not purport to represent
what Etinuum's results of operations would actually have been if the
transaction in fact had occurred on January 1, 1997, and is not necessarily
representative of Etinuum's results of operations for any future period.
Acorn
Effective October 1, 1999, Etinuum purchased all of the common stock of
Acorn. The purchase was accounted for under the purchase method of accounting.
The initial consideration consisted of cash of $550, $200 in short-term
payables, $100 from the issuance of 11,737 shares of Etinuum's common stock,
and acquisition costs of $100. The purchase agreement also includes a three-
year contingent earn-out of up to $1,900 in cash and up to 527,778 shares of
Etinuum common stock. The contingent earn-out will be recorded as additional
purchase price consideration (additional goodwill) when and if the annual goals
are achieved. The contingent earn-out is based on Acorn's annual targets of
earnings before interest, taxes, depreciation and amortization and will be
earned as follows:
<TABLE>
<CAPTION>
Contingent Earn-Out
--------------------
Cash Stock
--------- ----------
<S> <C> <C>
Year 1................................................. $ 600 250,000
Year 2................................................. 600 166,667
Year 3................................................. 700 111,111
--------- ----------
Total earn-out......................................... $ 1,900 527,778
========= ==========
</TABLE>
Additionally, Etinuum transferred 1,000,000 shares of Spider common stock
to the former Acorn stockholders. The former Acorn stockholders are entitled to
retain a proportionate number of Spider shares during year 1 of the earn-out
period. Etinuum will receive any forfeited Spider shares at the end of year 1
if the earn-out provision is not fully met.
If Acorn achieves less than 100% but greater than 75% of its performance
targets, the above amounts will be adjusted for not achieving the estimated
targets. If Acorn achieves less than 75% of its performance targets for any
annual measurement period, then no earn-out payment will be made for that
period.
The purchase price allocation is subject to adjustment based upon the
final determination of the fair value of the assets acquired and liabilites
assumed. The contingent earn-out could result in additional goodwill and
because the stock based earn-out will be recorded based upon the fair value of
Etinuum's stock at the time of issuance, such additional goodwill could be
substantial. Goodwill will be amortized over five years. Any additional
goodwill recorded as a result of the earn-out will be amortized prospectively
over the remaining amortization period.
F-13
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
The initial purchase price of Acorn was allocated to the acquired assets
and liabilities as follows:
<TABLE>
<S> <C>
Cash................................................................. $ 13
Other assets......................................................... 687
Property and equipment............................................... 312
Goodwill and other intangibles....................................... 1,443
-----
Total assets....................................................... 2,455
Current liabilities.................................................. (429)
Amounts advanced by Etinuum to Acorn................................. (450)
Borrowings assumed................................................... (626)
-----
$ 950
=====
</TABLE>
The following unaudited pro forma information details the estimated
effect of the Acorn acquisition assuming it had occurred on January 1, 1998:
<TABLE>
<CAPTION>
Etinuum
Year Ended 1998
December 31, 1998 Pro Forma
----------------- -----------
(Unaudited)
<S> <C> <C>
Revenue...................................... $ 17,664 $ 20,476
Net loss applicable to common stockholders... $(11,464) $(11,636)
Basic and diluted net loss per share......... $ (6.14) $ (6.19)
<CAPTION>
Etinuum
Year Ended 1999
December 31, 1999 Pro Forma
----------------- -----------
(Unaudited)
<S> <C> <C>
Revenue...................................... $ 24,699 $ 26,707
Net loss applicable to common stockholders... $(25,235) $(26,222)
Basic and diluted net loss per share......... $ (13.50) $ (13.95)
</TABLE>
The pro forma financial data presented above does not purport to
represent what Etinuum's results of operations would actually have been if the
transaction in fact had occurred on January 1, 1998, and are not necessarily
representative of Etinuum's results of operations for any future period.
(5) Spider Spin-off
Effective October 1, 1999, Etinuum distributed 100% of the shares of
Spider to its stockholders on a pro-rata basis. In connection with the
transaction, Etinuum distributed $1,000 in cash and technology that is
currently under development. Etinuum has the right to receive $1,450 in
royalty payments plus accrued interest at 8% over the next five years
resulting from the spin-off. The royalty payments are due by Spider regardless
of its future operations. Additionally, Etinuum has received a five-year
warrant to purchase 1,000,000 shares of Spider's common stock at an exercise
price of $0.013 per share. Etinuum exercised this warrant during the fourth
quarter of 1999 for $13 and the shares were transferred to the former Acorn
stockholders. As a condition of the spin-off, Etinuum will be allowed to
utilize the Spider technology for three years without any fee or royalty due
to Spider. Thereafter, Etinuum will pay for the use of the technology at its
most favored nations pricing if Etinuum chooses to continue to utilize the
Spider software. The realization of the advances to Spider is principally
dependent upon Spider's operating results and its ability to raise additional
capital subsequent to its spin-off. Etinuum will continue to recognize
Spider's net losses until all advances are reduced to zero.
F-14
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
During 1999, a valuation allowance of $1,055 was recognized by a charge to
operations reducing the advances to zero. Etinuum has no funding commitments or
guarantees in favor of Spider beyond the recorded receivable; however, it is
reasonably possible that Etinuum will recognize additional losses on Spider for
future shared costs.
In connection with the spin-off of Spider, Etinuum has reduced the
mandatory redemption value of their preferred shares by $0.13 per share. The
excess of the carrying value of the preferred shares over the revised
redemption value of $3,098 has been credited to additional paid-in capital.
(6) Borrowings
Notes payable and capital lease obligations consisted of the following at
December 31, 1998 and 1999:
<TABLE>
<CAPTION>
1998 1999
---- -------
<S> <C> <C>
Equipment loan............................................... $ -- $ 2,297
Revolving credit facilities.................................. -- 225
Related party notes.......................................... -- 198
Contingent grant............................................. -- 400
Capital lease obligations.................................... 20 191
---- -------
Total notes payable and capital lease obligations............ 20 3,311
Less--Unamortized discount on contingent grant............... -- (75)
Less--Current portion........................................ (13) (1,514)
---- -------
$ 7 $ 1,722
==== =======
</TABLE>
Lines-of-Credit
In 1997, Etinuum had a line-of-credit facility with a bank that provided
for maximum borrowings of $100. The line-of-credit expired in 1998.
During 1999, Etinuum entered into a revolving credit facility agreement
that provides for maximum borrowings of $5,000 or 80% of eligible receivables,
as defined by the agreement ($3,079 at December 31, 1999). This facility
matures on May 31, 2001 and bears interest at prime plus 1.5% (10.0% at
December 31, 1999). Principal and interest are payable monthly.
The borrowings under the line-of-credit are collateralized by receivables
and other assets of Etinuum. This facility requires Etinuum to maintain, among
other restrictions, a tangible net worth of $8,000 as defined in the agreement.
As of December 31, 1999, Acorn had an agreement with a bank for a $50
line-of-credit facility. At December 31, 1999, $50 was outstanding under this
line-of-credit. Interest accrues on outstanding borrowings at 12.5% per annum.
Interest is payable monthly and principal is payable upon demand.
As of December 31, 1999, Acorn had an agreement with a bank to provide a
$175 line of credit facility. At December 31, 1999, Acorn had outstanding
borrowings of $175 under this line. This obligation is collateralized by
certain assets of Acorn. Interest accrues at a per annum rate of 1% over the
bank's prime rate (9.5% at December 31, 1999). Principal and interest are
payable monthly.
Related Party Notes Payable
As of December 31, 1999, Acorn had notes totaling $198 to certain former
stockholders and officers of Acorn. The notes bear interest at a rate of 10%
per annum and are payable on demand.
F-15
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Equipment Facility
In September 1999, Etinuum entered into an equipment facility, which
provides for maximum borrowings of approximately $2,500 to allow for the
purchase of equipment to be used at Etinuum's communications center in Kansas.
This facility matures on March 5, 2002 and bears interest at 13.9%. Etinuum
paid $99 upon entering into the agreement as its first principal payment.
During 1999, Etinuum borrowed $2,513 to purchase equipment. The borrowings
under the equipment facility are collateralized by the related equipment
acquired.
Contingent Grant
In April of 1999, the Kansas Department of Commerce and Housing provided
Etinuum $400 as an incentive to open a communications center in Kansas. The
grant was received in the form of a non-interest-bearing note, which will be
forgiven over five years if certain prescribed employment and average salary
levels are maintained. Etinuum has discounted the note by $95 to reflect its
effective borrowing rate of 9.75%. The loan was used to purchase equipment to
be used at the Kansas location. As this loan is forgiven, Etinuum will adjust
the basis of the equipment purchased. If the levels of employment and average
salaries prescribed in the agreement are not maintained, the outstanding
portion of the loan, as defined in the agreement, plus penalties are due within
thirty days.
The future minimum principal payments on long-term borrowings are as
follows:
<TABLE>
<CAPTION>
Capital
Equipment Lease Contingent
Loan Obligations Grant Other Total
--------- ----------- ---------- ----- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31,
2000..................... $ 940 $109 $ 80 $423 $1,552
2001..................... 1,068 84 80 -- 1,232
2002..................... 289 7 80 -- 376
2003..................... -- 3 80 -- 83
2004..................... -- -- 80 -- 80
------ ---- ---- ---- ------
2,297 203 400 423 3,323
Less-payments representing
interest.................. -- (12) (75) -- (87)
------ ---- ---- ---- ------
$2,297 $191 $325 $423 $3,236
====== ==== ==== ==== ======
</TABLE>
F-16
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
(7) Income Taxes
Components of the income tax provision applicable to federal and state
income taxes are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Current benefit:
Federal........................................ $ -- $ -- $ --
State.......................................... -- -- --
------- ------- -------
Total........................................ -- -- --
------- ------- -------
Deferred benefit
Federal........................................ (3,728) (2,888) (1,778)
State.......................................... (601) (457) (455)
------- ------- -------
Total........................................ (4,329) (3,345) (2,233)
------- ------- -------
Total tax benefit............................ (4,329) (3,345) (2,233)
------- ------- -------
Valuation allowance.............................. 4,329 3,345 2,233
------- ------- -------
Net tax benefit.............................. $ -- $ -- $ --
======= ======= =======
</TABLE>
The reconciliation of income tax computed at the U.S. federal statutory
tax rate (35%) to Etinuum's effective income tax rates are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Expected tax benefit........................... $(4,163) $(3,336) $(4,554)
State tax benefit.............................. (421) (320) (455)
Disallowance of meals and entertainment ex-
penses........................................ 30 10 23
Amortization of goodwill....................... 225 276 463
Taxable gain on Spider spin-off................ -- -- 1,710
Losses on Spider............................... -- -- 406
Other.......................................... -- 25 174
Change in valuation allowance.................. 4,329 3,345 2,233
------- ------- -------
Provision for income taxes..................... $ -- $ -- $ --
======= ======= =======
</TABLE>
At December 31, 1999, Etinuum had approximately $23,000 of net operating
loss carryforwards that begin to expire in 2012.
Etinuum recognized a taxable gain of $4,500 upon its spin-off of Spider.
The amount of the gain was determined by an independent valuation of Spider.
It is reasonably possible that the amount of the gain could change in the
foreseeable future. Furthermore, the Tax Reform Act of 1986 contains
provisions that may limit the net operating loss carry forwards available for
use in any given year if certain events occur, including significant changes
in ownership interests.
F-17
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at December 31, 1998 and
1999 were as follows:
<TABLE>
<CAPTION>
December 31,
----------------
1998 1999
------- -------
<S> <C> <C>
Current deferred tax assets:
Bad debt allowance........................................ $ 156 $ 179
Vacation accrual.......................................... 53 103
Accrued bonus............................................. 79 308
Accrued severance and wages............................... 113 --
Customer deposits, deferred revenue and other............. 215 293
------- -------
616 883
------- -------
Non-current deferred tax assets:
Deferred rent............................................. 34 93
Net operating loss carryforward........................... 7,248 9,313
------- -------
7,282 9,406
------- -------
Total deferred tax assets................................. 7,898 10,289
------- -------
Non-current deferred tax liability:
Depreciation.............................................. (224) (431)
Acquired intangibles...................................... (412) (363)
------- -------
Total deferred tax liabilities............................ (636) (794)
------- -------
Net deferred tax asset.................................... 7,262 9,495
Valuation allowance....................................... (7,262) (9,495)
------- -------
$ -- $ --
======= =======
</TABLE>
Because Etinuum has incurred losses since its inception, management
determined a valuation allowance was necessary for the entire deferred tax
asset balance. It is reasonably possible that Etinuum's view of the
realizability of its deferred tax assets could change in the near future based
upon the successful execution of its business plan.
(8) Commitments and Contingencies
Leases
Etinuum leases office facilities and various equipment under operating
leases that expire through fiscal 2009. The total rental expense for office
facilities and equipment for the years ended December 31, 1997, 1998 and 1999
was $463, $888 and $1,294, respectively.
F-18
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Minimum future cash flow commitments under the above leases are as
follows:
<TABLE>
<S> <C>
Year ended December 31-
2000............................................................... $1,792
2001............................................................... 1,448
2002............................................................... 1,378
2003............................................................... 1,180
2004............................................................... 1,060
Thereafter........................................................... 2,640
------
$9,498
======
</TABLE>
Grant
Etinuum received a grant from the Kansas Department of Commerce and
Housing in connection with opening a communications center in Fort Scott,
Kansas. The grant was to reimburse Etinuum for certain costs incurred relating
to the opening of the customer care center, including training and project
administration. The grant is for up to $800, through November 2008. The grant
requires Etinuum to maintain certain minimum employment and average salary
levels as prescribed in the agreement. The reimbursements have been applied
against the eligible costs incurred in the accompanying statement of
operations. Through December 31, 1999, Etinuum has earned $336 from this grant
which has reduced selling, general and administrative expense. At December 31,
1999, Etinuum recorded a receivable for $185 for reimbursements of costs
incurred.
Etinuum has also received a $400 contingent grant from the Kansas
Department of Commerce and Housing in the form of a non-interest bearing loan
(Note 6).
Litigation
Etinuum is periodically involved in litigation arising in the ordinary
course of business. Management is of the opinion that the ultimate resolution
of any such matters will not have a material adverse effect on Etinuum's
financial position or results of operations.
(9) Convertible Preferred Stock Subject to Mandatory Redemption
In November 1999, Etinuum amended its Certificate of Incorporation to
increase the number of authorized shares of common and preferred stock to
170,000,000 and 79,000,000, respectively, and to accrue cumulative preferred
stock dividends of .145 preferred share for each share of the Series A, B, C
and D Stock and 0.1 preferred share for each share of the Series E Stock owned
on October 15, 1999. The declaration resulted in 4,676,464 shares (as converted
for Series A Stock) of preferred stock accrued on October 15, 1999. After
October 15, 1999, the cumulative dividend became 6% per annum on the stated
value of the Series A Stock and 8% per annum on the stated value of the Series
B, C, D, E and F Stock through July 31, 2001. This resulted in an additional
657,269 shares (as converted for Series A Stock) of preferred stock accrued
through December 31, 1999.
Preferred stock may be issued in series with such designations,
preferences, rights and limitations as the Board of Directors may deem
appropriate. The Series A, B, C, D, E and F Stock rank on a parity basis with
respect to dividends and rights upon liquidation. Each series of preferred
stock votes together with the common stock on all matters as if converted into
common shares. Other terms of each series of preferred stock, as amended on
November 19, 1999, are described below.
F-19
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Reverse Stock Split
Subsequent to year-end, Etinuum declared a 4 for 1 reverse stock split on
Etinuum's common stock. Common stock amounts and per share amounts have been
adjusted retroactively to give effect to the stock split. The conversion price
for the preferred stock has been adjusted to reflect the 4 to 1 reverse spilt
stock.
Conversion of Preferred Stock into Common Stock
Each share of Series A Stock is convertible at the option of the holders
into 50 shares of common stock. Accrued but unpaid dividends on the Series A
Stock may also be converted into common stock at the same effective conversion
ratio. All outstanding Series A Stock, including unpaid dividends,
automatically converts into common stock upon completion of an initial public
offering of common stock for aggregate proceeds of at least $20,000 and a per
share price of $4.44 (three times the conversion price per share).
Each share of Series B, C, D, E and F Stock is initially convertible at
the option of the holders into 0.25 shares of common stock (subject to
adjustment for certain events). The Series C, D, E and F conversion ratio and
the conversion ratio for certain Series B stockholders will be adjusted if
Etinuum issues or sells common stock or equivalents at a price less than their
stated conversion prices then in effect. Accrued but unpaid dividends on Series
B, C, D, E and F Stock may also be converted into common stock at the same
effective conversion ratio. All outstanding Series B, C, D, E and F Stock,
including unpaid dividends, automatically converts into common stock (4 for 1)
upon completion of an initial public offering of common stock for aggregate
proceeds of at least $25,000 and a per share price of at least $12.00, or, if
following any public offering, the aggregate market capitalization of shares
not held by officers, directors, employees and affiliates exceeds $25,000 and a
per share market price of at least $12.00 is maintained for 20 consecutive
trading days.
Mandatory Redemption and Accretion to Liquidation Values
The holders of at least two-thirds of each series of preferred stock,
voting as a separate series, may require Etinuum to redeem their shares at any
time on or after February 20, 2003, for the redemption values described in each
separate series. Offering costs for each series of preferred stock were
initially offset against the proceeds from each offering.
Periodic charges to net loss applicable to common stockholders are being
recognized to accrete the value of each series of preferred stock to its
liquidation and redemption value as of February 20, 2003.
F-20
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
A summary of Etinuum's mandatorily redeemable, convertible preferred stock
is presented in the table below:
<TABLE>
<CAPTION>
Series A Series B Series C Series D Series E
-------------- ------------------- ------------------ ----------------- ----------------
Shares Amount Shares Amount Shares Amount Shares Amount Shares Amount
------ ------ ---------- ------- ---------- ------ --------- ------- --------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balances,
December 31,
1996........... 20,000 $1,951 -- $ -- -- $ -- -- $ -- -- $ --
Repurchase of
Series A
preferred
stock.......... (5,000) (500) -- -- -- -- -- -- -- --
Issuance of
Series B
mandatorily
redeemable,
convertible
preferred stock
for cash, net
of issuance
costs of $319.. -- -- 10,475,898 17,920 -- -- -- -- -- --
Issuance of
Series B
mandatorily
redeemable,
convertible
preferred
stock, as
consideration
for purchase of
Protocall...... -- -- 1,863,270 3,244 -- -- -- -- -- --
Issuance of
Series C
mandatorily
redeemable,
convertible
preferred stock
for cash, net
of issuance
costs of
$1,606......... -- -- -- -- 2,871,913 3,394 -- -- -- --
Accretion to
liquidation and
redemption
value.......... -- 12 -- 66 -- 12 -- -- -- --
------ ------ ---------- ------- ---------- ------ --------- ------- --------- ------
Balances,
December 31,
1997........... 15,000 1,463 12,339,168 21,230 2,871,913 3,406 -- -- -- --
Modification of
terms on the
existing Series
C preferred
stock in
connection with
the Exchange
Agreement...... -- -- -- -- (2,871,913) (3,535) -- -- -- --
Issuance of new
Series C
mandatorily
redeemable,
convertible
preferred stock
in Exchange
Agreement...... -- -- -- -- 6,371,913 5,000 -- -- -- --
Issuance of
Series D
mandatorily
redeemable,
convertible
preferred stock
for cash, net
of issuance
costs of
$1,423......... -- -- -- -- -- -- 8,841,911 10,602 -- --
Adjustment to
Series B
preferred stock
as
consideration
for purchase of
Protocall...... -- -- (21,539) (38) -- -- -- -- -- --
Deemed
contribution
from majority
common
stockholder.... -- -- -- -- -- (157) -- -- -- --
Accretion to
liquidation and
redemption
value.......... -- 9 -- 72 -- 140 -- 248 -- --
------ ------ ---------- ------- ---------- ------ --------- ------- --------- ------
Balances,
December 31,
1998........... 15,000 1,472 12,317,629 21,264 6,371,913 4,854 8,841,911 10,850 -- --
Issuance of
Series E
mandatorily
redeemable
convertible
preferred stock
for cash, net
of issuance
costs of $52... -- -- -- -- -- -- -- -- 2,510,683 3,990
Issuance of
Series F
mandatorily
redeemable
convertible
preferred stock
for cash, net
of issuance
costs of $603.. -- -- -- -- -- -- -- -- -- --
Reduction of
redemption and
liquidation
value -- (368) -- (1,472) -- (717) -- (253) -- (288)
Beneficial
conversion
feature -- -- -- -- -- -- -- -- -- --
Adjustment to
Series B
preferred stock
as
consideration
for purchase of
Protocall...... -- -- (11,488) (20) -- -- -- -- -- --
Accrued
dividends...... -- 1,018 -- 4,301 -- 2,227 -- 3,090 -- 633
Accretion to
liquidation and
redemption
value.......... -- 6 -- 53 -- 35 -- 279 -- 13
------ ------ ---------- ------- ---------- ------ --------- ------- --------- ------
Balances,
December 31,
1999........... 15,000 $2,128 12,306,141 $24,126 6,371,913 $6,399 8,841,911 $13,966 2,510,683 $4,348
====== ====== ========== ======= ========== ====== ========= ======= ========= ======
<CAPTION>
Series F
-----------------
Shares Amount
--------- -------
<S> <C> <C>
Balances,
December 31,
1996........... -- $ --
Repurchase of
Series A
preferred
stock.......... -- --
Issuance of
Series B
mandatorily
redeemable,
convertible
preferred stock
for cash, net
of issuance
costs of $319.. -- --
Issuance of
Series B
mandatorily
redeemable,
convertible
preferred
stock, as
consideration
for purchase of
Protocall...... -- --
Issuance of
Series C
mandatorily
redeemable,
convertible
preferred stock
for cash, net
of issuance
costs of
$1,606......... -- --
Accretion to
liquidation and
redemption
value.......... -- --
--------- -------
Balances,
December 31,
1997........... -- --
Modification of
terms on the
existing Series
C preferred
stock in
connection with
the Exchange
Agreement...... -- --
Issuance of new
Series C
mandatorily
redeemable,
convertible
preferred stock
in Exchange
Agreement...... -- --
Issuance of
Series D
mandatorily
redeemable,
convertible
preferred stock
for cash, net
of issuance
costs of
$1,423......... -- --
Adjustment to
Series B
preferred stock
as
consideration
for purchase of
Protocall...... -- --
Deemed
contribution
from majority
common
stockholder.... -- --
Accretion to
liquidation and
redemption
value.......... -- --
--------- -------
Balances,
December 31,
1998........... -- --
Issuance of
Series E
mandatorily
redeemable
convertible
preferred stock
for cash, net
of issuance
costs of $52... -- --
Issuance of
Series F
mandatorily
redeemable
convertible
preferred stock
for cash, net
of issuance
costs of $603.. 5,210,093 10,495
Reduction of
redemption and
liquidation
value -- --
Beneficial
conversion
feature -- (2,624)
Adjustment to
Series B
preferred stock
as
consideration
for purchase of
Protocall...... -- --
Accrued
dividends...... -- 92
Accretion to
liquidation and
redemption
value.......... -- 478
--------- -------
Balances,
December 31,
1999........... 5,210,093 $8,441
========= =======
</TABLE>
F-21
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Series A Stock
In August and November of 1996, Etinuum issued a total of 20,000 shares of
Series A Convertible Preferred Stock, $.001 par value, and received net
proceeds of $1,951.
The Series A Stock is entitled to a preference in liquidation. The
liquidation or redemption price is $74 per share plus the amount of any
cumulative unpaid dividends (as amended). Effective November 19, 1999, Etinuum
amended its Certificate of Incorporation to provide for cumulative stock
dividends equal to .145 shares for each share of Series A Stock outstanding on
October 15, 1999. Subsequent to October 15, 1999, the cumulative dividend rate
becomes 6% per annum on the stated value through July 31, 2001. The dividends
resulted in 2,390 shares of preferred stock accrued on December 31, 1999.
Series B Stock
During 1997, Etinuum issued 12,339,168 shares of Series B Convertible
Preferred Stock, $.001 par value. Series B Stock issued for cash between
February and August of 1997 (10,475,898 shares at $1.741 per share) provided
net proceeds to Etinuum of $17,920. The offering costs included 10,770 shares
of common stock issued as a consulting fee that was valued at $29. A portion of
those proceeds was used to repurchase and retire 5,000 shares of Series A Stock
for $1,741, which resulted in a loss to the common stockholders of $1,241. The
consideration for the February 1997 acquisition of Protocall described in Note
4 included 1,863,270 shares of Series B Stock. During 1998 and 1999, Etinuum
received 21,539 and 11,488 shares of Series B Stock from escrow, as adjustments
to the Protocall acquisition, respectively.
The Series B Stock has a stated value per share of $1.611 (as amended).
The Series B Stock is generally entitled to a preference in liquidation at a
liquidation or redemption price of the greater of (i) $1.611 for each share of
common stock into which the Series B Stock could be converted, plus all accrued
and unpaid dividends, or (ii) the per share amount the holders would have
received if all shares of Series B Stock had been converted into common stock
immediately prior to such liquidation or redemption, plus all accrued and
unpaid dividends. Effective November 19, 1999, Etinuum amended its Certificate
of Incorporation to provide for cumulative stock dividends equal to .145 shares
for each share of Series B Stock outstanding on October 15, 1999. Subsequent to
October 15, 1999, the cumulative dividend rate becomes 8% per annum on the
stated value through July 31, 2001. The dividends resulted in 2,019,233 shares
of preferred stock accrued on December 31, 1999.
Series C Stock and Exchange Agreement
In December 1997, Etinuum issued 2,871,913 shares of Series C Convertible
Preferred Stock, $.001 par value to The Beacon Group III--Focus Value Fund,
L.P. for net proceeds of $4,890, or $1.741 per share. Proceeds were used in
part to repay loans advanced to Etinuum by Beacon during November and December
1997 in the aggregate amount of $3,000, plus accrued interest of $16. At the
date of the Series C Stock closing, Beacon received a five-year warrant to
purchase up to 875,000 shares of common stock at $6.96 per share. This warrant
was not assigned any value as the exercise price of the warrant was
significantly higher than the fair market value of the common stock on the
grant date. The warrant was subsequently cancelled in connection with the
Exchange Agreement discussed below. Beacon also received a warrant which
adjusts its Series B conversion ratio if Etinuum issues or sells common stock
or equivalents at a price less than the Series B Stock conversion price
(initially, $1.741 per share). This warrant was valued at $1,496 and has been
included in the offering costs of the Series C Stock. Additional offering costs
of $110 in cash was incurred in connection with this offering.
An Exchange Agreement was executed on May 7, 1998, simultaneous with the
Series D Stock closing (see Series D Stock below). Beacon surrendered both
warrants obtained at the time of the Series C Stock
F-22
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
closing and was issued 3,500,000 shares of additional Series C Stock and a new
warrant. The Exchange Agreement was accounted for at estimated fair value and
resulted in a charge to the common stockholders of $1,465. The exchange lowered
Beacon's effective per share cost of its Series C Stock to $.7847 and reduced
the average cost to Beacon of all shares of Series B and Series C Stock held by
Beacon to $1.36 per share, the same per share price paid by Conning for the
Series D Stock. The new warrant adjusts Beacon's conversion ratio in the Series
B Stock if Etinuum issues or sells common stock or equivalents at a price less
than the Series D Stock conversion price (initially, $1.36 per share).
The Series C Stock has a stated value per share of $.6547 (as amended).
The Series C Stock is entitled to a preference in liquidation at a liquidation
or redemption price of the greater of (i) $.6547 for each share of common stock
into which the Series C Stock could be converted, plus all accrued and unpaid
dividends, or (ii) the per share amount the holders would have received if all
shares of Series C Stock had been converted into common stock immediately prior
to such liquidation or redemption, plus all accrued and unpaid dividends.
Effective November 19, 1999, Etinuum amended its Certificate of Incorporation
to provide for cumulative stock dividends equal to .145 shares for each share
of Series C Stock outstanding on October 15, 1999. Subsequent to October 15,
1999, the cumulative dividend rate becomes 8% per annum on the stated value
through July 31, 2001. The dividends resulted in 1,045,525 shares of preferred
stock accrued on December 31, 1999.
In December 1997, in connection with the Series C Stock offering,
Etinuum's Chief Executive Officer agreed to place into escrow 50,000 shares of
his Etinuum common stock. The shares were contingently transferable to the
holder of Etinuum's Series A Stock as consideration for consenting to certain
corporate transactions related to the Series C Stock financing. The shares were
to be returned to the Chief Executive Officer if, prior to September 18, 1998,
Etinuum received at least $15,000 in net proceeds from issuance of its common
stock or equivalents at a price per share of at least $8.80. As this event did
not occur, the shares were transferred in September 1998 to the Series A Stock
holder, and Etinuum reflected the value of the escrowed shares as a
contribution to capital and a cost of the Series C Stock financing of $157.
Series D Stock
On May 7, 1998, Etinuum issued 8,823,529 shares of Series D Convertible
Preferred Stock to Conning Insurance Capital Limited Partnership for net
proceeds $11,812, or $1.36 per share. In connection therewith, Etinuum amended
and restated its Certificate of Incorporation and executed an Exchange
Agreement with Beacon. An additional 18,382 Series D shares were issued in
November 1998 for $25, resulting in total shares issued of 8,841,911. Proceeds
were used in part to repay loans advanced to Etinuum during April 1998 by
Beacon ($1,400) and certain officers of Etinuum (in the aggregate, $300), plus
accrued interest. In addition, Conning and Beacon were each granted warrants to
purchase up to $3,000 of additional Series D Stock (in the aggregate, 4,411,764
shares) at $1.36 per share through April 1999. The value of these warrants at
the date of grant was $1,235 using the Black-Scholes pricing model, assuming
volatility of 65%, risk-free interest rate of 5.4%, no expected dividends and a
life of one year. The value of the warrants has been included in the offering
costs of the Series D Stock. None of the warrants were exercised in 1998 or
1999.
The Series D Stock has a stated value per share of $1.23 (as amended). The
Series D Stock is generally entitled to a preference in liquidation at a
liquidation or redemption price of the greater of (i) $1.23 for each share of
common stock into which the Series D Stock could be converted, plus all accrued
and unpaid dividends, or (ii) the per share amount the holders would have
received if all shares of Series D Stock had been converted to common stock
immediately prior to such liquidation or redemption, plus all accrued and
unpaid dividends. Effective November 19, 1999, Etinuum amended its Certificate
of
F-23
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Incorporation to provide for cumulative stock dividends equal to .145 shares
for each share of Series D Stock outstanding on October 15, 1999. Subsequent to
October 15, 1999, the cumulative dividend rate becomes 8% per annum on the
stated value through July 31, 2001. The dividend resulted in 1,450,810 shares
of preferred stock accrued on December 31, 1999.
Series E Stock
On April 16, 1999, Etinuum issued 2,484,472 shares of Series E Convertible
Preferred Stock, $.001 par value for net proceeds of $3,948, or $1.61 per
share. An additional 26,211 shares of Series E Stock were issued within 180
days of initial closing for $42, resulting in total shares issued of 2,510,683.
The Series E Stock has a stated value per share of $1.48 (as amended). The
Series E Stock is generally entitled to a preference in liquidation at a
liquidation or redemption price of the greater of (i) $1.48 for each share of
common stock into which the Series E Stock could be converted, plus all accrued
and unpaid dividends, or (ii) the per share amount the holders would have
received if all shares of Series E Stock had been converted to common stock
immediately prior to such liquidation or redemption, plus all accrued and
unpaid dividends. Effective November 19, 1999, Etinuum amended its Certificate
of Incorporation to provide for cumulative stock dividends equal to .1 share
for each share of Series E Stock outstanding on October 15, 1999. Subsequent to
October 15, 1999, the cumulative dividend rate becomes 8% per annum on the
stated value through July 31, 2001. The dividends resulted in 297,098 shares of
preferred stock accrued on December 31, 1999.
Series F Stock
In November and December of 1999, Etinuum issued 5,210,093 shares of
Series F Convertible Preferred Stock, $.001 par value for net proceeds of
$10,495, or $2.13 per share. The net proceeds are to be used for working
capital purposes, a related party loan and to fund acquisitions.
The Series F Stock has an initial stated value per share of $2.13.
Cumulative dividends will accrue at 8% of the stated value per annum. The
dividends resulted in 43,129 shares of preferred stock accrued on December 31,
1999. The Series F Stock is generally entitled to a preference in liquidation
at a liquidation or redemption price of the greater of (i) $2.13 for each share
of common stock into which the Series F Stock could be converted, plus all
accrued and unpaid dividends, or (ii) the per share amount the holders would
have received if all shares of Series F Stock had been converted to common
stock immediately prior to such liquidation or redemption, plus all accrued and
unpaid dividends.
The Series F conversion ratio will be adjusted if Etinuum issues or sells
common stock or equivalents at a price less than its stated conversion price
then in effect. If the public offering price of common stock issued in
Etinuum's initial public offering is less than two times the conversion price,
the conversion price is adjusted to 50% of the public offering price. Further,
if an initial public offering is not consummated before July 31, 2000, then the
Series F conversion ratio will be reduced to 75% of the otherwise applicable
conversion price. The minimum 25% beneficial conversion feature of $2,624 has
reduced the Series F preferred stock carrying value and will be accreted
through July 31, 2000. If an initial public offering were to occur prior to
July 31, 2000, an additional charge of approximately $14,000 would be
recognized by Etinuum. Accrued but unpaid dividends on Series F Stock may also
be converted into common stock at the same effective conversion ratio.
F-24
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
(10) Stock Option Plans
Etinuum's 1997 Stock Option Plan was approved by the stockholders on
February 3, 1997, as amended subsequent to year end, to increase the reserve by
700,000 to a total of 2,455,552 shares of common stock for issuance upon
exercise of options granted under this plan.
Etinuum also adopted the 1998 Stock Option Plan effective May 7, 1998 as
amended, to reserve 1,564,417 common shares for issuance upon exercise of
options granted under this plan.
Generally options have been granted at an exercise price deemed at least
equal to or greater than the fair market value of Etinuum's common stock at the
date of grant and vest over periods ranging from 36 to 48 months as determined
by the Board of Directors. Options generally have a term of ten years from date
of grant, except for incentive stock options granted to stockholders holding
10% or more of Etinuum's stock outstanding, in which case the term is five
years. Under the Stock Plans, the Board of Directors has the discretion to set
the exercise price and to accelerate the vesting periods of options.
During 1999, options for 811,000 shares of common stock were granted with
exercise prices below fair market value. Etinuum will recognize $1,664 as
compensation expense over the vesting period of the options, ranging from three
to four years from the grant date. In 1999, $398 of compensation was
recognized.
The following table summarizes the activity relating to options:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
1997 1998 1999
------------------- ------------------- -------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- -------- --------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Stock Options:
Options outstanding, at
beginning of period... -- -- 1,312,394 $6.44 1,710,544 $6.07
Granted................ 1,321,887 $ 6.44 483,375 5.56 1,111,000 6.64
Exercised.............. -- -- (175) 8.00 (1,620) 5.05
Terminated............. (9,493) 7.04 (85,050) 9.20 (489,361) 6.44
--------- ------ --------- ----- --------- -----
Options outstanding, at
end of period......... 1,312,394 $ 6.44 1,710,544 $6.07 2,330,563 6.28
--------- ------ --------- ----- --------- -----
Options exercisable, at
end of period......... -- $ -- 670,883 $5.61 1,214,480 $5.96
========= ====== ========= ===== ========= =====
Weighted average fair
value of options
granted during the
period................ $ 0.96 $1.68 $2.72
====== ===== =====
</TABLE>
The total fair value of options granted was computed to be approximately
$1,283, $813 and $3,022 for the years ended December 31, 1997, 1998 and 1999,
respectively. For purposes of the fair value pro forma disclosures, these
amounts will be amortized ratably over the vesting period of the options.
Cumulative compensation cost recognized in pro forma net income or loss with
respect to options that are forfeited prior to vesting is adjusted as a
reduction of pro forma compensation expense in the period of forfeiture. Pro
forma stock-based compensation, net of the effect of forfeitures and tax, was
approximately $357, $503 and $1,156 for the years ended December 31, 1997, 1998
and 1999, respectively.
If the fair value method were used to account for employee stock option
grants, Etinuum's net loss applicable to common stockholders and loss per share
would have been increased to the following pro forma amounts:
F-25
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net loss applicable to common stockholders:
As reported............................... $(13,226) $(11,464) $(25,235)
======== ======== ========
Pro forma................................. $(13,583) $(11,967) $(26,391)
======== ======== ========
Net loss per share:
As reported............................... $ (7.09) $ (6.14) $ (13.50)
======== ======== ========
Pro forma................................. $ (7.28) $ (6.41) $ (14.11)
======== ======== ========
</TABLE>
The fair value of each option grant was determined using the minimum value
method, under which no volatility was assumed. The assumptions used to
determine the fair value of each option grant are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Risk-free interest rates......................... 6.17% 5.52% 5.91%
Expected dividend yield rates.................... 0.00% 0.00% 0.00%
Expected lives................................... 4 years 4 years 4 years
Expected volatility.............................. 0.001% 0.001% 0.001%
</TABLE>
The following table summarizes information about the stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------- --------------------
Weighted
Average Weighted- Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------- ----------- ----------- --------- ----------- --------
<S> <C> <C> <C> <C> <C>
$2.71 to $4.08...... 479,702 7.37 years $ 2.72 436,515 $ 2.72
$5.45 to $6.44...... 911,003 9.50 years $ 3.84 172,135 $ 6.25
$6.97 to $9.00...... 822,101 8.26 years $ 4.93 514,639 $ 7.02
$13.92 to $15.60.... 117,757 7.89 years $13.52 91,191 $15.14
</TABLE>
(11) Major Customers
A significant portion of Etinuum's revenue is derived from a limited
number of customers. To the extent that any significant customer uses less of
Etinuum's services or terminates its relationship with Etinuum, Etinuum's
revenues could decline substantially and seriously harm Etinuum's business and
results of operations. Additionally, certain of Etinuum's contracts with its
customers, including its largest customer, are on a month-to-month basis.
Etinuum's sales to customers in excess of 10% of revenues for the years ended
December 31, 1997, 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer A................................. -- -- $3,486 20% $6,788 27%
Customer B................................. $3,304 35% -- -- $2,930 12%
Customer C................................. -- -- $2,021 12% -- --
Customer D................................. -- -- $1,919 11% -- --
</TABLE>
F-26
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
Etinuum's accounts receivable balances, billed and unbilled, from
customers in excess of 10% of the accounts receivable balance at December 31,
1997, 1998 and 1999, are as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Customer A................................. $ 895 27% $1,253 19% $1,867 27%
Customer B................................. $1,409 43% -- -- $ 733 11%
Customer E................................. -- -- $ 653 10% -- --
</TABLE>
(12) Related Party Transactions
Lease
During 1997, Etinuum leased an aircraft from Mt. Evans Consulting, LLC, a
company partially owned by Etinuum's Chief Executive Officer. Etinuum had no
minimum commitments under this lease. Rental payments were based on Etinuum's
usage of the aircraft. Amounts paid or accrued by Etinuum under this lease
agreement during the year ended December 31, 1997 were $165. During 1998, the
lease was terminated.
Employment Agreements
In conjunction with the purchase of Protocall, Etinuum entered into
employment agreements with several employees of Protocall. The agreements
provide that one year of salary be paid in the event of involuntary
termination. In December 1997, Etinuum elected to terminate certain employees
that were employed under the agreements. In accordance with the agreements,
Etinuum accrued approximately $407 at December 31, 1997 that was charged to
selling, general and administrative expense in the accompanying consolidated
statements of operations.
Related Party Loans
On November 23, 1999, in connection with the Series F Stock issuance,
Etinuum loaned its Chief Executive Officer $600. The note is full recourse to
the personal assets of the Chief Executive Officer, including his stock in
Etinuum. The note bears interest at prime plus 1.5% (10.0% at December 31,
1999) and matures one year from issuance or earlier depending on the successful
registration of Etinuum's stock with the Securities and Exchange Commission.
In 1999, Etinuum executed a note with a key employee for $28 bearing
interest at 8% per year. The note is unsecured and matures in November 2003.
Etinuum has loaned certain key management a total of $62 in 1999 to allow
for a partial payment of taxes and to be used for various other purposes.
Principal and accrued interest are due in full on September 1, 2001. One half
of the loan can be forgiven each year if they are still employed at that time.
The loans bear interest at 7.75%.
Other Transactions
Etinuum maintains life insurance on the Chief Executive Officer in the
amount of $20,000. In the event of the Chief Executive Officer's death, the
first $10,000 of insurance proceeds are to be applied to repurchase shares from
the Chief Executive Officer's estate with the remaining proceeds benefiting his
estate, and the second $10,000 of insurance proceeds is payable to Etinuum.
F-27
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
(Dollars in thousands, except per share amounts)
In January 1998, Etinuum's Chief Executive Officer granted an option to a
key employee to purchase 62,500 shares of Etinuum common stock owned by the
Chief Executive Officer for $6.96 per share. The option has a stated life of
ten years and is fully exercisable. No compensation expense has been recognized
for this transaction as the exercise price was greater than the fair market
value on the date of grant.
(13) Subsequent Events
Employee Stock Purchase Plan
Etinuum has adopted the 2000 Employee Stock Purchase Plan on January 13,
1999. The plan will be implemented in eight semiannual offerings of 250,000
shares of stock for an aggregate of 2,000,000 available shares to be sold under
the plan. Eligible employees can withhold up to 10% of their base salary to be
used to purchase shares under the plan. Employees can purchase shares for the
lesser of 85% of the closing price at the beginning or ending of the purchase
period or a price set by the Board of Directors if the stock is not publicly
traded.
2000 Stock Incentive Plan
Etinuum has adopted the 2000 Stock Incentive Plan on January 13, 1999 to
reserve 2,750,000 shares of common shares for issuance upon stock grants or
exercise of options granted under this plan.
Warrant
In January 2000, Etinuum granted a warrant to a major customer to purchase
181,250 shares of common stock at an exercise price of $8.52 per share. The
value of the warrant at the date of grant was approximately $1.1 million. The
value was determined using the Black-Scholes pricing model, assuming volatility
of 65%, a risk free interest rate of 6.3%, no expected dividends and a
contractual life of three years. The warrant vested immediately upon issuance.
(14) Events Occurring Subsequent to Opinion Data (unaudited)
Effective March 2, 2000 Etinuum amended its Certificate of Incorporation
to change the automatic conversion of its Series B, C, D, E and F Stock to
provide that all outstanding Series B, C, D, E and F Stock, including unpaid
dividends, automatically converts into common stock (4 to 1) upon completion of
an initial public offering of common stock for aggregate proceeds of at least
$25,000 and a per share price of at least $10.00, or, if following any public
offering, the aggregate market capitalization of shares not held by officers,
directors, employees and affiliates exceeds $25,000 and a per share market
price of at least $10.00 is maintained for 20 consecutive trading days.
F-28
<PAGE>
INDEX TO UNAUDITED PRO FORMA
CONDENSED FINANCIAL INFORMATION
<TABLE>
<S> <C>
Unaudited Pro Forma Condensed Financial Information Basis of
Presentation............................................................. P-2
Pro Forma Condensed Balance Sheet Information (unaudited) at December 31,
1999..................................................................... P-3
Pro Forma Condensed Statement of Operations Information (unaudited) for
the year ended December 31, 1999......................................... P-4
Notes to Unaudited Pro Forma Condensed Financial Information.............. P-5
</TABLE>
P-1
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
BASIS OF PRESENTATION
The following unaudited pro forma condensed financial information gives
effect to (a) the spin-off by Etinuum of Spider, (b) the acquisition of all the
outstanding common stock of Acorn, and (c) the closing of Etinuum's initial
public offering. The acquisition of Acorn was accounted for using the purchase
method of accounting. The unaudited pro forma condensed financial information
is derived from the historical financial statements of Etinuum, Spider and
Acorn.
The unaudited pro forma condensed balance sheet information reflects the
automatic conversion of all shares of our preferred stock into common stock
upon completion of this offering. The unaudited pro forma condensed balance
sheet information also reflects our receipt of the estimated net proceeds of
$44.5 million from 4,500,000 shares of common stock included in this offering
at an assumed initial public offering price of $11.00 per share, after
deducting estimated underwriting discounts and expenses of $5 million.
The unaudited pro forma condensed statement of operations information
gives effect to the Spider spin-off and the Acorn acquisition as if they had
occurred on January 1, 1999. The purchase accounting adjustments made in
connection with the development of the pro forma financial information are
preliminary and have been made solely for purposes of developing such pro forma
financial information and may not be representative of actual future results.
Because the acquisition of Acorn includes a contingent earn-out, future
adjustments to reflect the acquisition of Acorn may be material.
In connection with the spin-off of Spider, Etinuum has advanced $1 million
to Spider. The $1 million will be repaid in the form of an unconditional
royalty payment due from Spider to Etinuum. Further, Spider has agreed to share
certain selling, general and administrative costs with Etinuum. The ability of
Spider to repay the $1 million advance and the shared costs is principally
dependent upon Spider's future operations. Etinuum will therefore recognize a
valuation allowance against the amounts due from Spider in an amount equal to
Spider's net loss subsequent to the spin-off. As a result, the reductions in
Etinuum's selling, general and administrative costs reflected in the unaudited
pro forma condensed statement of operations may not materialize if Spider is
unable to fund its share of the costs.
The unaudited pro forma condensed financial information should be read in
conjunction with the separate historical financial statements of Etinuum and
Acorn included in this registration statement. You should not rely upon the
unaudited pro forma condensed financial information as an indication of the
results of future operations or financial position that would have been
achieved if the transactions described above had taken place on the dates
indicated.
P-2
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
PRO FORMA CONDENSED BALANCE SHEET
(UNAUDITED)
AS OF DECEMBER 31, 1999
<TABLE>
<CAPTION>
Pro Forma
Etinuum (1) Adjustments Pro Forma
----------- ----------- ---------
<S> <C> <C> <C>
ASSETS
Current assets........................... $ 14,533 $ 46,035 (6) $ 60,568
Property and equipment, net.............. 7,982 -- 7,982
Goodwill and other intangibles, net...... 2,808 -- 2,808
Other assets............................. 1,055 (651)(7) 404
-------- -------- --------
Total assets......................... $ 26,378 $ 45,384 $ 71,762
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT)
Current liabilities...................... $ 7,000 $ 849 (7) $ 7,849
Deferred rent............................ 245 -- 245
Long-term borrowings..................... 1,722 -- 1,722
-------- -------- --------
Total liabilities.................... 8,967 849 9,816
-------- -------- --------
Convertible preferred stock subject to
mandatory redemption.................... 59,408 13,938 (4) --
(73,346)(5) --
Stockholders' Equity (Deficit):
Common stock........................... 1 1 (5) 2
Additional paid-in capital............. -- 46,035 (6) 103,942
(13,938)(4)
73,345 (5)
(1,500)(7)
Unearned compensation.................. (1,266) -- (1,266)
Retained earnings (deficit)............ (40,732) -- (40,732)
-------- -------- --------
Total stockholders' equity
(deficit)........................... (41,997) 103,943 61,946
-------- -------- --------
Total liabilities and stockholders'
equity (deficit).................... $ 26,378 $ 45,384 $ 71,762
======== ======== ========
</TABLE>
See accompanying notes to unaudited pro forma condensed financial information.
P-3
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999
(Unaudited)
<TABLE>
<CAPTION>
Pro Forma Pro Forma Offering Pro Forma
Etinuum(1) Acorn(2) Adjustments Combined Adjustments Adjusted
---------- -------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUE................. $ 24,699 $ 2,008 $ -- $ 26,707 $ -- $ 26,707
DIRECT COST OF
SERVICES............... (16,986) (978) -- (17,964) -- (17,964)
---------- ------- ------- ---------- ----------- -----------
GROSS PROFIT............ 7,713 1,030 -- 8,743 -- 8,743
---------- ------- ------- ---------- ----------- -----------
OPERATING EXPENSES:
Selling, general and
administrative........ 15,020 1,313 (1,204) (3) 15,129 -- 15,129
Depreciation and
amortization.......... 3,533 88 312 (2) 3,933 -- 3,933
Research and
development........... 1,079 260 (1,061) (3) 278 -- 278
---------- ------- ------- ---------- ----------- -----------
Total operating
expenses.............. 19,632 1,661 (1,953) 19,340 19,340
---------- ------- ------- ---------- ----------- -----------
LOSS FROM OPERATIONS.... (11,919) (631) 1,953 (10,597) -- (10,597)
LOSS FROM SPIDER........ (1,055) -- (2,265) (3) (3,320) -- (3,320)
OTHER (EXPENSES)
INCOME................. (36) (44) -- (80) -- (80)
---------- ------- ------- ---------- ----------- -----------
NET LOSS................ (13,010) (675) (312) (13,997) -- (13,997)
Accretion of mandatorily
redeemable convertible
preferred stock........ (864) -- -- (864) 864 (8) --
Cummulative dividends to
preferred
stockholders........... (11,361) -- -- (11,361) 11,361 (8) --
Series F Beneficial
Conversion Charge...... -- -- -- -- 13,938 (4) --
-- -- -- -- (13,938)(8) --
---------- ------- ------- ---------- ----------- -----------
NET LOSS APPLICABLE TO
COMMON STOCKHOLDERS.... $ (25,235) $ (675) $ (312) $(26,222) $ 12,225 $ (13,997)
========== ======= ======= ========== =========== ===========
BASIC AND DILUTED:
Net loss per share..... $ (13.50) $ (13.95) $ (0.90)
========== ========== ===========
Weighted average
shares................ 1,869,803 10,257 1,880,060 13,716,257 (8) 15,596,317
========== ======= ========== =========== ===========
</TABLE>
See accompanying notes to unaudited pro forma financial information.
P-4
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO UNAUDITED PRO FORMA CONDENSED
FINANCIAL INFORMATION
(1) Historical Financial Statements
Amounts represent the historical consolidated balance sheet of Etinuum as
of December 31, 1999 and the historical statement of operations of Etinuum for
the year ended December 31, 1999.
(2) Acquisition of Acorn
Effective October 1, 1999, Etinuum purchased all of the common stock of
Acorn. The operations of Acorn have been included in Etinuum's historical
statement of operations from that date. The unaudited results of operations
for Acorn for the nine months ended September 30, 1999, have been included in
the Acorn column.
The purchase was accounted for under the purchase method of accounting
for initial consideration of cash of $550, $200 payable to the former Acorn
stockholders, $100 from the issuance of 11,737 shares of Etinuum's common
stock, and acquisition costs of $100. The purchase agreement also includes a
three-year contingent earn-out of up to $1,900 in cash and up to 527,778
shares of Etinuum common stock. The contingent earn-out will be recorded as
additional purchase price consideration (additional goodwill) when and if the
annual goals are achieved. The contingent earn-out is based on Acorn's annual
targets of earnings before interest, taxes, depreciation and amortization and
could be earned as follows:
<TABLE>
<CAPTION>
Contingent Earn-
Out
----------------
Cash Stock
------- --------
<S> <C> <C>
Year 1..................................................... $ 600 250,000
Year 2..................................................... 600 166,667
Year 3..................................................... 700 111,111
------- --------
Total earn-out........................................... $ 1,900 527,778
======= ========
</TABLE>
If Acorn achieves less than 100% but greater than 75% of its performance
targets, the above amounts will be reduced for not achieving the estimated
targets. If Acorn achieves less than 75% of its performance targets for any
annual measurement period, then no earn-out payment will be made for that
period.
Additionally, Etinuum will transfer 1,000,000 shares of Spider to the
former Acorn stockholders if the earn-out conditions are met in Year One.
The initial purchase price of Acorn was allocated to the acquired assets
and liabilities as follows:
<TABLE>
<S> <C>
Initial consideration:
Cash.............................................................. $ 550
Stock............................................................. 100
Advances to Acorn prior to acquisition.............................. 450
Transaction costs................................................... 100
Due to Acorn stockholders........................................... 200
------
Total initial consideration..................................... 1,400
Allocated to:
Property and equipment............................................ (312)
Identifiable intangibles.......................................... (950)
Current working capital deficit................................... 355
------
Goodwill............................................................ $ 493
======
</TABLE>
P-5
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--
(Continued)
Goodwill will be amortized on a straight-line basis over five years. The
customer list and intellectual property acquired, will be amortized on a
straight-line basis over three years. Annual amortization included in the
unaudited pro forma statement of operations information is $415; an increase of
$312 over the amounts included in the historical financial information.
The contingent earn-out will be recorded using the fair value of Etinuum's
stock when payment becomes probable. Assuming the estimated initial offering
price of $11.00 per share, the additional goodwill from Acorn could approximate
$5.8 million. This would result in an additional $1.2 million in annual
amortization. This amount is presented to illustrate the significance of the
future adjustments to Acorn's purchase price on Etinuum's earnings. This should
not be viewed as a projection of the earn-out expected to be paid to the former
Acorn shareholders. The ultimate amount of the Acorn earn-out (if any) will
depend upon Acorn's actual future performance and Etinuum's stock price at the
time the additional shares are distributed to the former Acorn's shareholders.
(3) Spin-off of Spider
Effective October 1, 1999, Etinuum distributed 100% of the shares of
Spider to its stockholders on a pro rata basis. In connection with the
transaction, Etinuum agreed to distribute $1,000 in cash and research and
development relating to the technology that is currently under development to
Spider. Etinuum has the right to receive an unconditional royalty of $1,450
from Spider plus accrued interest at 8% over the next five years resulting from
the spin-off. The royalty payments are due by Spider regardless of its future
operations.
The costs directly attributable to the operations of Spider prior to the
spin-off, including payroll and payroll benefits for employees that became
Spider employees as a result of the spin-off, are shown as a reduction of
Etinuum's historical research and development costs. These costs were $1,061
for the nine-month period ended September 30, 1999. Spider is also charged for
certain shared support services for payroll, financial reporting, accounting
and tax, human resources, treasury and insurance and risk management services
under a transition support agreement. These costs would have been $1,204 for
the nine-month period ended September 30, 1999, and are shown as a reduction of
Etinuum's historical selling, general and administrative costs.
The repayment of the unconditional royalty obligation and Spider's ability
to fund its shared support costs are principally dependent upon the future
success of Spider's operations or its ability to raise capital. Etinuum will
provide a valuation allowance against any amounts due from Spider because of
this uncertainty. The amount of the valuation allowance to be charged against
income in any period will be equal to the lesser of (1) Spider's loss for the
period or (2) the amount due from Spider. As a result, the reduction in
research and development costs and the shared support costs discussed above
have been shown as a loss of $2,265 from Spider in the unaudited pro forma
statement of operations information.
As a condition of the spin-off, Etinuum will be allowed to utilize the
Spider technology for three years without any fee or royalty due to Spider.
Thereafter, Etinuum will pay for the use of the technology at its most favored
nations pricing if Etinuum chooses to continue to utilize the Spider software.
No amount has been reflected in the unaudited pro forma statement of operations
information for this future royalty because the amount is not reasonably
determinable at this time and it is uncertain whether Etinuum will continue to
use the Spider technology beyond the three year period.
P-6
<PAGE>
ETINUUM, INC. AND SUBSIDIARIES
(f.k.a. Intek Information, Inc.)
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS--
(Continued)
(4) Guaranteed Return to Series F Stockholders
The holders of the Series F stock have been guaranteed a minimum return of
100%, upon successful completion of the offering. This guaranteed return has
been reflected as a $13,938 charge to net loss applicable to common
stockholders and an increase in the Series F preferred stock. Based upon the
assumed initial offering price of $11.00 per share, approximately 721,124
additional shares of common stock will need to be issued to the Series F
preferred stockholders to achieve this return.
(5) Conversion of Preferred Stock to Common upon the Completion of the Offering
Etinuum's preferred stock will automatically convert to common stock upon
the successful completion of the offering.
(6) Initial Public Offering
Etinuum plans to issue 4,500,000 common shares in its initial public
offering. The estimated offering price is $11.00 per share. This will result in
proceeds of $46,035, net of the 7% underwriters discount.
(7) Offering Costs
Total offering costs, other than the underwriters discount, have been
estimated at $1,500. Etinuum has $651 in deferred offering costs included in
its December 31, 1999, historical balance sheet. The remaining $849 has been
reflected as a current liability in the accompanying unaudited pro forma
condensed balance sheet information.
(8) Net Loss Per Share
Pro forma net loss per share for the year ended December 31, 1999 assumes
the offering occured on January 1, 1999. Pro forma net loss per share is
computed using the pro forma net loss divided by the weighted average number of
common shares outstanding, including the pro forma effects of the following:
<TABLE>
<S> <C> <C>
.Shares issued in the initial public offering........... 4,500,000 shares
.Conversion of all Etinuum's convertible preferred
stock.................................................. 8,207,418 shares
.Dividends paid in kind on preferred stock.............. 287,715 shares
.Additional shares issued to Series F stockholders...... 721,124 shares
----------
Total additional shares............................... 13,716,257 shares
==========
</TABLE>
The charges to adjust net loss to net loss applicable to common
stockholders have been eliminated given the assumption that the closing of the
initial public offering occurred on January 1, 1999.
P-7
<PAGE>
ACORN INFORMATION SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Report of Independent Accountants.................................... A-2
Financial Statements:
Balance Sheet as of December 31, 1998.............................. A-3
Statement of Income for the Year Ended December 31, 1998........... A-4
Statement of Changes in Stockholders' Equity for the Year Ended
December 31, 1998................................................. A-5
Statement of Cash Flows for the Year Ended December 31, 1998....... A-6
Notes to Financial Statements........................................ A-7--A-11
</TABLE>
A-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of
Acorn Information Services, Inc.
In our opinion, the accompanying balance sheet and the related statements of
income, changes in stockholders' equity and of cash flows present fairly, in
all material respects, the financial position of Acorn Information Services,
Inc. at December 31, 1998, and the results of its operations and its cash flows
for the year, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's working capital deficiency and limited
availability to capital financing raises substantial doubt about its ability to
continue as a going concern. Management's plan in regard to these matters are
also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
Stamford, Connecticut
June 28, 1999, except for
the second and third paragraphs
of Note 10 referencing the
proposed acquisition by
Etinuum, Inc.,
which is as of July 16, 1999
A-2
<PAGE>
ACORN INFORMATION SERVICES, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................... $ 10,111
Accounts receivable................................................ 681,175
Loan receivable from employees .................................... 5,820
Other assets....................................................... 6,556
----------
Total current assets............................................. 703,662
Capitalized software................................................. 172,000
Fixed assets, net (Note 4)........................................... 244,533
Other assets......................................................... 17,877
----------
$1,138,072
==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................... $ 107,519
Accrued sales tax.................................................. 43,969
Other accrued expenses............................................. 51,497
Deferred revenue................................................... 150,000
Current portion of capital lease obligations....................... 54,883
Line of credit facility............................................ 119,065
Deferred tax liability............................................. 100,677
Notes payable--related party (Notes 5 & 6)......................... 197,800
----------
Total current liabilities........................................ 825,410
Capital lease obligations.......................................... 59,648
----------
Total liabilities................................................ 885,058
----------
Commitments (Note 9)
Stockholders' equity:
Class A common stock, no par value, 10,000 shares authorized;
1,800 shares issued and outstanding............................... 151,000
Class B common stock, no par value, 10,000 shares authorized;
no shares issued and outstanding.................................. --
Retained earnings.................................................. 102,014
----------
Total stockholders' equity....................................... 253,014
----------
Total liabilities and stockholders' equity......................... $1,138,072
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-3
<PAGE>
ACORN INFORMATION SERVICES, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Revenues:
Consulting........................................................ $2,812,226
----------
Costs and expenses:
Cost of revenues.................................................. 876,082
Sales and marketing............................................... 348,765
General and administrative........................................ 955,482
Research and development.......................................... 242,707
----------
2,423,036
----------
Income from operations........................................... 389,190
Interest expense.................................................... 53,051
----------
Income before income taxes....................................... 336,139
Provision for income taxes (Note 8)................................. 91,871
----------
Net income....................................................... $ 244,268
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-4
<PAGE>
ACORN INFORMATION SERVICES, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Common stock Treasury stock Retained Total
----------------- ---------------- earnings stockholders'
Shares Amount Shares Amount (deficit) equity (deficit)
------ --------- ------ --------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1,
1998................... 1,800 $ 51,000 -- $ -- $(142,254) $(91,254)
Transfer of stock....... (45) -- 45 -- -- --
Issuance of stock....... 45 100,000 (45) -- -- 100,000
Repurchase of stock..... (45) (100,000) 45 100,000 -- --
Issuance of stock....... 45 100,000 (45) (100,000) -- --
Net income.............. -- -- -- -- 244,268 244,268
----- --------- --- --------- --------- --------
Balance at December 31,
1998................... 1,800 $ 151,000 -- -- $ 102,014 $253,014
===== ========= === ========= ========= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-5
<PAGE>
ACORN INFORMATION SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
INCREASE (DECREASE) IN CASH
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income........................................................ $ 244,268
Adjustments to reconcile net income to net cash used in operating
activities:
Depreciation.................................................... 89,218
Changes in operating assets and liabilities:
Accounts receivable............................................. (489,659)
Loan receivable from employees.................................. (3,575)
Other assets.................................................... (4,579)
Accounts payable................................................ 18,100
Accrued sales tax............................................... 36,556
Other accrued expenses.......................................... 36,358
Deferred revenue................................................ 150,000
Deferred tax liability.......................................... 91,871
---------
Net cash provided by operating activities........................... 168,558
---------
Cash flows from investing activities:
Purchase of property and equipment................................ (87,719)
Capitalized software.............................................. (172,000)
---------
Net cash used in investing activities............................... (259,719)
---------
Cash flows from financing activities:
Principal payments on capital lease obligations................... (48,145)
Proceeds from line of credit...................................... 320,000
Principal payments on line of credit.............................. (271,435)
Proceeds from notes payable....................................... 276,634
Principal payments of notes payable............................... (276,634)
Issuance of common stock.......................................... 200,000
Repurchase of common stock........................................ (100,000)
---------
Net cash provided by financing activities........................... 100,420
---------
Net increase in cash................................................ 9,259
Cash--beginning of year............................................. 852
---------
Cash--end of year................................................... $ 10,111
=========
Supplemental disclosure of cash flow information:
Income taxes paid................................................. $ 5,720
=========
Interest paid..................................................... $ 31,438
=========
Supplemental disclosure of noncash financing activity:
During 1998, the Company entered into capital lease obligations to
purchase $106,675 of furniture and fixtures and computer
equipment.
</TABLE>
The accompanying notes are an integral part of these financial statements.
A-6
<PAGE>
ACORN INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. Nature of the Business
Acorn Information Services, Inc. (formerly Acorn Information Systems,
Inc.) ("Acorn" or the "Company") was incorporated in Conneticut in 1994. Acorn
develops and manages database marketing programs and interactive marketing
solutions for Fortune 1000 companies throughout the United States. Acorn has
developed expertise in the following areas: program management; marketing
database design; database operations; and analytical services.
2. Basis of Preparation
For the year ended 1998, the Company had a working capital deficiency and
had net cash outflows for operating and investing activites. The Company has
limited availability to capital financing. The Company has funded its
operations through shareholder loans and available lines of credit. It is
management's intention to continue to fund the Company's operating loss through
additional shareholder loans in order to meet its strategic objectives. The
Company believes that sufficient funding will be available to meet its planned
business objectives, including anticipated cash needs for working capital for a
reasonable period of time. However, there can be no assurance the Company will
be able to obtain sufficient funds to continue operations. As a result of the
foregoing, there exists substantial doubt about the Company's ability to
continue as a going concern. These financial statements do not include any
adjustments relating to the recoverability of carrying amount of recorded
assets or the amounts of liabilities that might result from the outcome of this
uncertainty.
3. Summary of Significant Accounting Policies
Revenue Recognition and Deferred Revenue
Revenue is derived from consulting services performed relating to software
development and consulting for customers. Revenue from consulting services is
recognized when the services are provided. Revenue generated from fixed fee
custom development contracts is primarily recognized using the percentage of
completion method. Due to the inherent uncertainties in the estimation process,
it is at least reasonably possible that estimates for cost to complete projects
in progress may be revised. Such revisions are recognized in the period in
which the revisions are determined. Revenue is deferred to the extent that cash
is received or fees are billed prior to satisfying obligations to customers.
Losses on contracts are recognized when determinable.
Fixed Assets
Fixed assets are stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Assets held under capital
leases are amortized over the shorter of the lease life or the estimated useful
life of the assets. Maintenance and repair costs are expensed as incurred.
Capitalized Software Costs
In accordance with Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise
Marketed," software development costs for new software products are expensed as
incurred until technological feasibility is established. Software development
costs incurred subsequent to the establishment of technological feasibility and
prior to general release are capitalized. During 1998, the Company capitalized
$172,000 of software development costs. These costs will be amortized over a
three-year period. Amortization commences when the product is available for
general release to customers. Capitalized software costs are stated at the
lower of cost or net realizable value. There was no amortization expense
incurred during 1998 as none of the products which had established
technological feasibility were available for general release to customers.
A-7
<PAGE>
ACORN INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Concentration of Credit Risk and Significant Customers
Financial instruments which potentially expose the Company to
concentration of credit risk consist primarily of trade accounts receivable.
The Company sells its services to various companies in the United States across
several industries. The Company performs ongoing credit evaluations of its
customers to ensure reserves for potential credit losses are not warranted.
At December 31, 1998, two of the Company's customers accounted for
approximately 45% and 32% of the Company's accounts receivable and two
customers accounted for approximately 37% and 25% of the Company's revenues for
the year then ended, respectively. No other customer exceeded 10% of revenues.
Financial Instruments
The carrying amounts of the Company's financial instruments, which include
cash, accounts receivable, accounts payable and accrued expenses, capital lease
obligations and line of credit, approximate their fair market values at
December 31, 1998.
Use of Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses at and during the reporting periods of the
financial statements. Actual results could differ from these estimates.l
4. Fixed Assets
Fixed assets consist of the following at December 31, 1998:
<TABLE>
<CAPTION>
Estimated
useful
life
(years)
----------
<S> <C> <C>
Furniture and fixtures................................. $ 45,882 5
Computer equipment..................................... 263,763 3
Leasehold improvements................................. 79,537 Lease life
---------
389,182
Accumulated depreciation............................... (144,649)
---------
$ 244,533
=========
</TABLE>
Depreciation expense for the year ended December 31, 1998 was $89,218.
The balances presented above for furniture and fixtures, computer
equipment and leasehold improvements include assets acquired under capital
leases of $30,206, $138,204 and $35,940, respectively. Accumulated amortization
on assets under capital leases totaled $56,481 as of December 31, 1998.
5. Related Party Transactions
During 1996, the Company issued promissory notes to certain officers and
shareholders of the Company totaling $113,800 (Note 6).
During 1997, the Company issued $84,000 of notes to certain officers and
shareholders of the Company for services rendered.
During 1998, the Company was advanced $276,634 by officers and
shareholders of the Company. Such advances were repaid by the Company during
1998. Interest expense related to these advances totaled $3,375 during 1998.
A-8
<PAGE>
ACORN INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. Debt
Line of Credit Facilities
On March 26, 1996, the Company entered into an agreement with a bank for a
$50,000 line of credit facility (the "Agreement"). At December 31, 1998, the
Company had no outstanding borrowings under the Agreement. This obligation was
guaranteed by certain shareholders of the Company. Under the terms of the
agreements, interest accrues on outstanding borrowings at 12.5% per annum,
interest is payable monthly and principal is payable upon demand. Interest
expense under this credit note totaled $5,174 during 1998.
On November 8, 1997, the Company entered into an agreement with a bank to
provide a $175,000 line of credit facility (the "Agreement"). At December 31,
1998, the Company had outstanding borrowings of $119,065 under the Agreement.
This obligation is guaranteed by certain shareholders of the Company and is
collateralized by all assets of the Company and expires in November 1999.
Interest accrues at a per annum rate of 1% over the bank's prime rate.
Principal and interest are payable monthly. Interest expense under this credit
note totaled $10,579 during 1998.
Notes Payable
During 1997, the Company issued notes totaling $84,000 to certain
shareholders of the Company for services rendered by the shareholders. The
notes bear interest at a rate of 10% per annum and is payable on demand.
Interest expense relating to these notes totaled $8,400 during 1998.
On December 31, 1996, the Company issued $113,800 of promissory notes to
certain officers and shareholders of the Company. The notes are payable on
demand and bear interest at 10% per annum. Interest expense relating to the
notes totaled $11,380 during 1998.
7. Common Stock
Each share of Class A common stock entitles the holder to one vote on all
matters submitted to a vote of the Company's stockholders. The Class B common
stock is non-voting, except as otherwise provided for in the Company's articles
of incorporation. Common stockholders are entitled to receive dividends, if
any, as may be declared by the board of directors on a share-for-share basis,
regardless of the class of common stock held.
During 1998, certain shareholders of the Company entered into treasury
stock sales and repurchase transactions. These transactions were recorded as
treasury stock and were accounted for under the cost method. There were no
outstanding treasury shares at December 31, 1998.
8. Income Taxes
The provision for income taxes for the year ended December 31, 1998 is as
follows:
<TABLE>
<S> <C>
Current tax expense:
U.S. federal....................................................... $ --
State and local.................................................... 816
-------
Total current........................................................ 816
-------
Deferred tax expense:
U.S. federal....................................................... 74,385
State and local.................................................... 16,670
-------
Total deferred....................................................... 91,055
-------
Total provision...................................................... $91,871
=======
</TABLE>
A-9
<PAGE>
ACORN INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company's net deferred tax assets (liabilities) are comprised of the
following at December 31, 1998:
<TABLE>
<S> <C>
Deferred tax assets:
Accounts payable............................................... $ 61,769
Net operating loss............................................. 45,441
Deferred revenue............................................... 43,492
Research and development credits............................... 16,831
Fixed assets................................................... 6,099
---------
173,632
Deferred tax liability:
Accounts receivables........................................... (274,309)
---------
Net deferred tax liability....................................... $(100,677)
=========
</TABLE>
At December 31, 1998, the Company has federal net operating loss
carryforwards of $112,724 and state net operating loss carryforwards of
$113,474. The federal losses will expire in 2012 through 2018 and the state
losses will expire in 2002 and 2003. Additionally, at December 31, 1998, the
Company has federal research and development credits of $16,831 available to
offset future tax liability. These credits will expire in 2018. If certain
substantial changes in the Company's ownership should occur, there would be an
annual limitation on the amount of the net operating loss and research and
development credit carryforwards which can be utilized.
9. Commitments
The Company has entered into noncancelable operating leases for office
space, automobiles and computer equipment and capital leases for furniture and
fixtures, computer equipment and leasehold improvements. The Company's future
minimum lease commitments under these leases are as follows:
<TABLE>
<CAPTION>
Operating Capital
leases leases
--------- --------
<S> <C> <C>
1999..................................................... $182,948 $ 64,457
2000..................................................... 155,457 35,567
2001..................................................... 140,241 18,670
2002..................................................... 134,506 6,598
2003..................................................... 11,209 2,647
-------- --------
Total.................................................... $624,361 127,939
========
Less--Amount representing interest....................... 13,408
--------
Present value of future minimum lease payments........... $114,531
========
</TABLE>
Rent expense under the noncancelable operating leases was approximately
$135,430 for the year ended December 31, 1998.
10. Subsequent Event
During the first quarter of 1999, the Company created a newly formed
Delaware corporation (Acorn Information Services, Inc.) which merged with the
existing Connecticut corporation (Acorn Information Systems, Inc.). In
connection with the merger, the number of authorized shares was reduced from
20,000
A-10
<PAGE>
ACORN INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
(10,000 Class A and 10,000 Class B) to 10,000 (5,000 Class A and 5,000 Class B)
and the per share par value was increased from none to $0.01. All outstanding
shares of Acorn Information Systems, Inc. were converted into Acorn Information
Services, Inc. shares at a ratio of one-to-one.
In July 1999, the Company signed a letter of intent to enter into a
proposed acquisition by Etinuum, Inc. ("Etinuum"). In connection with the
proposed acquisition, the Company received a bridge loan in the amount of
$200,000 from Etinuum. The bridge loan bears interest at a rate of 12% per
annum and will be payable on demand if the acquisition is not successfully
completed or on December 4, 1999. If the acquisition is successfully completed,
the proceeds received by the Company will be reduced by the amount of the
bridge loan.
Also in connection with the proposed acquisition, the Company received
$225,000 from Etinuum for working capital purposes. If the proposed acquisition
is successfully completed the amount will be forgiven. If the proposed
acquisition is not consummated, the amount will be payable on October 3, 1999.
The loan bears no interest.
A-11
<PAGE>
ACORN INFORMATION SERVICES, INC.
BALANCE SHEETS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
September 30,
-------------
1998 1999
-------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................... $ 126 $ 13
Trade receivables, net......................................... 287 658
Prepaid expenses and other..................................... 9 8
----- -------
Total current assets........................................... 422 679
----- -------
PROPERTY AND EQUIPMENT, net..................................... 212 312
OTHER ASSETS.................................................... 18 21
----- -------
Total assets................................................... $ 652 $ 1,012
===== =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable and accrued expenses.......................... $ 174 $ 351
Deferred revenue............................................... -- 55
Current borrowings............................................. 87 759
----- -------
Total current liabilities...................................... 261 1,165
LONG-TERM BORROWINGS, net of current portion.................... -- 340
----- -------
Total liabilities.............................................. 261 1,505
----- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Class A common stock, no par value, 10,000 shares authorized,
1,800 shares issued and outstanding............................ 51 151
Class B common stock, no par value, 10,000 shares authorized, no
shares issued and outstanding.................................. -- --
Retained earnings (deficit)..................................... 340 (644)
----- -------
Total stockholders' equity (deficit)........................... 391 (493)
----- -------
Total liabilities and stockholders' equity (deficit)........... $ 652 $ 1,012
===== =======
</TABLE>
The accompanying notes to financial statements
are an integral part of these unaudited balance sheets.
A-12
<PAGE>
ACORN INFORMATION SERVICES, INC.
STATEMENTS OF OPERATIONS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-Month
Period Ended
September 30,
--------------
1998 1999
------ ------
<S> <C> <C>
REVENUE........................................................ $2,144 $2,008
DIRECT COST OF SERVICES........................................ (606) (978)
------ ------
GROSS PROFIT................................................... 1,538 1,030
------ ------
OPERATING EXPENSES:
Selling, general and administrative.......................... 889 1,313
Depreciation and amortization................................ 115 88
Research and development..................................... 243 260
------ ------
Total operating expenses................................... 1,247 1,661
------ ------
INCOME (LOSS) FROM OPERATIONS.................................. 291 (631)
OTHER EXPENSES................................................. (29) (44)
------ ------
262 (675)
PROVISION FOR TAXES............................................ 92 --
------ ------
NET INCOME (LOSS).............................................. $ 170 $ (675)
====== ======
</TABLE>
The accompanying notes to financial
statements are an integral part of these unaudited statements.
A-13
<PAGE>
ACORN INFORMATION SERVICES, INC.
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
(UNAUDITED)
<TABLE>
<CAPTION>
Nine-Month
Period Ended
September 30,
--------------
1998 1999
------ ------
<S> <C> <C>
Cash flows from operating activities:
Net cash provided by (used in) operating activities............ $ 253 $ (164)
------ ------
Cash flows from investing activities:
Purchase of property and equipment............................. (202) (50)
------ ------
Net cash used in investing activities.......................... (202) (50)
------ ------
Cash flows from financing activities:
Proceeds from debt............................................. 90 284
Repayments of debt and capital leases.......................... (16) (67)
------ ------
Net cash provided by financing activities...................... 74 217
------ ------
Net increase in cash and cash equivalents...................... 125 3
Cash and cash equivalents, beginning of period................. 1 10
------ ------
Cash and cash equivalents, end of period....................... $ 126 $ 13
====== ======
</TABLE>
The accompanying notes to financial statements
are an integral part of these unaudited statements.
A-14
<PAGE>
ACORN INFORMATION SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
(1) Organization and Nature of Business
Acorn Information Services, Inc. was incorporated in Connecticut in 1994.
Acorn develops and manages database marketing programs and interactive
marketing solutions for Fortune 1000 companies throughout the United States.
Acorn has developed expertise in the following areas: program management,
marketing database design, database operations and analytical services.
(2) Unaudited Interim Financial Statements
The interim financial statements have been prepared by Acorn pursuant to
the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures relating to the interim periods normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. In the opinion of management, the accompanying unaudited condensed
financial statements of the interim periods contain all adjustments necessary
to present fairly the financial position of Acorn as of September 30, 1999 and
1998 and the results of operations and cash flows for the periods presented.
All such adjustments are of a normal recurring nature. The results of
operations for the nine-month period ended September 30, 1999 and 1998 are not
necessarily indicative of the results that may be achieved for a full fiscal
year and cannot be used to indicate financial performance for the entire year.
(3) Summary of Significant Accounting Policies
Revenue Recognition
Revenue is derived from consulting services performed relating to software
development and consulting for customers. Revenue from consulting services is
recognized when the services are provided. Revenue generated from fixed fee
custom development contracts is primarily recognized using the percentage of
completion method. Due to the inherent uncertainties in the estimation process,
it is at least reasonably possible that estimates for cost to complete projects
in progress may be revised. Such revisions are recognized in the period in
which the revisions are determined. Revenue is deferred to the extent that cash
is received or fees are billed prior to satisfying obligations to customers.
Losses on contracts are recognized when determinable.
Fixed Assets
Fixed assets are stated at cost and depreciated using the straight-line
method over the estimated useful lives of the assets. Assets held under capital
lease are amortized over the shorter of the lease life or the estimated useful
life of the assets. Maintenance and repair costs are expensed as incurred.
Use of Estimates
The preparation of Acorn's financial statements in conformity with
generally accepted accounting principles requires management to make certain
estimates and assumptions that affect the reported amounts of assets,
liabilities, revenues and expenses at and during the reporting periods of the
financial statements. Actual results could differ from these estimates.
A-15
<PAGE>
[The inside back cover shows a list of representative Etinuum clients. At the
top of the page is the wording "Etinuum Clients." The "Etinuum logo" is in the
center of the page with the clients' names displayed around the logo.]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4,500,000 Shares
[LOGO OF ETINUUM]
Common Stock
------------
PROSPECTUS
------------
Chase H&Q
Robertson Stephens
U.S. Bancorp Piper Jaffray
Wit SoundView
------------
, 2000
------------
You should rely only on the information contained in this prospectus. We
have not authorized anyone to provide you with information different from that
which is contained in this prospectus. We are offering to sell, and seeking
offers to buy, shares of common stock only in jurisdictions where offers and
sales are permitted. The information contained in this prospectus is accurate
only as of the date of this prospectus, regardless of the time of delivery of
this prospectus or of any sale of our common stock.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States are required to
inform themselves about and to observe any restrictions as to this offering and
the distribution of this prospectus applicable to that jurisdiction.
Through and including , 2000, the 25th day after commencement of the
offering, all dealers effecting transactions in the common stock, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to the obligations of dealers to deliver a prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The expenses to be paid by the registrant in connection with this offering
are as follows. All amounts other than the Securities and Exchange Commission
registration fee, the NASD filing fee and the Nasdaq National Market
application fee are estimates.
<TABLE>
<S> <C>
Registration fee............................................. $ 16,395
National Association of Securities Dealers, Inc. fee......... 5,755
NASDAQ National Market listing fee........................... 5,000
Legal fees and expenses...................................... 500,000
Accounting fees and expenses................................. 400,000
Printing and engraving expenses.............................. 350,000
Blue Sky fees and expenses................................... 25,000
Miscellaneous fees and expenses.............................. 197,850
----------
Total...................................................... $1,500,000
==========
</TABLE>
Item 14. Indemnification of Directors and Officers.
Section 145 of the Delaware General Corporation Law authorizes a court to
award, and permits a corporation to grant indemnity to current or former
directors and executive officers, and others acting in similar capacities at
the request of the company. This permitted indemnification may extend beyond
the scope of that provided under Delaware law, including under certain
circumstances for liabilities (including reimbursement for expenses incurred)
arising under the Securities Act of 1933, as amended (the "Securities Act").
As permitted by the Delaware General Corporation Law, our Amended and
Restated Certificate of Incorporation, which will become effective upon the
closing of this offering, includes a provision that eliminates the personal
liability of our directors for monetary damages for breach of fiduciary duty as
a director, except for liability (i) for any breach of the director's duty of
loyalty to us or our stockholders, (ii) for acts or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law, (iii)
under section 174 of the Delaware General Corporation Law regarding unlawful
dividends and stock purchases, or (iv) for any transaction from which the
director derived an improper personal benefit. Our Amended and Restated
Certificate of Incorporation permits indemnification of current and former
directors and executive officers to the maximum extent allowed by applicable
law.
Our Bylaws provide that, to the full extent allowed by Delaware General
Corporation Law, (i) we will indemnify our directors and officers, provided
that any indemnified officer and director acted in good faith and in a manner
which such officer and director reasonably believed to be in or not opposed to
our best interests, (ii) we may indemnify our other employees and agents, (iii)
we will advance expenses, as incurred, to our directors and officers in
connection with a legal proceeding, subject to certain very limited exceptions;
and (iv) we may purchase and maintain insurance on behalf of any director or
officer against any liability asserted against them in such capacity. The
rights conferred in the Bylaws are not exclusive of indemnification provided by
law, agreement or otherwise.
As permitted by Delaware General Corporation Law, we intend to enter into
indemnification agreements with each of our current directors and officers to
give such directors and officers additional contractual assurances regarding
the scope of the indemnification set forth in our Amended and Restated
Certificate of Incorporation and to provide additional procedural protections.
These agreements provide for
II-1
<PAGE>
indemnification against claims and liabilities arising as a result of their
service as directors or officers of Etinuum and the advancement of expenses
incurred by them in defending or litigating such claims. We believe that these
agreements, and the indemnification provisions in our Amended and Restated
Certificate of Incorporation and Bylaws, are sufficiently broad to permit
indemnification against claims involving the negligence or gross negligence of,
and violations of the Securities Act by, the covered directors and officers.
At present, there is no pending litigation or proceeding involving any of
our directors, officers or employees regarding which indemnification is sought,
nor are we aware of any threatened litigation that may result in claims for
indemnification.
We have also, with approval by our Board of Directors, obtained directors'
and officers' liability insurance for our current officers and directors.
Please refer to Section 7 of the Underwriting Agreement, Exhibit 1.1
hereto, which provides for the indemnification of officers, directors and
controlling persons of Etinuum against certain liabilities. See also the
undertakings set out in response to Item 17 below.
Please refer to the following documents filed as exhibits to this
registration statement regarding relevant indemnification provisions described
above and elsewhere herein:
<TABLE>
<C> <S>
1.1 Form of Underwriting Agreement
3.2.1 Revised Form of Amended and Restated Certificate of Incorporation
of the Registrant to be effective upon the closing of the offering
made pursuant to this Registration Statement
3.4 Form of Amended and Restated Bylaws of the Registrant to be
effective upon the closing of the offering made pursuant to this
Registration Statement
10.29 Form of Indemnification Agreement
</TABLE>
Item 15. Recent Sales of Unregistered Securities.
All sales of common stock made pursuant to the exercise of stock options
were made in reliance on Rule 701 under the Securities Act or on Section 4(2)
of the Securities Act.
All other sales of our securities were made in reliance on Section 4(2) of
the Securities Act and/or Regulation D promulgated under the Securities Act.
These sales were made without general solicitation or advertising. Each
purchaser was an accredited investor as defined in Rule 501(a) of the
Securities Act with access to all relevant information necessary to evaluate
the investment and represented to us that the shares were being acquired for
investment and not for resale.
Since December 1, 1996, we have issued unregistered securities as
described below:
<TABLE>
<C> <S>
February 1997: 10,190,120 shares of Series B preferred stock sold to
three accredited investors for $1.741 per share in
reliance on Section 4(2) of the Securities Act as a
private offering to a limited number of purchasers.
1,863,270 shares of Series B preferred stock issued to
eight shareholders of Protocall as part of the Protocall
acquisition.1
April-May, 1997: 285,778 shares of Series B preferred stock to nine
accredited investors at an average price of $1.74 per
share in reliance on Section 4(2) of the Securities Act
as a private offering to a limited number of purchasers.
December 1997: 2,871,913 shares of Series C preferred stock to Beacon
Group III-Focus Value Fund, L.P. at $1.741 per share in
reliance on Section 4(2) of the Securities Act as a
private offering to a limited number of purchasers.
Series No. 1 warrant issued to Beacon under Section 4(2)
to purchase up to 3,500,000 shares of Series C preferred
stock at $1.741 per share for five years./2/
</TABLE>
II-2
<PAGE>
<TABLE>
<C> <S>
Series B anti-dilution warrant issued to Beacon under
Section 4(2) for the purchase of an indeterminable number
of Series B preferred shares./2/
May 1998: 8,823,529 shares of Series D preferred stock issued to
Conning Capital Limited Partnership V and 18,382 shares
issued to another accredited investor for $1.36 per share
under Regulation D.
Conning and Beacon were each granted a right to purchase up
to $3,000,000 of additional Series D preferred stock at
$1.36 per share under Section 4(2) through April 1999,
which was not exercised.
Issued to Beacon 3,500,000 shares of Series C preferred
stock and a Series NB-1 warrant to acquire additional
shares of common stock under Section 4(2) in exchange for
the Series No. 1 and B warrants issued to it in December,
1997.
April 1999: 2,510,691 shares of Series E preferred stock to five
accredited investors for $1.61 per share under Regulation
D.
November 1999: 11,737 shares of common stock issued to Prospero Holdings
LLC in connection with the Acorn acquisition under
Regulation D.
5,210,093 shares of Series F preferred stock to 7
accredited investors at $2.13 per share under Regulation D.
January 2000: Issued a warrant to purchase 181,250 shares of our common
stock at $8.52 per share to Sony Electronics, Inc under
Section 4(2).
</TABLE>
- ------------------
/1/During 1999 and 1998, 11,488 and 21,539 shares of Series B preferred stock
were returned to us as adjustments for the price paid for Protocall in 1997.
/2/Beacon surrendered both warrants at the time of the Series D preferred
stock closing.
Item 16. Exhibits and Financial Statement Schedules.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement
2.1+ Share Purchase Agreement between Registrant, Acorn Information
Services, Inc. and the shareholders of Acorn Information Services,
Inc. dated October 30, 1999
2.1.1 Exhibits to Share Purchase Agreement between Registrant, Acorn
Information Services, Inc. and the shareholders of Acorn Information
Services, Inc. dated October 30, 1999
3.1+ Amended and Restated Certificate of Incorporation dated November 22,
1999
3.1.1 Amended and Restated Certificate of Incorporation of Etinuum, Inc.
dated March 2, 2000
3.2+ Form of Amended and Restated Certificate of Incorporation of the
Registrant to be effective upon the closing of the offering made
pursuant to this Registration Statement
3.2.1 Revised Form of Amended and Restated Certificate of Incorporation to
be effective upon the closing of the offering made pursuant to this
Registration Statement
3.3+ Restated Bylaws of the Registrant
3.4+ Form of Amended and Restated Bylaws of the Registrant to be
effective upon the closing of the offering made pursuant to this
Registration Statement
4.1+ Form of the Registrant's Common Stock Certificate
4.2+ Amended and Restated Shareholders' and Voting Agreement dated as of
January 14, 2000
4.3+ Registration Rights Agreement between the Registrant, the former
Acorn shareholders and Prospero L.L.C. dated October 30, 1999
4.3.1+ Amendment No. 2 Registration Rights Agreement between the
Registrant, the former Acorn shareholders and Prospero L.L.C.
</TABLE>
II-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
4.4+ Series A Purchase Agreement between the Registrant and Resource
Bancshares Corporation dated August 2, 1996
4.5+ Series B Purchase Agreement between the Registrant and The Beacon
Group III-Focus Value Fund, L.P., Squam Lake Investors II, L.P. and
Bain & Company dated as of February 3, 1997
4.5.1+ Amendment to Series B Purchase Agreement between the Registrant and
The Beacon Group III-Focus Value Fund, L.P., Squam Lake Investors
II, L.P. and Bain & Company
4.6+ Series C Purchase Agreement between the Registrant and The Beacon
Group III-Focus Value Fund, L.P. dated December 22, 1997
4.6.1+ Amendment to Series C Purchase Agreement between the Registrant and
The Beacon Group III-Focus Value Fund, L.P.
4.7+ Series D Purchase Agreement by and among the Registrant, Conning
Capital Limited Partnership V, The Beacon Group III-Focus Value
Fund, L.P. and Certain Other Investors dated as of May 7, 1998
4.7.1+ Amendment to Series D Purchase Agreement between the Registrant,
Conning Capital Limited Partnership V, The Beacon Group III-Focus
Value Fund, L.P. and Certain Other Investors
4.8+ Series E Preferred Stock Purchase Agreement by and among the
Registrant and U.S. Information Technology Financing, L.P.,
Encompass Group, Inc., Trans Cosmos USA, Inc. and Certain Other
Parties dated as of April 16, 1999
4.8.1+ Amendment to Series E Preferred Stock Purchase Agreement by and
among the Registrant and U.S. Information Technology Financing,
L.P., Encompass Group, Inc., Trans Cosmos USA, Inc. and Certain
Other Parties
4.9+ Series F Preferred Stock Purchase Agreement by and among the
Registrant and BVCF IV, L.P. and Certain Other Parties dated as of
November 19, 1999
4.9.1+ Amendment to Series F Preferred Stock Purchase Agreement by and
among the Registrant and BVCF IV, L.P. and Certain Other Parties
4.10+ Amended and Restated Registration Rights Agreement dated January 14,
2000
4.11+ Letter Agreement by certain stockholders of the Registrant dated
January 14, 2000
5.1+ Opinion of Chrisman, Bynum & Johnson, P.C.
5.1.1 Revised Opinion of Chrisman, Bynum & Johnson, P.C.
10.1+ 1997 Restated Stock Option Plan
10.1.1 Amendment to 1997 Restated Stock Option Plan
10.2+ 1998 Restated Stock Option Plan
10.3+ 2000 Stock Incentive Plan
10.4+ 2000 Employee Stock Purchase Plan
10.5+ Contribution Agreement dated October 27, 1999, between the
Registrant and Spider Technologies, Inc.
10.6+ Distribution Plan between the Registrant and Spider Technologies,
Inc. dated November 5, 1999
10.7.1+ Promissory Note dated October 1, 1999, by Timothy C. O'Crowley
10.7.2+ Promissory Note Dated October 1, 1999, by Franklin D. Richards
10.7.3+ Promissory note and pledge agreement of Timothy C. O'Crowley dated
November 23, 1999
10.7.4+ Promissory Note dated November 20, 1998 by Franklin D. Richards
10.8+ Sublease and Resource Sharing Agreement between the Registrant and
Spider Technologies, Inc. effective October 1, 1999
10.9+ Amended and Restated Software Assignment and Grant-Back License,
Maintenance and Support Agreement between the Registrant and Spider
Technologies, Inc. effective November 4, 1999
10.9.1+ Intellectual Property Security Agreement between the Registrant and
Spider Technologies, Inc. dated November 5, 1999
10.9.2+ Agreement Regarding Matters between the Registrant and Spider
Technologies, Inc.
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.10+ Transition Support Agreement between the Registrant and Spider
Technologies, Inc. dated November 4, 1999
10.11+ Separation Agreement between the Registrant and Spider Technologies,
Inc. effective October 1, 1999
10.12+ Tax Separation Agreement between the Registrant and Spider
Technologies, Inc. effective
October 1, 1999
10.13* Consulting Agreement between Spider Technologies, Inc. and Timothy
O'Crowley
10.14+ Second Restated and Amended Management Employment Agreement of
Timothy O'Crowley
10.15+ Second Amended and Restated Employment Agreement of Franklin D.
Richards
10.16+ Building Lease between the Registrant and the City of Fort Scott,
Kansas dated March 8, 1999 (Fort Scott)
10.16.1+ Addendum No. 1 to Building Lease between Registrant and the City of
Fort Scott, Kansas dated March 8, 1999 (Fort Scott)
10.17+ Lease between the Registrant and M&S California Fund, L.P. dated
June 17, 1997 (San Diego)
10.17.1+ First Amendment to Office Building Lease between the Registrant and
M&S California Fund, L.P. dated 10.17.2
10.18+ Office Lease between the Registrant and Westmark Terrace Tower II,
Inc. dated June 9, 1999 (DTC)
10.18.1+ First Amendment to Lease between the Registrant and Westmark Terrace
Tower II dated June 1, 1999 (DTC)
10.19+ Lease of Office Space between the Registrant and Brookfield Republic
Inc. dated November 15, 1996 (Republic Plaza)
10.19.1+ First Amendment and Lease of Additional Office Space between the
Registrant and Brookfield Republic Inc. dated October 17, 1997
(Republic Plaza)
10.20+ Office Lease between the Registrant and The Equitable Life Assurance
Society dated March 5, 1997 (Hayward)
10.20.1+ Commencement of Term Agreement between the Registrant and The
Equitable Life Assurance Society dated May 2, 1997 (Hayward)
10.20.2+ Estoppel Certificate of the Registrant to ATC Partners LLC dated
September 24, 1998 regarding Office Lease with The Equitable Life
Assurance Society (Hayward)
10.21+ Industrial/ Commercial Multi-Tenant Lease between the Registrant and
Livermore Airway Business Park dated January 14, 1999 (Livermore)
10.22+ Industrial/ Commercial Multi-Tenant Lease between the Registrant and
Livermore Airway Business Park dated January 30, 1999 (Livermore)
10.23+ Commercial Lease between Acorn Information Services, Inc. and Lot 4
LLC dated January 5, 1998 (Shelton)
10.23.1+ First Amendment of Lease between Acorn Information Services, Inc.
and Lot 4 LLC dated April 20, 1998 (Shelton)
10.24+ Loan and Security Agreement between the Registrant and Silicon
Valley Bank dated June 10, 1999
10.24.1+ Exhibits to Loan and Security Agreement between the Registrant and
Silicon Valley Bank dated June 10, 1999
10.25+ Master Loan and Security Agreement between the Registrant and
Charter Financial, Inc. dated August 26, 1999
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------- ----------------------
<C> <S>
10.25.1+ Exhibits to Master Loan and Security Agreement between the
Registrant and Charter Financial, Inc. dated August 26, 1999
10.26+ Agreement and Plan of Reorganization between the Registrant and
Protocall New Business Specialists, Inc. dated February 3, 1997
10.27+X Share Purchase Agreement between Registrant, Acorn Information
Services, Inc. and the Shareholders of Acorn Information Services,
Inc. dated October 30, 1999
10.27.1X Exhibits to Share Purchase Agreement between Registrant, Acorn
Information Services, Inc. and the Shareholders of Acorn Information
Services, Inc. dated October 30, 1999
10.28+ Master Service Agreement between the Registrant and Sony
Electronics, Inc. dated May 1, 1997
10.28.1++ Addendum A to Master Service Agreement between the Registrant and
Sony Electronics, Inc. dated April 1, 1999
10.28.2+ Warrant issued to Sony Electronics, Inc. dated January 14, 2000
10.29+ Form of Indemnification Agreement
10.30+ Kansas Economic Opportunity Initiatives Fund Loan Agreement and
Promissory Note
10.31+ Agreement Among the Registrant, Fort Scott Community College and the
Kansas
Department of Commerce and Housing dated March 15, 1999
21.1+ Subsidiaries of the Registrant
23.1 Consent of Chrisman, Bynum & Johnson (included in Exhibit 5.1.1)
23.2 Consent of Arthur Andersen LLP
23.3 Consent of PricewaterhouseCoopers LLP
24.1+ Power of Attorney (see Page II-5 of this Registration
Statement)
27.1+ Financial Data Schedule
</TABLE>
- ------------------
+Confidential treatment requested as to certain portions of this exhibit.
* To be supplied by amendment.
+ Previously filed.
X These exhibits have been refiled as exhibits 2.1 and 2.1.1.
Item 17. Undertakings.
We hereby undertake to provide to the underwriters at the closing
specified in the underwriting Agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling persons
pursuant to the provisions described under Item 14 above, or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us 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, we will, unless in the opinion of our 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 Securities Act and will be governed by the final adjudication
of such issue.
II-6
<PAGE>
We hereby undertake that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus 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-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act, the Registrant has
duly caused this Amendment to Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized, in the City of Englewood, State
of Colorado, on the 3rd day of March 2000.
ETINUUM, INC.
By: /s/ TIMOTHY C. O'CROWLEY
Timothy C. O'Crowley
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Title Date
/s/ TIMOTHY C. O'CROWLEY Chairman of the
- ------------------------------------- Board, President, March 3, 2000
Timothy C. O'Crowley Chief Executive
Officer and
Director (Principal
Executive Officer)
/s/ STEVEN Q. HANSEN Chief Financial
- ------------------------------------- Officer (Principal March 3, 2000
Steven Q. Hansen Financial and
Accounting Officer)
/s/ STEVEN Q. HANSEN, POA Director
- ------------------------------------- March 3, 2000
Stephen S. Hyde
/s/ STEVEN Q. HANSEN, POA Director
- ------------------------------------- March 3, 2000
Steven F. Piaker
/s/ STEVEN Q. HANSEN, POA Director
- ------------------------------------- March 3, 2000
Harold W. Pote
/s/ STEVEN Q. HANSEN, POA Director
- ------------------------------------- March 3, 2000
Rick L. Weller
/s/ STEVEN Q. HANSEN, POA Director
- ------------------------------------- March 3, 2000
Eric R. Wilkinson
</TABLE>
II-8
<PAGE>
EXHIBIT 1.1
ETINUUM, INC.
4,500,000 Shares/1/
Common Stock
UNDERWRITING AGREEMENT
_____ __, 2000
CHASE SECURITIES INC.
ROBERTSON STEPHENS, INC.
U.S. BANCORP PIPER JAFFRAY, INC.
SOUNDVIEW TECHNOLOGY GROUP, INC.
c/o Chase Securities Inc.
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Etinuum, Inc., a Delaware corporation (the "Company"), proposes to issue
and sell 4,500,000 shares of its authorized but unissued Common Stock, $ 0.0001
par value (the "Common Stock") (said 4,500,000 shares of Common Stock being the
"Underwritten Stock"). The Company proposes to grant to the Underwriters (as
hereinafter defined) an option to purchase up to 675,000 additional shares of
Common Stock (the "Option Stock" and with the Underwritten Stock collectively
the "Stock"). The Common Stock is more fully described in the Registration
Statement and the Prospectus hereinafter mentioned.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (collectively the "Underwriters", which term shall
also include any underwriter purchasing Stock pursuant to Section 3(b) hereof).
You represent and warrant that you have been authorized by each of the other
Underwriters to enter into this Agreement on its behalf and to act for it in the
manner herein provided.
_______________________
/1/ Plus an option to purchase from the Company up to 675,000 additional
shares to cover over-allotments.
<PAGE>
Chase Securities Inc. and Wit Capital Corporation (an affiliate of
SoundView Technology Group, Inc.) have each agreed to reserve a portion of the
Stock to be purchased under this Agreement for sale to the Company's directors,
officers, employees and business associates and other parties related to the
Company (collectively, "Participants"), as set forth in the Prospectus under the
heading "Underwriting" (the "Directed Stock Program"). The Stock to be sold by
Chase Securities Inc. and Wit Capital Corporation pursuant to the Directed Stock
Program is referred to hereinafter as the "Directed Stock." Any Directed Stock
not orally confirmed for purchase by any Participants by the end of the business
day on which this Agreement is executed will be offered to the public by the
Underwriters as set forth in the Prospectus.
1. Registration Statement. The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1 (No.
333-94755), including the related preliminary prospectus, for the registration
under the Securities Act of 1933, as amended (the "Securities Act") of the
Stock. Copies of such registration statement and of each amendment thereto, if
any, including the related preliminary prospectus (meeting the requirements of
Rule 430A of the rules and regulations of the Commission) heretofore filed by
the Company with the Commission have been delivered to you.
The term Registration Statement as used in this agreement shall mean such
registration statement, including all exhibits and financial statements, all
information omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, in the form in which it became effective, and any
registration statement filed pursuant to Rule 462(b) of the rules and
regulations of the Commission with respect to the Stock (a "Rule 462(b)
registration statement"), and, in the event of any amendment thereto after the
effective date of such registration statement (the "Effective Date"), shall also
mean (from and after the effectiveness of such amendment) such registration
statement as so amended (including any Rule 462(b) registration statement). The
term Prospectus as used in this Agreement shall mean the prospectus relating to
the Stock first filed with the Commission pursuant to Rule 424(b) and Rule 430A
(or if no such filing is required, as included in the Registration Statement)
and, in the event of any supplement or amendment to such prospectus after the
Effective Date, shall also mean (from and after the filing with the Commission
of such supplement or the effectiveness of such amendment) such prospectus as so
supplemented or amended. The term Preliminary Prospectus as used in this
Agreement shall mean each preliminary prospectus included in such registration
statement prior to the time it becomes effective.
2
<PAGE>
The Company has caused to be delivered to you copies of each Preliminary
Prospectus and has consented to the use of such copies for the purposes
permitted by the Securities Act.
2. Representations and Warranties of the Company. The Company hereby
represents and warrants as follows:
(a) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction of its incorporation, has full corporate
power and authority to own or lease its properties and conduct its business
as described in the Registration Statement and the Prospectus and as being
conducted, and is duly qualified as a foreign corporation and in good
standing in all jurisdictions in which the character of the property owned
or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would
not have a material adverse effect on the business, properties, financial
condition or results of operations of the Company and its subsidiaries,
taken as a whole).
(b) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
materially adverse change in the business, properties, financial condition
or results of operations of the Company and its subsidiaries, taken as a
whole, whether or not arising from transactions in the ordinary course of
business (a "Material Adverse Effect"), other than as set forth in the
Registration Statement and the Prospectus, and since such dates, except in
the ordinary course of business, neither the Company nor any of its
subsidiaries has entered into any material transaction not referred to in
the Registration Statement and the Prospectus.
(c) The Registration Statement and the Prospectus comply, and on the
Closing Date (as hereinafter defined) and any later date on which Option
Stock is to be purchased, the Prospectus will comply, in all material
respects, with the provisions of the Securities Act and the rules and
regulations of the Commission thereunder; on the Effective Date, the
Registration Statement did not contain any untrue statement of a material
fact and did not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date the Prospectus did not and, on the
Closing Date and any later date on which Option Stock is to be purchased,
will not contain any untrue statement of a material fact or omit to state
any material fact necessary in order to make the statements therein, in the
light of the
3
<PAGE>
circumstances under which they were made, not misleading; provided,
however, that none of the representations and warranties in this
subparagraph (iii) shall apply to statements in, or omissions from, the
Registration Statement or the Prospectus made in reliance upon and in
conformity with information herein or otherwise furnished in writing to the
Company by or on behalf of the Underwriters for use in the Registration
Statement or the Prospectus.
Each of the Registration Statement and any Rule 462(b)
registration statement has become effective under the Securities Act and no
stop order suspending the effectiveness of the Registration Statement or
any Rule 462(b) registration statement has been issued under the Securities
Act and no proceedings for that purpose have been instituted or are pending
or, to the knowledge of the Company, are contemplated by the Commission,
and any request on the part of the Commission for additional information
has been complied with.
(d) The Stock, when issued and sold to the Underwriters as provided
herein, will be duly and validly issued, fully paid and nonassessable and
conforms to the description thereof in the Prospectus. No further approval
or authority of the stockholders or the Board of Directors of the Company
will be required for the issuance and sale of the Stock as contemplated
herein.
(e) Prior to the Closing Date the Stock to be issued and sold by the
Company will be authorized for listing by the Nasdaq National Market upon
official notice of issuance.
(f) Arthur Andersen, LLP, the accountants who certified the
consolidated financial statements included in the Registration Statement
are independent public accountants as required by the Securities Act and
the rules and regulations promulgated thereunder.
(g) The consolidated financial statements included in the
Registration Statement and the Prospectus, together with the related notes,
present fairly the financial position of the Company and its subsidiaries
at the dates indicated and the consolidated statement of operations,
stockholders' equity and cash flows of the Company and its subsidiaries for
the periods specified; said consolidated financial statements have been
prepared in conformity with generally accepted accounting principles
("GAAP") applied on a consistent basis throughout the periods involved,
except to the extent specifically noted in such statements. The selected
consolidated financial data and the summary consolidated financial data
4
<PAGE>
included in the Prospectus present fairly the information shown therein and
have been compiled on a basis consistent with that of the audited
consolidated financial statements included in the Registration Statement.
(h) Except as otherwise disclosed in the Registration Statement, all
of the issued and outstanding capital stock of each subsidiary of the
Company has been duly authorized and validly issued, is fully paid and non-
assessable and is owned by the Company, directly or through subsidiaries,
free and clear of any security interest, mortgage, pledge, lien,
encumbrance, claim or equity, other than the pledge to Charter Financial,
Inc. under the Master Loan and Security Agreement No. 4339, the pledge to
Silicon Valley Bank under the Loan and Security Agreement dated as of June
10, 1999 and the right of first refusal granted under Section 5.16 of the
Share Purchase Agreement dated as of October 30, 1999 among the Company,
Acorn Information Services, Inc. and the shareholders named therein; none
of the outstanding shares of capital stock of any subsidiary was issued in
violation of the preemptive or similar rights of any securityholder of such
subsidiary. The only subsidiaries of the Company are the subsidiaries
listed on Exhibit 21.1 to the Registration Statement.
(i) This Agreement has been duly authorized, executed and delivered
by the Company and is a valid and binding agreement of the Company,
enforceable in accordance with its terms except insofar as indemnification
and contribution provisions may be limited by applicable law or equitable
principles and except as enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to or
affecting creditors' rights generally or by general equitable principles.
(j) Neither the Company nor any of its subsidiaries is in violation
of its Certificate or Articles of Incorporation or By-laws or in default in
the performance or observance of any obligation, agreement, covenant or
condition contained in any contract, indenture, mortgage, deed of trust,
loan or credit agreement, note, lease or other agreement or instrument to
which the Company or any of its subsidiaries is a party or by which it or
any of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (the "Agreements and Instruments"),
other than defaults that would not, individually or in the aggregate, have
a Material Adverse Effect; and the execution, delivery and performance of
this Agreement and the consummation of the transactions contemplated in
this Agreement and in the Registration Statement (including the issuance
and sale of the Stock and the use of the proceeds from the sale of the
Stock as described in the Prospectus under the caption
5
<PAGE>
"Use of Proceeds") and compliance by the Company with its obligations under
this Agreement have been duly authorized by all necessary corporate action
and do not and will not, whether with or without the giving of notice or
passage of time or both, conflict with or constitute a breach of, or
default or Repayment Event (as defined below) under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company or any subsidiary pursuant to, the Agreements and
Instruments, nor will such action result in any violation of the provisions
of the charter or by-laws of the Company or any subsidiary or, to the best
knowledge of the Company, any applicable law, statute, rule, regulation,
judgment, order, writ or decree of any government, government
instrumentality or court, domestic or foreign, having jurisdiction over the
Company or any subsidiary or any of their assets, properties or operations.
As used herein, a "Repayment Event" means any event or condition which
gives the holder of any note, debenture or other evidence of indebtedness
(or any person acting on such holder's behalf) the right to require the
repurchase, redemption or repayment of all or a portion of such
indebtedness by the Company or any subsidiary.
(k) No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent, and the
Company is not aware of any existing or imminent labor disturbance by the
employees of any of its or any subsidiary's principal suppliers,
manufacturers, customers or contractors.
(l) There is no action, suit, proceeding, inquiry or investigation
before or brought by any court or governmental agency or body, domestic or
foreign, now pending, or, to the knowledge of the Company, threatened,
against or affecting the Company or any subsidiary, which is required to be
disclosed in the Registration Statement (other than as disclosed therein)
or which might reasonably be expected to have a Material Adverse Effect or
to materially and adversely affect the consummation of the transactions
contemplated in this Agreement or the performance by the Company of its
obligations hereunder.
(m) There are no contracts or documents which are required to be
described in the Registration Statement or the Prospectus or to be filed as
exhibits thereto which have not been so described and filed as required.
(n) Except as described in the Registration Statement or the
Prospectus, the Company together with its subsidiaries owns and possesses
all right, title and interest in and to, or has duly licensed from third
parties a valid, enforceable right to use, all patents, patent rights,
licenses,
6
<PAGE>
inventions, copyrights, know-how (including trade secrets and other
unpatented or unpatentable proprietary or confidential information, systems
or procedures), trademarks, service marks and trade names (herein called
Patent and Proprietary Rights) currently employed by it in connection with
its business. Except as described in the Registration Statement or the
Prospectus, neither the Company nor any of its subsidiaries has received
any notice of or is otherwise aware of any infringement or misappropriation
of or conflict with asserted rights of others with respect to any Patent or
Proprietary Rights, or of any facts which would render any Patent or
Proprietary Rights invalid or inadequate to protect the interest of the
Company or its subsidiaries therein.
(o) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency is necessary or required for the performance by the
Company of its obligations under this Agreement, in connection with the
offering, issuance or sale of the Securities hereunder or thereunder or the
consummation of the transactions contemplated by this Agreement, except
such as have been already obtained or as may be required under the
Securities Act or the rules and regulations promulgated thereunder or state
securities laws.
(p) Except as described in the Prospectus, the Company and its
subsidiaries possess such permits, licenses, approvals, consents and other
authorizations ("Governmental Licenses") issued by the appropriate federal,
state, local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by them; the Company and its subsidiaries are in
compliance with the terms and conditions of all such Governmental Licenses;
all of the Governmental Licenses are valid and in full force and effect;
and neither the Company nor any of its subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
Governmental Licenses.
(q) The Company and its subsidiaries have good title to all
properties owned by them, in each case, free and clear of all mortgages,
pledges, liens, security interests, claims, restrictions or encumbrances of
any kind except such as are described in the Prospectus; and all of the
leases and subleases material to the business of the Company and its
subsidiaries, considered as one enterprise, and under which the Company or
any of its subsidiaries holds properties described in the Prospectus, are
in full force and effect, and neither the Company nor any subsidiary has
any notice of any material claim of any sort that has been asserted by
anyone adverse to the rights of the Company or any subsidiary under any
7
<PAGE>
of the leases or subleases mentioned above, or affecting or questioning the
rights of the Company or such subsidiary to the continued possession of the
leased or subleased premises under any such lease or sublease.
(r) Except as described in the Registration Statement, and to the
best knowledge of the Company, (A) neither the Company nor any of its
subsidiaries is in violation of any federal, state, local or foreign
statute, law, rule, regulation, ordinance, code, policy or rule of common
law or any judicial or administrative interpretation thereof, including any
judicial or administrative order, consent decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land surface
or subsurface strata) or wildlife, including, without limitation, laws and
regulations relating to the release or threatened release of chemicals,
pollutants, contaminants, wastes, toxic substances, hazardous substances,
petroleum or petroleum products ("Hazardous Materials") or to the
manufacture, processing, distribution, use, treatment, storage, disposal,
transport or handling of Hazardous Materials ("Environmental Laws"), (B)
the Company and its subsidiaries have all permits, authorizations and
approvals required under any applicable Environmental Laws and are each in
compliance with their requirements, (C) there are no pending or threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against the
Company or any of its subsidiaries and (D) there are no events or
circumstances that might reasonably be expected to form the basis of an
order for clean-up or remediation, or an action, suit or proceeding by any
private party or governmental body or agency, against or affecting the
Company or any of its subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(s) Based upon the letter from Chase Securities Inc. dated February
15, 2000 relating to the inadvisability of including secondary sales of
Common Stock in the Registration Statement, there are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or, except as disclosed
in the Prospectus, otherwise registered by the Company under the Securities
Act.
(t) The Company and each of its subsidiaries have filed all necessary
federal, state, local and foreign income, payroll, franchise and other tax
returns (after giving effect to extensions) and have paid all taxes shown
as due thereon or with respect to any of its properties, and there is
8
<PAGE>
no tax deficiency that has been, or to the knowledge of the Company is
likely to be, asserted against the Company, any of its subsidiaries or any
of their properties or assets.
(u) The Company and each of its subsidiaries is insured by insurers
of recognized financial responsibility against such losses and risks and in
such amounts as is reasonably prudent in the business in which it is
engaged or proposed to engage after giving effect to the transactions
described in the Prospectus; and the Company does not have any reason to
believe that it will not be able to renew its existing insurance coverage
as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business.
(v) The Company maintains a system of internal accounting controls
sufficient to provide reasonable assurances that (i) transactions are
executed in accordance with management's general or specific authorization;
(ii) transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain accountability for assets; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for assets is
compared with existing assets at reasonable intervals and appropriate
action is taken with respect to any differences.
(w) To the best of the Company's knowledge, neither the Company nor
any employee or agent of the Company has made any payment of funds of the
Company or received or retained any funds in violation of any law, rule or
regulation, including, without limitation, the Foreign Corrupt Practices
Act.
(x) To the best of the Company's knowledge, the Company has paid all
material tariff, custom, import, export and other duties required to be
paid by it (if any) in connection with the exportation of products from the
country of manufacture, the importation of products into the United States,
the exportation of products from the United States and the importation of
products into another country and has provided all appropriate authorities
with the requisite information, all of which, to the best of the Company's
knowledge, is true and correct, necessary for the proper determination of
the foregoing.
(y) The Company and each member of its Control Group (as defined
below) is in compliance in all material respects with all presently
applicable provisions of the U.S. Employee Retirement Income Security
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Act of 1974, as amended ("ERISA"), and the regulations and published
interpretations thereunder; no "reportable event" (as defined in ERISA and
the regulations and published interpretations thereunder) has occurred with
respect to any material "pension plan" (as defined in ERISA and the
regulations and published interpretations thereunder) established or
maintained by the Company or any member of its Control Group; neither the
Company nor any member of its Control Group has incurred nor expects to
incur any material liability under (i) Title IV of ERISA with respect to
termination of, or withdrawal from, any "pension plan" or (ii) Section 412
or 4971 of the U.S. Internal Revenue Code of 1986, as amended (the "Code");
and each material "pension plan" established or maintained by the Company
that is intended to be qualified under Section 401(a) of the Code is so
qualified in all material respects and has received a favorable
determination letter as to its qualification and nothing has occurred,
whether by action or failure to act, which would cause the loss of such
qualification. For purposes of this subsection, "Control Group" is defined
to include any entity which is part of a group which includes the Company
and is treated as a single employer under Section 414 of the Code.
(z) Except as disclosed under "Underwriting" in the Prospectus, the
Company has not incurred any liability for any finder's fees or similar
payments in connection with the transactions contemplated hereby.
(aa) The statements (A) in the Prospectus under the captions
"Capitalization", "Related Party Transactions" and "Description of Capital
Stock" and (B) in the Registration Statement in Items 14 and 15, in each
case insofar as such statements constitute summaries of the legal matters,
documents or proceedings referred to therein, fairly present the
information called for with respect to such legal matters, documents and
proceedings and fairly summarize the matters referred to therein.
(bb) The Company has not offered, or caused Chase Securities Inc. or
Wit Capital Corporation to offer, Stock to any person pursuant to the
Directed Stock Program with the specific intent to unlawfully influence (i)
a customer or supplier of the Company to alter the customer's or supplier's
level or type of business with the Company, or (ii) a trade journalist or
publication to write or publish favorable information about the Company or
its products.
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3. Purchase of the Stock by the Underwriters.
(a) On the basis of the representations and warranties and
subject to the terms and conditions herein set forth, the Company
agrees to issue and sell 4,500,000 shares of the Underwritten Stock to
the several Underwriters and each of the Underwriters agrees to
purchase from the Company the respective aggregate number of shares of
Underwritten Stock set forth opposite its name in Schedule I. The
price at which such shares of Underwritten Stock shall be sold by the
Company and purchased by the several Underwriters shall be $___ per
share. In making this Agreement, each Underwriter is contracting
severally and not jointly; except as provided in paragraphs (b) and
(c) of this Section 3, the agreement of each Underwriter is to
purchase only the respective number of shares of the Underwritten
Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail
or refuse (otherwise than for a reason sufficient to justify the
termination of this Agreement under the provisions of Section 8 or 9
hereof) to purchase and pay for the number of shares of the Stock
agreed to be purchased by such Underwriter or Underwriters, the
Company shall immediately give notice thereof to you, and the non-
defaulting Underwriters shall have the right within 24 hours after the
receipt by you of such notice to purchase, or procure one or more
other Underwriters to purchase, in such proportions as may be agreed
upon between you and such purchasing Underwriter or Underwriters and
upon the terms herein set forth, all or any part of the shares of the
Stock which such defaulting Underwriter or Underwriters agreed to
purchase. If the non-defaulting Underwriters fail so to make such
arrangements with respect to all such shares and portion, the number
of shares of the Stock which each non-defaulting Underwriter is
otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining
shares and portion which the defaulting Underwriter or Underwriters
agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the shares and portion
which the defaulting Underwriter or Underwriters agreed to purchase if
the aggregate number of such shares of the Stock exceeds 10% of the
total number of shares of the Stock which all Underwriters agreed to
purchase hereunder. If the total number of shares of the Stock which
the defaulting Underwriter or Underwriters agreed to purchase shall
not be purchased or absorbed in accordance with the two preceding
sentences, the Company shall have the right, within 24 hours next
succeeding the 24-hour period above referred to, to make arrangements
with other underwriters or purchasers satisfactory to you for purchase
of such shares and portion on the terms
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<PAGE>
herein set forth. In any such case, either you or the Company shall
have the right to postpone the Closing Date determined as provided in
Section 5 hereof for not more than seven business days after the date
originally fixed as the Closing Date pursuant to said Section 5 in
order that any necessary changes in the Registration Statement, the
Prospectus or any other documents or arrangements may be made. If
neither the non-defaulting Underwriters nor the Company shall make
arrangements within the 24-hour periods stated above for the purchase
of all the shares of the Stock which the defaulting Underwriter or
Underwriters agreed to purchase hereunder, this Agreement shall be
terminated without further act or deed and without any liability on
the part of the Company to any non-defaulting Underwriter and without
any liability on the part of any non-defaulting Underwriter to the
Company. Nothing in this paragraph (b), and no action taken hereunder,
shall relieve any defaulting Underwriter from liability in respect of
any default of such Underwriter under this Agreement.
(c) On the basis of the representations, warranties and
covenants herein contained, and subject to the terms and conditions
herein set forth, the Company grants an option to the several
Underwriters to purchase, severally and not jointly, up to 675,000
shares in the aggregate of the Option Stock from the Company at the
same price per share as the Underwriters shall pay for the
Underwritten Stock. Said option may be exercised only to cover over-
allotments in the sale of the Underwritten Stock by the Underwriters
and may be exercised in whole or in part at any time (but not more
than once) on or before the thirtieth day after the date of this
Agreement upon written or telegraphic notice by you to the Company
setting forth the aggregate number of shares of the Option Stock as to
which the several Underwriters are exercising the option. Delivery of
certificates for the shares of Option Stock, and payment therefor,
shall be made as provided in Section 5 hereof. The number of shares of
the Option Stock to be purchased by each Underwriter shall be the same
percentage of the total number of shares of the Option Stock to be
purchased by the several Underwriters as such Underwriter is
purchasing of the Underwritten Stock, as adjusted by you in such
manner as you deem advisable to avoid fractional shares.
4. Offering by Underwriters.
(a) The terms of the initial public offering by the Underwriters
of the Stock to be purchased by them shall be as set forth in the
Prospectus. The Underwriters may from time to time change the public
offering price after the closing of the initial public offering and
increase or decrease the concessions and discounts to dealers as they
may determine.
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<PAGE>
(b) The information set forth in the last paragraph on the front
cover page and under "Underwriting" in the Registration Statement, any
Preliminary Prospectus and the Prospectus relating to the Stock filed
by the Company (insofar as such information relates to the
Underwriters) constitutes the only information furnished by the
Underwriters to the Company for inclusion in the Registration
Statement, any Preliminary Prospectus, and the Prospectus, and you on
behalf of the respective Underwriters represent and warrant to the
Company that the statements made therein are correct.
5. Delivery of and Payment for the Stock.
(a) Delivery of certificates for the shares of the Underwritten
Stock and the Option Stock (if the option granted by Section 3(c)
hereof shall have been exercised not later than 7:00 a.m., San
Francisco time, on the date two business days preceding the Closing
Date), and payment therefor, shall be made at the office of Davis Polk
& Wardwell, 1600 El Camino Real, Menlo Park, CA 94025, at 7:00 a.m.,
San Francisco time, on the fourth business day after the date of this
Agreement, or at such time on such other day, not later than seven
full business days after such fourth business day, as shall be agreed
upon in writing by the Company and you. The date and hour of such
delivery and payment (which may be postponed as provided in Section
3(b) hereof) are herein called the Closing Date.
(b) If the option granted by Section 3(c) hereof shall be
exercised after 7:00 a.m., San Francisco time, on the date two
business days preceding the Closing Date, delivery of certificates for
the shares of Option Stock, and payment therefor, shall be made at the
office of Davis Polk & Wardwell, 1600 El Camino Real, Menlo Park, CA
94025, at 7:00 a.m., San Francisco time, on the third business day
after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be
made to the Company or its order by one or more wire transfers in same
day funds. Such payment shall be made upon delivery of certificates
for the Stock to you for the respective accounts of the several
Underwriters against receipt therefor signed by you. Certificates for
the Stock to be delivered to you shall be registered in such name or
names and shall be in such denominations as you may request at least
one business day before the Closing Date, in the case of Underwritten
Stock, and at least one business day prior to the purchase thereof, in
the case of the Option Stock. Such certificates will be made available
to the Underwriters for inspection,
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<PAGE>
checking and packaging at the offices of Lewco Securities Corporation,
2 Broadway, New York, New York 10004 on the business day prior to the
Closing Date or, in the case of the Option Stock, by 3:00 p.m., New
York time, on the business day preceding the date of purchase.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall not
relieve such Underwriter from any of its obligations hereunder.
6. Further Agreements of the Company. The Company covenants and
agrees as follows:
(a) The Company will (i) prepare and timely file with the
Commission under Rule 424(b) a Prospectus containing information
previously omitted at the time of effectiveness of the Registration
Statement in reliance on Rule 430A and (ii) not file any amendment to
the Registration Statement or supplement to the Prospectus of which
you shall not previously have been advised and furnished with a copy
or to which you shall have reasonably objected in writing or which is
not in compliance with the Securities Act or the rules and regulations
of the Commission.
(b) The Company will promptly notify each Underwriter in the
event of (i) the request by the Commission for amendment of the
Registration Statement or for supplement to the Prospectus or for any
additional information, (ii) the issuance by the Commission of any
stop order suspending the effectiveness of the Registration Statement,
(iii) the institution or notice of intended institution of any action
or proceeding for that purpose, (iv) the receipt by the Company of any
notification with respect to the suspension of the qualification of
the Stock for sale in any jurisdiction, or (v) the receipt by it of
notice of the initiation or threatening of any proceeding for such
purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time
be issued, to obtain the withdrawal thereof at the earliest possible
moment.
(c) The Company will (i) on or before the Closing Date, deliver
to you a signed copy of the Registration Statement as originally filed
and of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a
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<PAGE>
signed copy of each post-effective amendment, if any, to the
Registration Statement (together with, in each case, all exhibits
thereto unless previously furnished to you) and will also deliver to
you, for distribution to the Underwriters, a sufficient number of
additional conformed copies of each of the foregoing (but without
exhibits) so that one copy of each may be distributed to each
Underwriter, (ii) as promptly as possible deliver to you and send to
the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably
request, and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an
Underwriter or dealer, likewise send to the Underwriters as many
additional copies of the Prospectus and as many copies of any
supplement to the Prospectus and of any amended prospectus, filed by
the Company with the Commission, as you may reasonably request for the
purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer any event
relating to or affecting the Company, or of which the Company shall be
advised in writing by you, shall occur as a result of which it is
necessary, in the opinion of counsel for the Company or of counsel for
the Underwriters, to supplement or amend the Prospectus in order to
make the Prospectus not misleading in the light of the circumstances
existing at the time it is delivered to a purchaser of the Stock, the
Company will forthwith prepare and file with the Commission a
supplement to the Prospectus or an amended prospectus so that the
Prospectus as so supplemented or amended will not contain any untrue
statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances existing at the time such Prospectus is delivered to
such purchaser, not misleading. If, after the initial public offering
of the Stock by the Underwriters and during such period, the
Underwriters shall propose to vary the terms of offering thereof by
reason of changes in general market conditions or otherwise, you will
advise the Company in writing of the proposed variation, and, if in
the opinion either of counsel for the Company or of counsel for the
Underwriters such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file
with the Commission a supplement to the Prospectus or an amended
prospectus setting forth such variation. The Company authorizes the
Underwriters and all dealers to whom any of the Stock may be sold by
the several Underwriters to use the Prospectus, as from time to time
amended or supplemented, in connection with the sale of the Stock in
accordance with
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<PAGE>
the applicable provisions of the Securities Act and the applicable
rules and regulations thereunder for such period.
(e) Prior to the filing thereof with the Commission, the Company
will submit to you, for your information, a copy of any post-effective
amendment to the Registration Statement and any supplement to the
Prospectus or any amended prospectus proposed to be filed.
(f) The Company will cooperate, when and as requested by you, in
the qualification of the Stock for offer and sale under the securities
or blue sky laws of such jurisdictions as you may designate and,
during the period in which a prospectus is required by law to be
delivered by an Underwriter or dealer, in keeping such qualifications
in good standing under said securities or blue sky laws; provided,
however, that the Company shall not be obligated to file any general
consent to service of process or to qualify as a foreign corporation
in any jurisdiction in which it is not so qualified. The Company will,
from time to time, prepare and file such statements, reports, and
other documents as are or may be required to continue such
qualifications in effect for so long a period as you may reasonably
request for distribution of the Stock.
(g) During a period of five years commencing with the date
hereof, the Company will furnish to you, and to each Underwriter who
may so request in writing, copies of all periodic and special reports
furnished to shareholders of the Company and of all information,
documents and reports filed with the Commission.
(h) Not later than the 45th day following the end of the fiscal
quarter first occurring after the first anniversary of the Effective
Date, the Company will make generally available to its security
holders an earnings statement in accordance with Section 11(a) of the
Securities Act and Rule 158 thereunder.
(i) The Company agrees to pay all costs and expenses incident to
the performance of its obligations under this Agreement, including all
costs and expenses incident to (i) the preparation, printing and
filing with the Commission and the National Association of Securities
Dealers, Inc. (the "NASD") of the Registration Statement, any
Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the
several documents required by paragraph (c) of this Section 6 to be so
furnished, (iii) the printing of this Agreement and related documents
delivered to the Underwriters, (iv) the preparation, printing and
filing of all supplements and amendments to the
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Prospectus referred to in paragraph (d) of this Section 6, (v) the
furnishing to you and the Underwriters of the reports and information
referred to in paragraph (g) of this Section 6 and (vi) the printing
and issuance of stock certificates, including the transfer agent's
fees.
(j) The Company agrees to reimburse you, for the account of the
several Underwriters, for blue sky fees and related disbursements
(including counsel fees and disbursements and cost of printing
memoranda for the Underwriters) paid by or for the account of the
Underwriters or their counsel in qualifying the Stock under state
securities or blue sky laws and in the review of the offering by the
NASD.
(k) The Company hereby agrees that, without the prior written
consent of Chase Securities Inc. on behalf of the Underwriters (such
consent not to be unreasonably withheld), the Company will not, for a
period of 180 days following the commencement of the public offering
of the Stock by the Underwriters, directly or indirectly, (i) sell,
offer, contract to sell, make any short sale, pledge, sell any option
or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase or otherwise transfer
or dispose of any shares of Common Stock or any securities convertible
into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock or (ii) enter into any swap or other agreement
that transfers, in whole or in part, any of the economic consequences
or ownership of Common Stock, whether any such transaction described
in clause (i) or (ii) above is to be settled by delivery of Common
Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Stock to be sold to the
Underwriters pursuant to this Agreement, (B) shares of Common Stock
issued by the Company upon the exercise of options granted under the
stock option plans of the Company (the "Option Plans") or upon the
exercise of warrants outstanding as of the date hereof, all as
described under the caption "Capitalization" in the Preliminary
Prospectus, and (C) grants or options to purchase Common Stock granted
under the Option Plans.
(l) If at any time during the 25-day period after the
Registration Statement becomes effective any rumor, publication or
event relating to or affecting the Company shall occur as a result of
which in your opinion the market price for the Stock has been or is
likely to be materially affected (regardless of whether such rumor,
publication or event necessitates a supplement to or amendment of the
Prospectus), the Company will, after written notice from you advising
the Company to the effect set forth above, forthwith prepare, consult
with you concerning the substance of,
17
<PAGE>
and disseminate a press release or other public statement, reasonably
satisfactory to you and to counsel to the Company, responding to or
commenting on such rumor, publication or event.
(m) The Company is familiar with the Investment Company Act of
1940, as amended, and has in the past conducted its affairs, and will
in the future conduct its affairs, in such a manner to ensure that the
Company was not and will not be an "investment company" or a company
"controlled" by an "investment company" within the meaning of the
Investment Company Act of 1940, as amended, and the rules and
regulations thereunder.
(n) The Company agrees to place stop transfer orders on any
Directed Stock that has been sold to Participants subject to the three
month restriction on sale, transfer, assignment, pledge or
hypothecation imposed by NASD Regulation, Inc. under its
Interpretative Material 2110-1 on free-riding and withholding to the
extent necessary to ensure compliance with the three month
restrictions.
(o) The Company agrees to comply with all applicable securities
and other applicable laws, rules and regulations in each jurisdiction
in which the Directed Stock is offered in connection with the Directed
Stock Program.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer
thereof) who controls any Underwriter within the meaning of Section 15
of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified
parties or any of them may become subject under the Securities Act,
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
or the common law or otherwise, and the Company agrees to reimburse
each such Underwriter and controlling person for any legal or other
expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against
any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be
brought against, the respective indemnified parties, in each case
arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (including the Prospectus as part thereof and any Rule
462(b)
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<PAGE>
registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement), or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, or (ii) any untrue statement or alleged untrue statement
of a material fact contained in any Preliminary Prospectus or the
Prospectus (as amended or as supplemented if the Company shall have
filed with the Commission any amendment thereof or supplement thereto)
or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that (1) the indemnity agreements of the Company contained in
this paragraph (a) shall not apply to any such losses, claims,
damages, liabilities or expenses if such statement or omission was
made in reliance upon and in conformity with information furnished as
herein stated or otherwise furnished in writing to the Company by or
on behalf of any Underwriter for use in any Preliminary Prospectus or
the Registration Statement or the Prospectus or any such amendment
thereof or supplement thereto and (2) the indemnity agreement
contained in this paragraph (a) with respect to any Preliminary
Prospectus shall not inure to the benefit of any Underwriter from whom
the person asserting any such losses, claims, damages, liabilities or
expenses purchased the Stock which is the subject thereof (or to the
benefit of any person controlling such Underwriter) if at or prior to
the written confirmation of the sale of such Stock a copy of the
Prospectus (or the Prospectus as amended or supplemented) was not sent
or delivered to such person and the untrue statement or omission of a
material fact contained in such Preliminary Prospectus was corrected
in the Prospectus (or the Prospectus as amended or supplemented)
unless the failure is the result of noncompliance by the Company with
paragraph (c) of Section 6 hereof. The indemnity agreements of the
Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof shall remain
operative and in full force and effect regardless of any investigation
made by or on behalf of any indemnified party and shall survive the
delivery of and payment for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold
harmless the Company, each of its officers who signs the Registration
Statement on his own behalf or pursuant to a power of attorney, each
of its directors, each other Underwriter and each person (including
each partner or officer thereof) who controls the Company or any such
other Underwriter within the meaning of Section 15 of the Securities
Act, from and against any and all losses, claims, damages or
liabilities, joint or several, to which such indemnified parties or
any of them may become
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subject under the Securities Act, the Exchange Act, or the common law
or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the
respective indemnified parties in connection with defending against
any such losses, claims, damages or liabilities or in connection with
any investigation or inquiry of, or other proceeding which may be
brought against, the respective indemnified parties, in each case
arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (including the Prospectus as part thereof and any Rule
462(b) registration statement) or any post-effective amendment thereto
(including any Rule 462(b) registration statement) or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading or (ii) any untrue statement or alleged untrue statement of
a material fact contained in the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any
amendment thereof or supplement thereto) or the omission or alleged
omission to state therein a material fact necessary in order to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, if such statement or omission was made
in reliance upon and in conformity with information furnished as
herein stated or otherwise furnished in writing to the Company by or
on behalf of such indemnifying Underwriter for use in the Registration
Statement or the Prospectus or any such amendment thereof or
supplement thereto. The indemnity agreement of each Underwriter
contained in this paragraph (b) shall remain operative and in full
force and effect regardless of any investigation made by or on behalf
of any indemnified party and shall survive the delivery of and payment
for the Stock.
(c) Each party indemnified under the provision of paragraphs (a)
and (b) of this Section 7 agrees that, upon the service of a summons
or other initial legal process upon it in any action or suit
instituted against it or upon its receipt of written notification of
the commencement of any investigation or inquiry of, or proceeding
against, it in respect of which indemnity may be sought on account of
any indemnity agreement contained in such paragraphs, it will promptly
give written notice (the "Notice") of such service or notification to
the party or parties from whom indemnification may be sought
hereunder. No indemnification provided for in such paragraphs shall be
available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action,
suit, investigation, inquiry or proceeding to which the Notice would
have related and was prejudiced by the failure to give the
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Notice, but the omission so to notify such indemnifying party or parties of
any such service or notification shall not relieve such indemnifying party
or parties from any liability which it or they may have to the indemnified
party for contribution or otherwise than on account of such indemnity
agreement. Any indemnifying party shall be entitled at its own expense to
participate in the defense of any action, suit or proceeding against, or
investigation or inquiry of, an indemnified party. Any indemnifying party
shall be entitled, if it so elects within a reasonable time after receipt
of the Notice by giving written notice (the "Notice of Defense") to the
indemnified party, to assume (alone or in conjunction with any other
indemnifying party or parties) the entire defense of such action, suit,
investigation, inquiry or proceeding, in which event such defense shall be
conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to
the indemnified party or parties; provided, however, that (i) if the
indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of
the indemnified party or parties in conducting the defense of such action,
suit, investigation, inquiry or proceeding or that there may be legal
defenses available to such indemnified party or parties different from or
in addition to those available to the indemnifying party or parties, then
counsel for the indemnified party or parties shall be entitled to conduct
the defense to the extent reasonably determined by such counsel to be
necessary to protect the interests of the indemnified party or parties and
(ii) in any event, the indemnified party or parties shall be entitled to
have counsel chosen by such indemnified party or parties participate in,
but not conduct, the defense. If, within a reasonable time after receipt of
the Notice, an indemnifying party gives a Notice of Defense and the counsel
chosen by the indemnifying party or parties is reasonably satisfactory to
the indemnified party or parties, the indemnifying party or parties will
not be liable under paragraphs (a) through (c) of this Section 7 for any
legal or other expenses subsequently incurred by the indemnified party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding, except that (A) the indemnifying party or parties
shall bear the legal and other expenses incurred in connection with the
conduct of the defense as referred to in clause (i) of the proviso to the
preceding sentence and (B) the indemnifying party or parties shall bear
such other expenses as it or they have authorized to be incurred by the
indemnified party or parties. If, within a reasonable time after receipt of
the Notice, no Notice of Defense has been given, the indemnifying party or
parties shall be responsible for any legal or other expenses incurred by
the indemnified party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding.
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(d) If the indemnification provided for in this Section 7 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 7, then each indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount
paid or payable by such indemnified party as a result of the losses,
claims, damages or liabilities referred to in paragraph (a) or (b) of this
Section 7 (i) in such proportion as is appropriate to reflect the relative
benefits received by each indemnifying party from the offering of the Stock
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only
the relative benefits referred to in clause (i) above but also the relative
fault of each indemnifying party in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities, or
actions in respect thereof, as well as any other relevant equitable
considerations. The relative benefits received by the Company and the
Underwriters shall be deemed to be in the same respective proportions as
the total net proceeds from the offering of the Stock received by the
Company and the total underwriting discount received by the Underwriters,
as set forth in the table on the cover page of the Prospectus, bear to the
aggregate public offering price of the Stock. Relative fault shall be
determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by each
indemnifying party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement or
omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by any
other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first sentence
of this paragraph (d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (d). Notwithstanding the provisions of this paragraph
(d), no Underwriter shall be required to contribute any amount in excess of the
underwriting discount applicable to the Stock purchased by such Underwriter. No
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation. The Underwriters'
obligations in
22
<PAGE>
this paragraph (d) to contribute are several in proportion to their respective
underwriting obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice of such service to the party or parties from whom contribution may be
sought, but the omission so to notify such party or parties of any such service
shall not relieve the party from whom contribution may be sought from any
obligation it may have hereunder or otherwise (except as specifically provided
in paragraph (c) of this Section 7).
(e) The Company will not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect
of which indemnification may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning
of Section 15 of the Securities Act or Section 20 of the Exchange Act is a
party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of such Underwriter
and each such controlling person from all liability arising out of such
claim, action, suit or proceeding.
8. Directed Share Program Indemnification. (a) The Company agrees to
indemnify and hold harmless each of Chase Securities Inc. and Wit Capital
Corporation and each person (including each partner or officer thereof) who
controls Chase Securities Inc. or Wit Capital Corporation within the meaning of
Section 15 of the Securities Act from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), or the common law or otherwise,
and the Company agrees to reimburse Chase Securities Inc., Wit Capital
Corporation and such controlling person for any legal or other expenses
(including, except as otherwise hereinafter provided, reasonable fees and
disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in any material prepared by the
Company or with the prior written consent of the Company and counsel for the
Company for distribution to Participants in connection with the Directed Stock
Program, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make
23
<PAGE>
the statements therein not misleading, (ii) the failure of any Participant to
pay for and accept delivery of Directed Stock that the Participant has agreed to
purchase, or (iii) the Directed Stock Program other than losses, claims, damages
or liabilities (or expenses relating thereto) that are finally judicially
determined to have resulted from bad faith or gross negligence of Chase
Securities Inc., Wit Capital Corporation or such controlling person; provided,
however, that the indemnity agreement contained in this Section 8(a) with
respect to any Preliminary Prospectus shall not inure to the benefit of Chase
Securities Inc. or Wit Capital Corporation from whom the person asserting any
such losses, claims, damages, liabilities or expenses purchased the Stock which
is the subject thereof (or to the benefit of any person controlling Chase
Securities Inc. or Wit Capital Corporation) if at or prior to the written
confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with Section 6(c) hereof. The indemnity agreements of the Company
contained in this Section 8(a) and the representations and warranties of the
Company contained in Section 2 hereof shall remain operative and in full force
and effect regardless of any investigation made by or on behalf of any
indemnified party and shall survive the delivery of and payment for the Directed
Stock.
(b) Each party indemnified under the provisions of Section 8(a) (an
"indemnified DSP party") agrees that, upon the service of a summons or
other initial legal process upon it in any action or suit instituted
against it or upon its receipt of written notification of the commencement
of any investigation or inquiry of, or proceeding against, it in respect of
which indemnity may be sought on account of any indemnity agreement
contained in such paragraphs, it will promptly give Notice of such service
or notification to the party or parties from whom indemnification may be
sought hereunder. No indemnification provided for in such paragraphs shall
be available to any party who shall fail so to give the Notice if the party
to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related
and was prejudiced by the failure to give the Notice, but the omission so
to notify such indemnifying party or parties of any such service or
notification shall not relieve such indemnifying party or parties from any
liability which it or they may have to the indemnified DSP party for
contribution or otherwise than on account of such indemnity agreement. Any
indemnifying party shall be entitled at its own expense to participate in
the defense of any action, suit or proceeding against, or investigation or
inquiry of, an indemnified DSP party. Any indemnifying
24
<PAGE>
party shall be entitled, if it so elects within a reasonable time after
receipt of the Notice by giving a Notice of Defense to the indemnified DSP
party, to assume (alone or in conjunction with any other indemnifying party
or parties) the entire defense of such action, suit, investigation, inquiry
or proceeding, in which event such defense shall be conducted, at the
expense of the indemnifying party or parties, by counsel chosen by such
indemnifying party or parties and reasonably satisfactory to the
indemnified DSP party or parties; provided, however, that (i) if the
indemnified DSP party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of
the indemnified DSP party or parties in conducting the defense of such
action, suit, investigation, inquiry or proceeding or that there may be
legal defenses available to such indemnified DSP party or parties different
from or in addition to those available to the indemnifying party or
parties, then counsel for the indemnified DSP party or parties shall be
entitled to conduct the defense to the extent reasonably determined by such
counsel to be necessary to protect the interests of the indemnified DSP
party or parties and (ii) in any event, the indemnified DSP party or
parties shall be entitled to have counsel chosen by such indemnified DSP
party or parties participate in, but not conduct, the defense. If, within a
reasonable time after receipt of the Notice, an indemnifying party gives a
Notice of Defense and the counsel chosen by the indemnifying party or
parties is reasonably satisfactory to the indemnified DSP party or parties,
the indemnifying party or parties will not be liable under paragraph (a) of
this Section 8 for any legal or other expenses subsequently incurred by the
indemnified DSP party or parties in connection with the defense of the
action, suit, investigation, inquiry or proceeding, except that (A) the
indemnifying party or parties shall bear the legal and other expenses
incurred in connection with the conduct of the defense as referred to in
clause (i) of the proviso to the preceding sentence and (B) the
indemnifying party or parties shall bear such other expenses as it or they
have authorized to be incurred by the indemnified DSP party or parties. If,
within a reasonable time after receipt of the Notice, no Notice of Defense
has been given, the indemnifying party or parties shall be responsible for
any legal or other expenses incurred by the indemnified DSP party or
parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(c) If the indemnification provided for in Section 8(a) is
unavailable or insufficient to hold harmless an indemnified DSP party under
Section 8(a), then each indemnifying party, in lieu of indemnifying such
indemnified DSP party, shall contribute to the amount paid or payable by
such indemnified DSP party as a result of the losses, claims,
25
<PAGE>
damages or liabilities referred to in Section 8(a) (i) in such proportion
as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Directed Stock or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative
benefits referred to in clause (i) above but also the relative fault of
each indemnifying party in connection with the statements or omissions that
resulted in such losses, claims, damages or liabilities, or actions in
respect thereof, as well as any other relevant equitable considerations.
The relative benefits received by the Company, on the one hand, and Chase
Securities Inc. and Wit Capital Corporation, on the other hand, shall be
deemed to be in the same respective proportions as the total net proceeds
from the offering of the Directed Stock received by the Company and the
total underwriting discount received by Chase Securities Inc. and Wit
Capital Corporation bears to the aggregate public offering price of the
Directed Stock. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission or alleged omission to state a material fact relates
to information supplied by each indemnifying party and the parties'
relative intent, knowledge, access to information and opportunity to
correct or prevent such untrue statement or omission.
The Company, Chase Securities Inc. and Wit Capital Corporation agree that
it would not be just and equitable if contributions pursuant to this paragraph
(c) were to be determined by pro rata allocation or by any other method of
allocation which does not take into account the equitable considerations
referred to in the first sentence of this paragraph (c). The amount paid by an
indemnified DSP party as a result of the losses, claims, damages or liabilities,
or actions in respect thereof, referred to in the first sentence of this
paragraph (c) shall be deemed to include any legal or other expenses reasonably
incurred by such indemnified DSP party in connection with investigation,
preparing to defend or defending against any action or claim which is the
subject of this paragraph (c). Notwithstanding the provisions of this paragraph
(c), Chase Securities Inc. and Wit Capital Corporation shall not be required to
contribute any amount in excess of the underwriting discount applicable to the
Directed Stock purchased by Chase Securities Inc. and Wit Capital Corporation.
No person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give written
notice
26
<PAGE>
of such service to the party or parties from whom contribution may be sought,
but the omission so to notify such party or parties of any such service shall
not relieve the party from whom contribution may be sought from any obligation
it may have hereunder or otherwise (except as specifically provided in paragraph
(b) of this Section 8).
(d) The Company will not, without the prior written consent of Chase
Securities Inc. and Wit Capital Corporation, settle or compromise or
consent to the entry of any judgment in any pending or threatened claim,
action, suit or proceeding in respect of which indemnification may be
sought hereunder (whether or not Chase Securities Inc. or Wit Capital
Corporation or any person who controls Chase Securities Inc. or Wit Capital
Corporation within the meaning of Section 15 of the Securities Act is a
party to such claim, action, suit or proceeding) unless such settlement,
compromise or consent includes an unconditional release of Chase Securities
Inc. and Wit Capital Corporation and each such controlling person from all
liability arising out of such claim, action, suit or proceeding.
9. Termination. This Agreement may be terminated by you at any time
prior to the Closing Date by giving written notice to the Company if after the
date of this Agreement trading in the Common Stock shall have been suspended, or
if there shall have occurred (i) the engagement in hostilities or an escalation
of major hostilities by the United States or the declaration of war or a
national emergency by the United States on or after the date hereof, (ii) any
outbreak of hostilities or other national or international calamity or crisis or
change in economic or political conditions if the effect of such outbreak,
calamity, crisis or change in economic or political conditions in the financial
markets of the United States would, in the Underwriters' reasonable judgment,
make the offering or delivery of the Stock impracticable, (iii) suspension of
trading in securities generally or a material adverse decline in value of
securities generally on the New York Stock Exchange, the American Stock
Exchange, The Nasdaq Stock Market, or limitations on prices (other than
limitations on hours or numbers of days of trading) for securities on either
such exchange or system, (iv) the enactment, publication, decree or other
promulgation of any federal or state statute, regulation, rule or order of, or
commencement of any proceeding or investigation by, any court, legislative body,
agency or other governmental authority which in the Underwriters' reasonable
opinion materially and adversely affects or will materially or adversely affect
the business or operations of the Company, (v) declaration of a banking
moratorium by either federal or New York State authorities or (vi) the taking of
any action by any federal, state or local government or agency in respect of its
monetary or fiscal affairs which in the Underwriters' reasonable opinion has a
material adverse effect on the securities
27
<PAGE>
markets in the United States. If this Agreement shall be terminated pursuant to
this Section 8, there shall be no liability of the Company to the Underwriters
and no liability of the Underwriters to the Company; provided, however, that in
the event of any such termination the Company agrees to indemnify and hold
harmless the Underwriters from all costs or expenses incident to the performance
of the obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (i) and (j) of Section 6 hereof.
10. Conditions of Underwriters' Obligations. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
performance by the Company of all its obligations to be performed hereunder at
or prior to the Closing Date or any later date on which Option Stock is to be
purchased, as the case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective; and no
stop order suspending the effectiveness thereof shall have been issued and
no proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder
and the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except as
to the financial statements contained therein), shall have been approved at
or prior to the Closing Date by Davis Polk & Wardwell, counsel for the
Underwriters.
(c) You shall have received from Chrisman, Bynum & Johnson P.C.,
counsel for the Company, an opinion, addressed to the Underwriters and
dated the Closing Date, covering the matters set forth in Annex A hereto
and if Option Stock is purchased at any date after the Closing Date,
additional opinions from each such counsel, addressed to the Underwriters
and dated such later date, confirming that the statements expressed as of
the Closing Date in such opinions remain valid as of such later date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus
omitted to state any material fact required to be stated therein or
necessary in order to make the statements therein, respectively, not
misleading, (ii) since the Effective Date, no event has occurred which
should have been set forth in a supplement or amendment to the Prospectus
which has not been set forth in such a supplement or amendment, (iii) since
the
28
<PAGE>
respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change
in or affecting the business, properties, financial condition or results of
operations of the Company and its subsidiaries, taken as a whole, whether
or not arising from transactions in the ordinary course of business, and,
since such dates, except in the ordinary course of business, neither the
Company nor any of its subsidiaries has entered into any material
transaction not referred to in the Registration Statement in the form in
which it originally became effective and the Prospectus contained therein,
(iv) neither the Company nor any of its subsidiaries has any material
contingent obligations which are not disclosed in the Registration
Statement and the Prospectus, (v) there are not any pending or known
threatened legal proceedings to which the Company or any of its
subsidiaries is a party or of which property of the Company or any of its
subsidiaries is the subject which are material and which are not disclosed
in the Registration Statement and the Prospectus, (vi) there are not any
franchises, contracts, leases or other documents which are required to be
filed as exhibits to the Registration Statement which have not been filed
as required, (vii) the representations and warranties of the Company herein
are true and correct in all material respects as of the Closing Date or any
later date on which Option Stock is to be purchased, as the case may be,
and (viii) there has not been any material change in the market for
securities in general or in political, financial or economic conditions
from those reasonably foreseeable as to render it impracticable in your
reasonable judgment to make a public offering of the Stock, or a material
adverse change in market levels for securities in general (or those of
companies in particular) or financial or economic conditions which render
it inadvisable to proceed.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date or
such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company, stating that the respective signers
of said certificate have carefully examined the Registration Statement in
the form in which it originally became effective and the Prospectus
contained therein and any supplements or amendments thereto, and that the
statements included in clauses (i) through (vii) of paragraph (d) of this
Section 9 are true and correct.
(f) You shall have received from Arthur Andersen, LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and
29
<PAGE>
any later date on which Option Stock is purchased, confirming that they are
independent public accountants with respect to the Company within the
meaning of the Securities Act and the applicable published rules and
regulations thereunder and based upon the procedures described in their
letter delivered to you concurrently with the execution of this Agreement
(the "Original Letter"), but carried out to a date not more than three
business days prior to the Closing Date or such later date on which Option
Stock is purchased (i) confirming, to the extent true, that the statements
and conclusions set forth in the Original Letter are accurate as of the
Closing Date or such later date, as the case may be, and (ii) setting forth
any revisions and additions to the statements and conclusions set forth in
the Original Letter which are necessary to reflect any changes in the facts
described in the Original Letter since the date of the Original Letter or
to reflect the availability of more recent financial statements, data or
information. The letters shall not disclose any change, or any development
involving a prospective change, in or affecting the business or properties
of the Company or any of its subsidiaries which, in your sole judgment,
makes it impractical or inadvisable to proceed with the public offering of
the Stock or the purchase of the Option Stock as contemplated by the
Prospectus.
(g) You shall have received from Arthur Andersen, LLP a letter
stating that they considered the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the nature,
scope, timing and extent of the audit tests applied in connection with the
audit of the Company's financial statements as at December 31, 1999, did
not disclose any weakness in internal controls that they considered to be
material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (f) of Section 6 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for listing by the Nasdaq National
Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
directors, officers, and beneficial holders of more than 1% of the
outstanding Common Stock and all other securityholders of the Company
holding more than 1% of the Company's Common Stock (on an as converted, as
exercised or as exchanged basis) agreements, in form
30
<PAGE>
reasonably satisfactory to Chase Securities Inc., stating that without the
prior written consent of Chase Securities Inc. on behalf of the
Underwriters, such person or entity will not, for a period of 180 days
following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell,
make any short sale, pledge, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant
to purchase or otherwise transfer or dispose of any shares of Common Stock
or any securities convertible into or exchangeable or exercisable for or
any rights to purchase or acquire Common Stock or (ii) enter into any swap
or other agreement that transfers, in whole or in part, any of the economic
consequences or ownership of Common Stock, whether any such transaction
described in clause (i) or (ii) above is to be settled by delivery of
Common Stock or such other securities, in cash or otherwise.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Davis Polk & Wardwell, counsel for the Underwriters,
shall reasonably be satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 9 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that (i) in the event of such termination, the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof, and (ii) if this Agreement is terminated by you because of any
refusal, inability or failure on the part of the Company to perform any
agreement herein, to fulfill any of the conditions herein, or to comply with any
provision hereof other than by reason of a default by any of the Underwriters,
the Company will reimburse the Underwriters severally upon demand for all
out-of-pocket expenses (including reasonable fees and disbursements of counsel)
that shall have been incurred by them in connection with the transactions
contemplated hereby.
11. Conditions of the Obligation of the Company. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission.
31
<PAGE>
In case either of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by the Company by giving notice to
you. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company; provided,
however, that in the event of any such termination the Company agrees to
indemnify and hold harmless the Underwriters from all costs or expenses incident
to the performance of the obligations of the Company under this Agreement,
including all costs and expenses referred to in paragraphs (i) and (j) of
Section 6 hereof.
12. Reimbursement of Certain Expenses. In addition to its other
obligations under Section 7 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any claim,
action, investigation, inquiry or other proceeding arising out of or based upon
any statement or omission, or any alleged statement or omission, described in
paragraph (a) of Section 7 of this Agreement, notwithstanding the absence of a
judicial determination as to the propriety and enforceability of the obligations
under this Section 12 and the possibility that such payments might later be held
to be improper; provided, however, that (i) to the extent any such payment is
ultimately held to be improper, the persons receiving such payments shall
promptly refund them and (ii) such persons shall provide to the Company, upon
request, reasonable assurances of their ability to effect any refund, when and
if due.
13. Persons Entitled to Benefit of Agreement. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 7 hereof, the several parties (in addition to the
Company and the several Underwriters) indemnified under the provisions of said
Section 7, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser, as
such purchaser, of any of the Stock from any of the several Underwriters.
14. Notices. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters, shall
be mailed, telegraphed or delivered to Chase Securities Inc., One Bush Street,
San Francisco, California 94104; and if to the Company, shall be mailed,
telegraphed or delivered to it at its office, 5619 DTC Parkway, 12/th/ Floor,
Englewood, CO 80111-3017, Attention: Chief Executive Officer. All notices given
by telegraph shall be promptly confirmed by letter.
32
<PAGE>
15. Miscellaneous. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of
paragraph[s] (k) [and (l)] of Section 6 hereof shall be of no further force or
effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement between the
Company and the several Underwriters in accordance with its terms.
Very truly yours,
ETINUUM, INC.
By_________________________
Name:
Title:
The foregoing Agreement is hereby confirmed
and accepted as of the date first above written.
CHASE SECURITIES INC.
ROBERTSON STEPHENS, INC.
U.S. BANCORP PIPER JAFFRAY
SOUNDVIEW TECHNOLOGY GROUP, INC.
By Chase Securities Inc.
By________________________________
Name:
Title:
33
<PAGE>
Acting on behalf of the several Underwriters,
including themselves, named in Schedule I hereto.
34
<PAGE>
SCHEDULE I
UNDERWRITERS
Number of Shares
Underwriters to be Purchased
- ------------ ---------------
Chase Securities Inc. ........................
Robertson Stephens, Inc. .....................
U.S. Bancorp Piper Jaffray....................
SoundView Technology Group, Inc. .............
Total.................................... ----------------
================
35
<PAGE>
ANNEX A
Matters to be Covered in the Opinion of Chrisman, Bynum & Johnson, P.C.
Counsel for the Company
(i) Each of the Company and its subsidiaries has been duly
incorporated and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, is duly qualified as a foreign
corporation and in good standing in each state of the United States of America
in which its ownership or leasing of property requires such qualification
(except where the failure to be so qualified would not have a Material Adverse
Effect), and has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement;
all the issued and outstanding capital stock of each of the subsidiaries of the
Company has been duly authorized and validly issued and is fully paid and
nonassessable, and is owned by the Company free and clear of all liens,
encumbrances and security interests (other than the lien of Charter Financial,
Inc. pursuant to its Master Loan and Security Agreement dated by Charter
Financial, Inc. on October 6, 1999, as amended, the lien of Silicon Valley Bank
pursuant to its Loan and Security Agreement dated June 10, 1999, as amended, and
the right of first refusal as to the stock of Acorn Information Services, Inc.
set forth in Section 5.16 of the Share Purchase Agreement between the Company,
Acorn Information Services, Inc. and its former shareholders dated October 30,
1999), and to the best of such counsel's knowledge, no options, warrants or
other rights to purchase, agreements or other obligations to issue or other
rights to convert any obligations into shares of capital stock or ownership
interests in such subsidiaries are outstanding, other than the rights of the
former shareholders of Acorn Information Services, Inc. as described above in
this paragraph;
(ii) the authorized capital stock of the Company consists of 10,000,000
shares of Preferred Stock, of which there are outstanding . shares, and
100,000,000 shares of Common Stock, $ 0.0001 par value, of which there are
outstanding . shares (including the Underwritten Stock plus the
number of shares of Option Stock issued on the date hereof) [and such additional
number of shares, if any, as may have been issued after . and prior
to the Closing Date, pursuant to . ]; proper corporate proceedings have
been taken validly to authorize such authorized capital stock; all of the
outstanding shares of such capital stock (including the Underwritten Stock and
the shares of Option Stock issued, if any) have been duly and validly issued and
(based in part upon a certificate of an officer of the Company concerning due
receipt of payment for such shares) are fully paid and nonassessable; any Option
Stock purchased after
36
<PAGE>
the Closing Date, when issued and delivered to and paid for by the Underwriters
as provided in the Underwriting Agreement, will have been duly and validly
issued and be fully paid and nonassessable; and no preemptive rights of, or
rights of refusal in favor of, stockholders exist with respect to the Stock, or
the issue and sale thereof, pursuant to the Certificate of Incorporation or
Bylaws of the Company and, to the knowledge of such counsel, there are no
contractual preemptive rights that have not been waived, rights of first refusal
or rights of co-sale which exist with respect to the issue and sale of the
Stock;
(iii) the Registration Statement has become effective under the
Securities Act and, to the best of such counsel's knowledge, no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and no proceedings for that
purpose have been instituted or are pending or contemplated by the Commission;
(iv) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the rules
and regulations of the Commission thereunder;
(v) such counsel has no reason to believe that the Registration Statement
(except as to the financial statements and schedules and other financial or
statistical data contained or incorporated by reference therein, as to which
such counsel need not express any opinion or belief) at the Effective Date
contained any untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading, or that the Prospectus (except as to the financial statements
and schedules and other financial or statistical data contained or incorporated
by reference therein, as to which such counsel need not express any opinion or
belief) as of its date or at the Closing Date (or any later date (on or prior to
the date of this opinion) on which Option Stock is purchased), contained or
contains any untrue statement of a material fact or omitted or omits to state a
material fact necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading;
(vi) the information required to be set forth in the Registration
Statement in answer to Items 9, 10 (insofar as it relates to such counsel) and
11(c) of Form S-1 is to the best of such counsel's knowledge accurately and
adequately set forth therein in all material respects or no response is required
with respect to such Items, and, the description of the Company's stock option
plans and the options granted and which may be granted thereunder and the
options granted otherwise than under such plans set forth in the Prospectus
accurately and fairly presents, in
37
<PAGE>
all material respects, the information required to be shown with respect to said
plans and options to the extent required by the Securities Act and the rules and
regulations of the Commission thereunder;
(vii) the statements (A) in the Prospectus under the captions
"Capitalization," "Related Party Transactions" and "Description of Capital
Stock" and (B) in the Registration Statement in Items 14 and 15, in each case
insofar as such statements constitute summaries of the documents referred to
therein, in all material respects fairly present the information called for with
respect to such documents and fairly summarize the matters referred to therein;
(viii) the Company is not, and after giving effect to the offering and sale
of the Stock and the application of the proceeds thereof as described in the
Prospectus will not be, required to register as an "investment company" as such
term is defined in the Investment Company Act of 1940, as amended;
(ix) such counsel do not know of any franchises, contracts, leases,
documents or legal proceedings, pending or threatened, which in the opinion of
such counsel are of a character required to be described in the Registration
Statement or the Prospectus or to be filed as exhibits to the Registration
Statement, which are not described and filed as required;
(x) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(xi) the issue and sale by the Company of the shares of Stock sold by the
Company as contemplated by the Underwriting Agreement will not conflict with, or
result in a breach of (i) the Certificate of Incorporation or Bylaws of the
Company or any of its subsidiaries or (ii) any agreement or instrument known to
such counsel to which the Company or any of its subsidiaries is a party or any
applicable law or regulation, or so far as is known to such counsel, any order,
writ, injunction or decree, of any jurisdiction, court or governmental
instrumentality; except as to each item in clause (ii) where such conflict or
breach would not have a Material Adverse Effect; and, provided further, that as
to compliance with applicable law or regulation, the limitations and
qualifications on other matters set forth in this opinion which concern
compliance with applicable law or regulation (including, without limitation,
paragraph (v)) apply with equal force and effect to the opinion in this
paragraph on compliance with applicable law or regulation;
(xii) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights, or
had
38
<PAGE>
such rights waived, or such rights have expired by reason of lapse of time
following notification of the Company's intent to file the Registration
Statement;
(xiii) no consent, approval, authorization or order of any court or
governmental agency or body is required for the consummation of the transactions
contemplated in the Underwriting Agreement, except (i) such as have been
obtained, including under the Securities Act, and (ii) such as may be required
under state securities or blue sky laws in connection with the purchase and
distribution of the Stock by the Underwriters;
(xiv) the Stock issued and sold by the Company has been duly authorized
for listing by the Nasdaq National Market upon official notice of issuance; and
(xv) (i) such counsel has no knowledge at the Effective Date of any
allegation on the part of any person that the Company is infringing any patent
rights, trade secrets, trademarks, service marks or other proprietary
information or materials of any such person other than a notice from Q.Sys
International, Inc. regarding certain Lucent Technologies, Inc. predictive
dialer technology that the Company does not believe it uses; (ii) to the best of
such counsel's knowledge at the Effective Date there are no legal or
governmental proceedings pending relating to patent rights, trade secrets,
trademarks, service marks or other proprietary information or materials of the
Company other than the processing of mark applications, and to such counsel's
knowledge no such proceedings are threatened or contemplated by governmental
authorities or others; (iii) to the best of such counsel's knowledge based upon
its inquiries to Company officers (but without independent analysis), the
Amended and Restated Software Assignment and Grant-Back License, Maintenance and
Support Agreement between the Company and Spider Technologies, Inc. grants the
Company sufficient rights to use the "Software" and "Developed Software" (as
defined therein) for the purposes for which it is used at the Effective Date.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States, the state of Colorado, or the corporate
law of the state of Delaware, upon opinions of local counsel satisfactory in
form and scope to counsel for the Underwriters. Copies of any opinions so relied
upon shall be delivered to the Representatives and to counsel for the
Underwriters and the foregoing opinion shall also state that counsel knows of no
reason the Underwriters are not entitled to rely upon the opinions of such local
counsel.
39
<PAGE>
CONFIDENTIAL TREATMENT REDACTED PORTIONS APPLIED FOR
Exhibit 2.1
BY ETINUUM, INC.
(PREVIOUSLY INTEK INFORMATION, INC.)
SHARE PURCHASE AGREEMENT
AMONG
INTEK INFORMATION, INC.,
ACORN INFORMATION SERVICES, INC.,
AND
THE SHAREHOLDERS NAMED HEREIN
DATED AS OF OCTOBER 30, 1999
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1 DEFINITIONS........................................................................ 1
ARTICLE 2 PURCHASE AND SALE OF ACORN STOCK................................................... 5
2.1 Purchase Price..................................................................... 5
--------------
2.2 Contingent Earn-out Consideration.................................................. 6
---------------------------------
2.3 Capital For Growth And Economically Justified Capital Expenditures................. 11
------------------------------------------------------------------
2.4 Effect of Employee Departures and Minimum EBITDA Threshold......................... 12
----------------------------------------------------------
2.5 Closing............................................................................ 15
-------
2.6 Transaction Costs.................................................................. 17
-----------------
2.7 Transaction Advisor Fees........................................................... 17
------------------------
ARTICLE 3 REPRESENTATIONS AND WARRANTIES.................................................... 18
3.1 Authorization Capitalization; Outstanding Shares................................... 18
------------------------------------------------
3.2. Organization; Good Standing; Power; Etc............................................ 18
---------------------------------------
3.3 Agreements Relating to Stock; Options; Warrants; Restrictions on Shares: ETC....... 18
-----------------------------------------------------------------------
3.4 Charter and Bylaws; Officers and Directors......................................... 19
------------------------------------------
3.5 No Subsidiaries.................................................................... 19
---------------
3.6 Authorizations and Enforceability.................................................. 19
---------------------------------
3.7 Effect of Agreement, Etc........................................................... 19
------------------------
3.8 Restrictions; Burdensome Agreements................................................ 20
-----------------------------------
3.9 Government Consents................................................................ 20
-------------------
3.10 Compliance; Licenses and Permits................................................. 20
--------------------------------
3.11 Financial Statements; Absence of Undisclosed Liabilities......................... 21
--------------------------------------------------------
3.12 Tax Matters...................................................................... 22
-----------
3.13 Title to Properties; Absence of Liens and Encumbrances; Etc...................... 22
-----------------------------------------------------------
3.14 Facilities; Equipment and Condition..............................................
-----------------------------------
3.15 Insurance........................................................................ 23
---------
3.16 Contracts........................................................................ 23
---------
3.17 Litigation....................................................................... 24
----------
3.18 Intellectual Property and Other Intangible Assets................................ 24
-------------------------------------------------
3.19 No Interest in Competitors; Etc.................................................. 25
-------------------------------
3.20 Books and Records................................................................ 26
-----------------
3.21 Insider Transactions............................................................. 26
--------------------
3.22 Employees........................................................................ 26
---------
3.23 Union Contracts; Labor Relations; Etc............................................ 26
-------------------------------------
3.24 Employee Benefit Plans........................................................... 27
----------------------
3.25 Bank Accounts and Safe Deposit Arrangements...................................... 27
-------------------------------------------
3.26 Powers of Attorney............................................................... 27
------------------
3.27 No Finder........................................................................ 27
---------
3.28 No Material Adverse Change....................................................... 27
--------------------------
3.29 Investment Representations....................................................... 28
--------------------------
3.30 Suppliers and Customers.......................................................... 30
-----------------------
3.31 Securities Act, Etc.............................................................. 30
-------------------
3.32 Lawyers and Accountants.......................................................... 30
-----------------------
3.33 Accounting Controls.............................................................. 30
-------------------
3.34 Names............................................................................ 31
-----
</TABLE>
-i-
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
<TABLE>
<S> <C>
3.35 Material Misstatements or Omissions......................................... 31
-----------------------------------
3.36 Not A United States Real Property Interest.................................. 31
------------------------------------------
3.37 Other....................................................................... 31
-----
3.38 Year 2000 Compliance........................................................ 31
--------------------
3.39 Due Diligence............................................................... 32
------------
ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF INTEK.................................... 32
4.1 Organization; Good Standing; Power; Etc..................................... 36
---------------------------------------
4.2 Restrictions; Burdensome Agreements......................................... 37
-----------------------------------
4.3 Subsidiaries................................................................ 38
------------
4.4 Capitalization; Outstanding Shares.......................................... 39
----------------------------------
4.5 Charter and Bylaws; Officers and Directors.................................. 34
------------------------------------------
4.6 Authorization............................................................... 34
-------------
4.7 Financial Statements........................................................ 34
--------------------
4.8 No Material Adverse Change.................................................. 35
--------------------------
4.9 Material Liabilities........................................................ 35
--------------------
4.10 Material Contracts........................................................ 35
------------------
4.11 Compliance with Other Instruments, None Burdensome, Etc................... 35
-------------------------------------------------------
4.12 Litigation, Etc........................................................... 35
---------------
4.13 Governmental Consents..................................................... 36
---------------------
4.14 Intek Tax Matters......................................................... 36
-----------------
4.15 Offering.................................................................. 37
--------
4.16 Brokers or Finders........................................................ 37
------------------
4.17 Compliance; Licenses and Permits.......................................... 37
--------------------------------
4.18 Material Misstatements or Omissions....................................... 37
-----------------------------------
4.19 Lawyers and Accountants................................................... 38
-----------------------
4.20 Effect of Agreement, Etc.................................................. 38
------------------------
4.21 Other..................................................................... 38
-----
ARTICLE V OTHER COVENANTS AND AGREEMENTS.............................................. 38
5.1 Access to Information....................................................... 39
---------------------
5.2 Business Relationships...................................................... 39
----------------------
5.3 No Shop..................................................................... 40
-------
5.4 Amendments.................................................................. 40
----------
5.5 Resignations and Closing Date Board......................................... 40
-----------------------------------
5.6 Signature Cards............................................................. 40
---------------
5.7 Additional Financial Statements............................................. 40
-------------------------------
5.8 Satisfaction of Conditions.................................................. 40
--------------------------
5.9 Tax Elections - Post Closing Change....................................... 40
-----------------------------------
5.10 This Section intentionally left blank..................................... 40
-------------------------------------
5.11 Confidentiality........................................................... 40
---------------
5.12 Covenant Not to Compete................................................... 41
-----------------------
5.13 Governmental Filings...................................................... 43
--------------------
5.14 Good Faith................................................................ 43
----------
5.15 Existing Acorn Loans; Bridge Loan......................................... 43
---------------------------------
5.16 Unwind Provision; Changes in Control; Intek IPO........................... 43
-----------------------------------------------
5.17 Board Observer; Executive Management Committee............................ 44
----------------------------------------------
ARTICLE 6 CONDITIONS OF CLOSING...................................................... 45
- --------------------------------
</TABLE>
-ii-
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
<TABLE>
<S> <C>
6.1 Intek's Conditions of Closing............................................... 45
-----------------------------
6.2 Acorn's Conditions of Closing............................................... 46
-----------------------------
ARTICLE 7 AMENDMENT................................................................... 47
ARTICLE 8 INDEMNIFICATION............................................................ 48
8.1 Shareholders' General Indemnification Covenants............................. 48
-----------------------------------------------
8.2 Procedures for Indemnification Pursuant to Section 8.1...................... 48
------------------------------------------------------
8.3 Certain Information......................................................... 50
-------------------
8.4 Release by Shareholders..................................................... 50
-----------------------
8.5 Indemnification by Intek.................................................... 50
------------------------
8.6 Exclusive Remedy............................................................ 51
----------------
8.7 No Rights of Shareholders Against Acorn..................................... 51
---------------------------------------
8.8 Limits on Indemnification; Escrow........................................... 51
---------------------------------
ARTICLE 9 MISCELLANEOUS.............................................................. 52
-------------
9.1 Notice...................................................................... 52
------
9.2 Execution of Additional Documents........................................... 53
---------------------------------
9.3 Binding Effect; Benefits.................................................... 54
------------------------
9.4 Entire Agreement............................................................ 54
----------------
9.5 Governing Law............................................................... 54
-------------
9.6 Arbitration; Consent to Jurisdiction........................................ 54
------------------------------------
9.7 Attorneys' Fees and Costs................................................... 55
-------------------------
9.8 Survival.................................................................... 55
--------
9.9 Counterparts................................................................ 55
------------
9.10 Headings.................................................................. 55
--------
9.11 Waivers................................................................... 55
-------
9.12 Merger of Documents....................................................... 56
-------------------
9.13 Incorporation of Exhibits and Schedules................................... 56
---------------------------------------
9.14 Severability.............................................................. 56
------------
9.15 Assignability............................................................. 56
-------------
9.16 No Action for Failure to Deliver Opinions, Etc............................ 56
-----------------------------------------------
9.17 Effectiveness of Agreement................................................ 57
--------------------------
9.18 Reference to Shareholders Agreement....................................... 57
-----------------------------------
9.19 Action by Shareholders.................................................... 57
----------------------
9.20 Shareholder Family LLC's.................................................. 57
------------------------
</TABLE>
-iii-
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
SCHEDULES TO
SHARE PURCHASE AGREEMENT
AMONG
INTEK INFORMATION, INC., ACORN INFORMATION SERVICES, INC. and
THE SHAREHOLDERS NAMED HEREIN
ACORN; KEY SHAREHOLDERS
Schedule Number & Description
2.2.2.A Shareholder Representative
2.2.2.B Shareholder Percentage Purchase Price
3.1 Capitalization
3.2 Good Standing States
3.3 Agreements Relating to Stock
3.4.A Articles and Bylaws
3.4.B Officers and Directors
3.5 Subsidiaries
3.7. Effects of Agreement
3.8 Restrictions; Burdensome Agreements
3.10 Permits, Licenses
3.11.1 Financial Statements
3.11.2 Exceptions to Financial Statements
3.12 Estimate of Accrued Taxes
3.13 Title to Properties and Assets; Liens and Encumbrances
3.14 Furniture, Fixtures and Equipment
3.15 Insurance
3.16 Leases and Other Material Contracts
3.17 Litigation
3.18.1 Trademarks, Tradenames, Patents, Copyrights; Exceptions to Right
to Use
3.18.2 Exceptions to Unrestricted Rights to Use Trade Secrets, Know-
How, Inventions, Designs, Etc.
3.18.3 Third Party Infringement of Intellectual Property
3.18.4 Conveyances of Intellectual Property
3.19 Interests in Competitors
3.21 Insider Transactions
3.23 Labor and Employment Disputes
3.24 Employee Benefit Plans
3.25 Banking and Investment Information
-iv-
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
3.28 Certain Changes in Business or Operations
3.29.7 Shareholder Mailing Addresses and States of Residence
3.30 Material Agreements with Customers or Suppliers
5.5 Resignations and Closing Date Board
-v-
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
INTEK
Schedule Number & Description
4.1 Good Standing States
4.4 Capitalization
4.5.A Charter and Bylaws
4.5.B Officers and Directors
4.7 Financial Statements
4.9 Material Undisclosed Liabilities
4.10 Material Contracts and Commitments
4.12 Litigation
4.14 Tax Exceptions
4.20 Effect of Agreement
5.5 Resignations and Closing Date Board
-vi-
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
EXHIBITS TO
SHARE PURCHASE AGREEMENT
AMONG
INTEK INFORMATION, INC., ACORN INFORMATION SERVICES, INC.
and THE SHAREHOLDERS NAMED HEREIN
Exhibit Number & Description
2.2.4 Form of Registration Rights Agreement
2.2.5 Intek Shareholders Agreement
2.7 Transaction Advisor Fee Payment Agreement
3.36 FIRPTA Affidavit
5.3 Standstill Agreement dated June 4, 1999
6.1.1 Form of Acorn Employment Agreements and Employee
Stock Restriction Agreement
6.1.2 Form of Acorn Officer's Certificate
6.1.6 Form of Acorn Secretary's Certificate
6.1.7 Form of Opinion of Counsel for Acorn and Key Shareholders
6.2.2 Form of Intek Officer's Certificate
6.2.5 Form of Intek Secretary's Certificate
6.2.6 Form of Opinion of Counsel for Intek
8.8.3 Form of Escrow Agreement
-vii-
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
SHARE PURCHASE AGREEMENT
AMONG
INTEK INFORMATION, INC.,
ACORN INFORMATION SERVICES, INC.
AND THE SHAREHOLDERS NAMED HEREIN
This Share Purchase Agreement is dated as of October 30, 1999,
("Agreement") and is entered into by and among Intek Information, Inc., a
Delaware corporation ("Intek"), Acorn Information Services, Inc., a Delaware
corporation ("Acorn"), and Venkat Sharma, Shoba Murali, Raja Ramnarayan and
Sunil Gupta (referred to herein individually by name and collectively as the
"Key Shareholders") and all other shareholders of Acorn common stock listed on
the signature page hereof (referred to collectively as the "Non Employee
Shareholders" and together with the Key Shareholders as the "Shareholders").
RECITALS
A. Acorn is generally engaged in the business of providing marketing,
consulting, analytic and other related services to clients seeking online
marketing and technological solutions.
B. Intek is generally engaged in the business of providing inbound and
outbound telemarketing, teleservicing, e-servicing and other related services.
C. The Shareholders own all of the outstanding capital stock of Acorn.
D. Intek wishes to acquire all of the issued and outstanding shares of
capital stock of Acorn from the Shareholders under the terms and conditions
provided herein.
E. Concurrently with the Closing, among other things: (i) the Key
Shareholders will enter into employment agreements (which shall include non-
compete covenants) with Acorn; and (ii) Intek, the Shareholders and a mutually
agreed upon escrow agent will enter into an escrow agreement for the escrow of
the Escrow Consideration (as hereinafter defined). Each of those agreements
shall become effective only upon the Closing; and each of those documents and
the other operative documents and certificates to be executed and delivered in
connection herewith is sometimes referred to individually as a "Document" or
collectively as the "Documents."
ARTICLE 1
DEFINITIONS
-----------
The following terms have the meanings set forth below:
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
"Acorn" means Acorn Information Services, Inc., a Delaware corporation.
-----
"Acorn Shares" means all of the issued and outstanding shares of capital
------------
stock of Acorn.
"Acorn Officers Loans" means those certain loans from various officers of
--------------------
Acorn to Acorn as described on Schedule 3.21.
"Annual Measurement Period" has the definition set forth in Section 2.2.
-------------------------
"Base Consideration" means the amount payable to the Shareholders by Intek
------------------
at Closing in consideration for the Acorn Shares and as provided in Section 2.1
herein.
"Bridge Loan" means the loan to Acorn by Intek in the principal amount of
-----------
$200,000 pursuant to a Promissory Note executed by Acorn on June 4, 1999 for
regular payroll and priority accounts payable disbursements and secured by
certain collateral pursuant to a security agreement and by the personal
guarantees of the Key Shareholders.
"Change in Control" means (i) a sale, transfer or disposition of all or
-----------------
substantially all of the assets of Intek; (ii) a merger or consolidation in
which Intek is not the surviving corporation, other than a reincorporation
merger; or (iii) a transaction in which a person and his or her affiliates, who
prior to the transaction are the beneficial owners of less than fifty percent
(50%) of the outstanding common stock of Intek, hold, as a result of the
transaction, two-thirds or more of Intek's outstanding common stock on an as-
converted to common basis.
"Closing" means the closing of the transactions contemplated by this
-------
Agreement and as set forth in Section 2.5 herein.
"Closing Date" has the meaning set forth in Section 2.5 herein.
------------
"Code" means the Internal Revenue Code of 1986, as amended.
----
"Confidential Information" has the meaning set forth in Section 5.11
------------------------
herein.
"Contingent Earn-Out Consideration" means the amount payable to the
---------------------------------
Shareholders by Intek in consideration for the Acorn Shares that is contingent
upon Acorn meeting certain performance targets as provided in Section 2.2
herein.
"Date of Termination" has the meaning given to it in the Employment
-------------------
Agreement.
"Earn-Out Period" has the meaning set forth in Section 2.2.1 herein.
---------------
2
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
"EBITDA" means earnings before interest, taxes, depreciation and
------
amortization. For purposes of calculating EBITDA hereunder, corporate overhead
expenses for finance and administration, human resources, administration and
executive functions will be allocated between Intek and Acorn on the basis of
the pro rata percentage of the number of Intek (and Intek subsidiary, other than
Acorn, employees) and Acorn employees, respectively, after those expenses
incurred solely by Intek and Spider (as hereinafter defined) are deducted.
Legal, consulting, audit and advisor fees directly incurred by Acorn, or by
Intek on behalf of Acorn will be billed to Acorn at actual cost.
"Employment Agreement" means the employment agreement between Intek and
--------------------
each of the Key Shareholders in substantially the form attached hereto as
Exhibit 6.1.1, to be executed concurrently herewith.
"Escrow Consideration" means the consideration defined in Section 8.8.3
--------------------
herein.
"Escrow Agreement" means the escrow agreement described in Section 8.8.3
----------------
herein and attached as Exhibit 8.8.3 hereto.
"GAAP" means United States generally accepted accounting principles applied
----
in accordance with Intek's then current accounting policies.
"Intek Shares" means the shares of Intek common stock, $0.0001 par value
------------
per share, that may be issued to the Shareholders by Intek pursuant to this
Agreement.
"Intek" means Intek Information, Inc., a Delaware corporation.
-----
"IPO" means an initial public offering of the capital stock of Intek under
---
the Securities Act of 1933, as amended.
"Key Shareholders" means Venkat Sharma, Shoba Murali, Raja Ramnarayan and
----------------
Sunil Gupta.
"Material" means a material effect on (i) the business operations,
--------
condition (financial or otherwise), prospects, assets, liabilities or results of
operations of either Acorn or Intek, taken as a whole, (ii) the value, condition
or marketability of any material assets of either Acorn or Intek, taken as a
whole or (iii) the ability of either Acorn or Intek to perform on a timely basis
its obligations under any material contract or to exercise or enforce any of its
material rights, powers or remedies under any material contract; provided, that
--------
no prospective change in the business, operations, condition (financial or
otherwise) or results of operations of Acorn or Intek, on account of general
economic conditions or local, regional, national or international industry
conditions shall be deemed to constitute a material effect.
3
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
"Minimum EBITDA Targets" means the performance targets that Acorn must
----------------------
achieve a percentage of as a condition to Intek's obligation to pay the
Contingent Earn-Out Consideration and to Intek's obligation to make certain
capital contributions to Acorn pursuant to Section 2.3 herein. The
determination of whether the Minimum EBITDA Targets are met for purposes of this
Agreement shall be made based on minimum EBITDA reported by Acorn.
"Net Operating Income" means revenues from continuing operations less
--------------------
operating expenses reported in accordance with GAAP.
"Non-Employee Shareholders" means the holders of Acorn common stock who are
-------------------------
not Key Shareholders.
"Person" is to be broadly construed and includes, without limitation, any
------
entity, body, association, governmental body or agency, natural person or trust.
"Replacement Employee" means the person or persons who is or are hired
--------------------
to replace a Key Shareholder whose employment is terminated for any reason with
Acorn, and the person or persons who may be hired to replace such replacee.
"Return" means any report, return, statement, estimate, declaration,
------
notice, form or other information required to be supplied to a taxing authority
in connection with Taxes (as hereafter defined).
"Shareholders" means the Non-Employee Shareholders and the Key
------------
Shareholders.
"Spider" means Spider Technologies, Inc., a Delaware corporation and a
------
previously wholly owned subsidiary of Intek.
"Spider Shares" means the common stock of Spider, par value $0.0001 per
-------------
share.
"Sustained Profitability" means (a) positive Net Operating Income for any
-----------------------
consecutive 30 day period after June 1, 1999 and (b) bona fide and well founded
projections of positive Net Operating Income for the four (4) months following
such period of positive Net Operating Income.
"Sustained Profitability Consideration" means $650,000 in cash or
-------------------------------------
immediately available funds less the outstanding principal amount and accrued
interest on the Bridge Loan as of the date of achievement of Sustained
Profitability (which amount shall be used to pay off the Bridge Loan in full),
and less Acorn's cumulative negative Net Operating Income for the period between
September 1, 1999 and the date Acorn achieves Sustained Profitability.
4
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
"Taxes" means, any taxes, assessments, duties, fees, levies, imposts,
-----
deductions, withholdings, including, without limitation, income, gross receipts,
ad valorem, value added, excise, real or personal property, asset, sales, use,
license, payroll, transaction, capital, net worth and franchise taxes, estimated
taxes, withholding, employment, social security, workers compensation, utility,
severance, production, unemployment compensation, occupation, premium, windfall
profits, transfer and gains taxes, or other governmental charges of any nature
whatsoever imposed by any government or taxing authority of any country or
political subdivision of any country and any liabilities with respect thereto,
including any penalties, additions to tax, fines or interest thereon, and
includes any liability of the company arising under any tax sharing agreement to
which the company is or has been a party.
"Terminated Key Shareholder Cash Earn-Out" means the cash portion of the
----------------------------------------
Contingent Earn-Out Consideration that a Key Shareholder whose employment with
Acorn has been terminated would have been entitled to receive pursuant to
Section 2.2 herein for the Annual Measurement Period in which the Date of
Termination occurred had such Key Shareholder continued to be an employee of
Acorn.
"Terminated Key Shareholder Shares" means the number of Intek Shares that a
---------------------------------
Key Shareholder whose employment with Acorn has been terminated would have been
entitled to receive as Contingent Earn-Out Consideration pursuant to Section 2.2
herein for the Annual Measurement Period in which the Date of Termination
occurred had such Key Shareholder continued to be an employee of Acorn.
ARTICLE 2
PURCHASE AND SALE OF ACORN STOCK
--------------------------------
2.1 Purchase Price.
--------------
Subject to the terms and conditions set forth in this Agreement, on
the date of the Closing, the Shareholders will transfer and convey all of the
Acorn Shares free and clear of any liens, claims, security interests or
encumbrances of any kind to Intek, and Intek will acquire the Acorn Shares from
the Shareholders for a purchase price (the "Purchase Price") comprised of:
2.1.1. a non-contingent cash payment in the aggregate amount of
$100,000 (the "Base Consideration") payable in cash or immediately available
funds to the Shareholders at the Closing;
2.1.2. an obligation to pay certain contingent payments (the
"Contingent Earn-Out Consideration"), consisting of both cash and the Intek
Shares, determined and paid in the amounts and subject to the terms and
conditions as set forth in
5
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
Section 2.2 below; and
2.1.3. If Acorn achieves Sustained Profitability on or before
November 30, 1999, the Sustained Profitability Consideration payable within
thirty (30) days after Intek's determination that Acorn has achieved Sustained
Profitability and Intek shall make such payment to the Shareholders
Representative (as defined in Section 2.2.2), less any amounts to be paid into
escrow pursuant to Section 8.8 herein. If Acorn does not achieve Sustained
Profitability by November 30, 1999, Intek shall have no obligation to pay the
Shareholders the Sustained Profitability Consideration and Acorn's and the Key
Shareholders' obligations under the Bridge Loan will remain in effect and
interest on such loan will continue to accrue in accordance with the terms of
the Bridge Loan and the Letter of Intent.
The portion of the Purchase Price for the Acorn Shares payable at the
Closing will be paid to each Shareholder based upon the percentages listed on
Schedule 2.2.2B hereto. All subsequent payments of the Purchase Price payable
hereunder shall be made pursuant to Section 2.2 below.
2.2 Contingent Earn-Out Consideration.
---------------------------------
Intek will pay to the Shareholders the Contingent Earn-Out
Consideration, if Acorn meets certain percentages of certain Minimum EBITDA
Targets as set forth in this Section 2.2 on the first, second and third
anniversary dates of the last day of the month in which the Closing Date occurs
("Year 1," "Year 2" and "Year 3," respectively, and each may be referred to as
an "Annual Measurement Period"). Upon satisfaction of such targets, the
Contingent Earn-Out Consideration will be paid in cash and Intek Shares subject
to and as provided in Sections 2.2.4 and 2.2.5.
2.2.1. Payment of the Contingent Earn-Out Consideration is
expressly conditioned upon Acorn meeting the "Percent Minimum EBITDA" Targets in
Year 1, Year 2 and Year 3 (collectively, the "Earn-Out Period") set forth in the
second following table and will be made in the form of cash and the Intek Shares
in the maximum amounts set forth in the following table:
Contingent Earn-Out Consideration
---------------------------------
Minimum
-------
EBITDA TARGET Cash Portion Stock Portion
------------- ------------ -------------
Year 1 [$ _________] up to $ 600,000 up to 1,000,000 Intek Shares
Year 2 [$ _________] up to $ 600,000 up to 666,667 Intek Shares
6
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
Year 3 [$ ] up to $ 700,000 up to 444,444 Intek Shares
------------- ----------------- ----------------------------
Total: [$ ] up to $ 1,900,000 up to 2,111,111 Intek Shares
============= ================= ============================
The aggregate amount of the Contingent Earn-Out Consideration payable in
respect of any Annual Measurement Period will be determined separately for each
year in the Earn-Out Period and will be calculated based on the percentage of
the Minimum EBITDA Target Acorn achieves in each such year as follows:
Percent Minimum Percent Contingent Earn-Out
--------------- ---------------------------
EBITDA Consideration Earned
------ --------------------
100% 100%
90% 80%
80% 60%
75% 50%
The aggregate amount of the Contingent Earn-Out Consideration payable by
Intek pursuant to the foregoing table will be calculated on a linear basis up to
100% of the Minimum EBITDA Target. Proportional adjustments will be made in
each year in the Earn-Out Period between the cash and stock portions of the
Contingent Earn-Out Consideration (by way of example only, if the 80% Minimum
EBITDA Target were achieved in Year 1, the Contingent Earn-Out Consideration
would be an aggregate amount equal to $360,000 in cash and 600,000 Intek
Shares). No Contingent Earn-Out Consideration will be paid in respect of a
particular Annual Measurement Period if EBITDA is less than 75% of the Minimum
EBITDA Target in any such Annual Measurement Period, whether or not Intek
determines to make a capital contribution to Acorn as provided in Section 2.3
below, notwithstanding Acorn's failure to achieve 75% of the Minimum EBITDA
Target. The amount of the Contingent Earn-Out Consideration shall not be
affected by whether Acorn achieves Sustained Profitability. The number of Intek
Shares payable hereunder shall be adjusted for any stock splits, stock dividends
payable in Intek common stock, recapitalizations, stock combinations, or similar
transactions of Intek common stock and, at the option of Intek, either
appropriate adjustment will be made to the number of shares of Intek Shares to
be delivered hereunder in the event of any spin off (other than Intek's spin off
of Spider Shares) or appropriate distribution of stock of the company that is
spun off will be made to the Shareholders in the event of any such spin off or
similar transaction (which shares will be subject to all the terms hereof
applicable to Intek Shares, including Intek's stock registration obligations but
as to registration rights only to the extent Intek is able to obtain
registration rights with respect to such shares).
7
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
2.2.2. Contingent Earn-Out Consideration will be measured
separately for each year in the Earn-Out Period so that if the Minimum EBITDA
Target is met in one Annual Measurement Period but not in another, the Earn Out
Consideration for the Annual Measurement Period in which the Minimum EBITDA
Target is met would be payable. The cash portion of the Contingent Earn-Out
Consideration, if any, will be paid within thirty (30) days after the closing of
Intek's books of account for each Annual Measurement Period and will be paid in
an aggregate amount, less any amounts to be paid into Escrow as provided in
Section 8.8.3 herein, to a Shareholders Representative designated in Schedule
2.2.2.A ("Shareholders Representative") for allocation and distribution at the
times and in the amounts agreed to by the Shareholders to each of the
Shareholders entitled to receive payment thereunder. The Shareholders covenant
that the payment of the cash portion of the Earn-Out Consideration by Intek to
the Shareholders Representative and the allocation and distribution to the
Shareholders by the Shareholders Representative will not adversely affect the
tax, accounting or legal effects of the transactions to Intek that Intek would
have received had Intek paid such amounts directly to the Shareholders. The
Shareholders further agree that upon payment of the cash portion of the Earn-Out
Consideration by Intek to the Shareholders Representative, Intek will have fully
performed its payment obligations with respect to the Cash Earn Out under this
Section 2.2.2, and that the Shareholders shall hold Intek harmless and agree to
pay all costs associated with any Intek defense that may arise from any claim
asserted by a Shareholder against Intek in connection with the allocation and
distribution of funds to the Shareholders by the Shareholders Representative.
The stock portion of the Contingent Earn-Out Consideration, if
any, will be earned contingently as of the last day of each annual Measurement
Period and will be paid and delivered within thirty (30) days after the closing
of Intek's books of account for Year 3, free and clear of all liens, charges,
security interests or encumbrances of any kind other than those provided for
herein including, if then in effect, the Intek Shareholders' Agreement (defined
below). The Shareholders shall furnish to Intek on the Closing Schedule 2.2.2.B
which contains the percentages of the Contingent Earn-Out Consideration each
Shareholder is entitled to receive hereunder, which Schedule shall be updated
and promptly furnished to Intek from time to time upon the change of any such
percentages during the Earn-Out Period.
2.2.3. If the parties dispute any Contingent Earn-Out
Consideration calculations, a "big five" accounting firm, which may be Acorn's
then current or Intek's then current accounting firm, or a mutually acceptable
reputable accounting firm, will determine the amount of Contingent Earn-Out
Consideration payable, if any, and such determination shall be final and binding
on the parties. The cost of such determination shall be borne equally by Intek
on the one hand and the Shareholders on the other hand.
2.2.4. Upon payment to the Shareholders of the Intek stock
portion of the Contingent Earn-Out Consideration following Year 3, if any, Intek
will provide to
8
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
the Shareholders upon request of all or any of the Shareholders one of the
following, provided that such request is made no later than three (3) months
prior to the date on which the Shareholders must pay tax on the receipt of such
Intek Shares: (i) a loan with a term of three (3) years, bearing fixed simple
interest at the prime rate reported on the date of the loan in the "Money Rates"
section of the Wall Street Journal (or if such rate is not published, a
-------------------
comparable rate of Citibank, N.A. ("Prime Rate") amortized in equal monthly
payments in an amount equal to up to twenty-five percent (25%) of the fair
market value of Intek Shares held by the requesting Shareholders as of the date
of receipt of the Intek Shares and secured by 25% of the Intek Shares held by
the requesting Shareholders; or (ii) an offer to repurchase at fair market value
twenty-five percent (25%) of the Intek Shares held by the requesting
Shareholders as of such date; or (iii) one demand registration right requiring
Intek to register up to twenty-five percent (25%) of the Intek Shares (except
that in certain circumstances under the Registration Rights Agreement, such
percentage may be increased to up to 50% of the Intek Shares) held by the
requesting Shareholders pursuant to a registered public offering under the
Securities Act of 1933, as amended, and pursuant to a Registration Rights
Agreement in the form attached hereto as Exhibit 2.2.4 (the foregoing
transactions shall be referred to individually as a "Liquidity Event"). The
determination of the manner in which Intek shall provide a Liquidity Event
pursuant to subparagraph (i), (ii) or (iii) above shall be at Intek's sole
discretion. In the case of a grant of registration rights, if the Shareholders
are unable to sell their Intek Shares under a registration statement filed
pursuant to such registration within a sufficient period of time to satisfy
their tax obligations for the receipt of such Intek Shares, Intek will provide
to the Shareholders either (at Intek's sole discretion) a loan or a repurchase
of the Shareholders' Intek Shares in the manner set forth in (i) and (ii) above
less the amount received upon any sale under such registration statement.
2.2.5. Upon issuance and delivery in Year 3 of the Intek Shares
(if any) to the Shareholders entitled to receive Intek Shares pursuant to this
Section 2.2 and Section 2.4, such Shareholders shall become parties to the Intek
Shareholders Agreement (the "Shareholders Agreement") substantially in the form
attached hereto as Exhibit 2.2.5, and as subsequently amended or superseded and
replaced in accordance with the terms of the Shareholders Agreement, and agree
to be bound by the terms and conditions of the Shareholders Agreement and shall
execute and deliver such Shareholders Agreement to Intek prior to the delivery
of Intek Shares hereunder. The Shareholders acknowledge that the terms of the
Shareholders Agreement may change over time in accordance with the terms of the
Shareholders Agreement and that the Shareholders Agreement may be terminated and
not replaced by any other agreement, in accordance with the terms of the
Shareholders Agreement. No Shareholder is entering into this Agreement on the
basis that such changes or termination will not occur. Notwithstanding anything
to the contrary herein, the consent of a majority of the ownership percentages
reflected on Exhibit 2.2.2.B, as the same may be amended, shall be required for
any amendment to the Shareholders Agreement that does not apply to all holders
of the same class of shares as the Intek Shares and that adversely impacts the
Shareholders as a group.
9
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
2.2.6. In addition to the Intek Shares issuable pursuant to this
Section 2.2, the Non-Employee Shareholder shall be entitled to receive 22,500
Spider Shares at the Closing and shall place such Spider Shares in escrow as
provided in the Stock Restriction Agreement. The Non-Employee Shareholder shall
be entitled to receive on the Disbursement Date (as defined in the Stock
Restriction Agreement) such number of shares of Spider Shares equal to the
number of Intek Shares that the Non-Employee Shareholder is entitled to receive
under this Section 2.2 in Year 1, subject to Section 5.16 herein (and as
adjusted for all stock splits, stock dividends, stock combinations and
recapitalizations of Spider common stock and Intek common stock, other than the
Spider spin off transaction) (the "Non-Employee Shares"). As a condition to the
receipt of the Non-Employee Shares hereunder, the Non-Employee Shareholder
agrees to execute and deliver a copy of the Spider Shareholders Agreement that
it executed by the holders of seventy percent (70%) or more of the outstanding
common stock of Spider (the "Spider Shareholders Agreement").
As used in this Section, the Non-Employee Shares includes any and
all proceeds and products of the Non-Employee Shares, whether by dividend,
distribution, as consideration for a merger, or otherwise. In the event such
proceeds or products includes cash, any cash shall be placed in escrow account
as provided in the Stock Restriction Agreement. The Non-Employee Shareholder
shall be entitled to receive on the date the amount of such products or proceeds
in proportion to the number of Non-Employee Shares he is entitled to receive on
the Disbursement Date.
The Non-Employee Shareholder may not sell, transfer, gift,
assign, pledge, encumber or otherwise dispose ("Transfer") of any of his Non-
Employee Shares during his lifetime until receipt of such shares following Year
3, unless to another Acorn Shareholder or to a partnership, trust or other
entity formed for estate planning purposes, subject to the same restrictions
contained in Section 9.20, or with the prior written consent of the Company,
which consent may be withheld for any reason or for no reason. Any Transfer of
the Non-Employee Shares, whether voluntary or involuntary or by operation of
law, which is made in violation of this Section 2.2.6 (other than a Transfer
resulting from a merger or similar event required by applicable law to be
approved by a vote of the shareholders of Spider) shall be null and void and
have no effect, and Intek shall not recognize any such Transfer or recognize the
transferee as the holder of such Non-Employee Shares for any purpose. If the No
Employee Shareholder Transfers his Non-Employee Shares in accordance with this
Section 2.2.6, then such Transfer may be consummated subject to the restrictions
in the Spider Shareholders Agreement; provided, however, that any transferee
-------- -------
thereof shall execute and deliver a counterpart of the Spider Shareholders
Agreement and shall agree to be subject to the restrictions and obligations
thereunder. The Non-Employee Shareholder agrees and acknowledges that any
transfer of his Non-Employee Shares shall be subject to and made in accordance
with the terms of the Spider Shareholders Agreement.
10
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
2.3 Capital for Growth and Economically Justified Capital Expenditures.
------------------------------------------------------------------
2.3.1. Intek will provide certain economically justified capital
contributions to Acorn upon the request of the Chief Executive Officer of Acorn
(a "Capital Request") to fund the growth and ongoing operations of Acorn as
described in the Acorn Business Plan dated May, 1999 ("Business Plan"), and to
facilitate Acorn's achievement of the Minimum EBITDA Targets during the Earn Out
Period. A Capital Request shall be in writing and submitted to the Chief
Executive Officer of Intek, and shall contain a description of the business and
economic justification for such requested capital for each period during the
Earn Out Period. The following table sets forth the maximum levels of
economically justified Capital Expenditure Contributions and economically
justified Working Capital Contributions projected to fund each Minimum EBITDA
Target level:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------
Capital Expenditures Working Minimum
Contribution Capital Contribution EBITDA
by Intek by Intek Target
$000's $000's $000's
-----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Year 1 $ 500 $1,010 [$ ]
-----------------------------------------------------------------------------------------
Year 2 $ 750 $2,000 [$ ]
-----------------------------------------------------------------------------------------
Year 3 $1,500 $5,000 [$ ]
-----------------------------------------------------------------------------------------
TOTALS: $2,750 $8,010 [$ ]
-----------------------------------------------------------------------------------------
</TABLE>
The final determination of the amount of capital contribution provided by
Intek hereunder will be made by the Chief Executive Officer of Intek with the
advice and counsel of the Chief Executive Officer of Acorn and other Key
Shareholders, taking into account factors, including, without limitation,
Acorn's actual performance compared to its Business Plan, Acorn's projected
volume, profitability and other appropriate business and economic factors.
Intek's judgment is final as to what capital expenditures are economically
justified based on such factors.
2.3.2. Subject to the above limitations, Intek will provide
working capital to Acorn in an amount that is not greater than Acorn's revenues
from sales for a period of fifty (50) days and the amount of Acorn's accounts
payable for a period of thirty-five (35) days. The amount of the capital
contributions provided by Intek pursuant to this Section 2.3 shall be reduced by
the amount of net funds provided by Acorn's operations in the applicable Annual
Measurement Period.
2.3.3. The parties agree and acknowledge that the working
capital contributed by Intek will be used to fund Acorn's normal business
operations, intensify market
11
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
development, pay off past due accounts payable, and pay current interest amounts
owing on the Chase and Fleet loans (as defined below). It is further agreed that
net revenues from Acorn's operations and the proceeds from working capital
contributed by Intek will not be used to pay off the Acorn Officers Loans or
debt to other third parties other than Intek except as specifically provided in
this Agreement.
2.3.4. Notwithstanding the other provisions of this Section 2.3,
if Acorn does not achieve one hundred percent (100%) of the Minimum EBITDA
Target in any single Annual Measurement Period, but achieves seventy-five
percent (75%) or greater than the Minimum EBITDA Target, at Intek's sole
discretion, Intek's capital contribution will be adjusted on a linear basis to
reflect Acorn's actual results compared with the Minimum EBITDA Target. If
Acorn's EBITDA is less than seventy-five percent (75%) of the Minimum EBITDA
Target in any single Annual Measurement Period, Intek, at its sole discretion,
will determine the appropriate level of capital contributions, if any, provided
to Acorn hereunder. If at Intek's sole discretion Intek decides in any Annual
Measurement Period to provide capital contributions despite Acorn's failure to
meet seventy-five percent (75%) of the Minimum EBITDA Target, it will be under
no obligation in any other Annual Measurement Period to provide capital
contributions unless the Minimum EBITDA Targets are met.
2.4 Effect of Employee Departures and Minimum EBITDA Threshold.
----------------------------------------------------------
2.4.1. If the employment of any Key Shareholder is terminated:
2.4.1.1. by a Key Shareholder (other than by reason of
his or her death, Disability or Hardship, or by Intek without Cause or a
material breach of the Employment Agreement by Intek; each such capitalized
term as defined in the Employment Agreement), before Acorn's annual EBITDA,
measured on a trailing 12-month basis, equals or exceeds [$_______] (the
"Annual EBITDA Threshold"); or
2.4.1.2. by Intek for Cause (as defined in the
Employment Agreement) before Annual EBITDA Threshold is achieved,
then such terminated Key Shareholder shall be entitled to
receive (i) his or her portion of the Base Consideration and the Sustained
Profitability Consideration accrued as of the Date of Termination, and (ii) his
or her cash portion only of the Contingent Earn-Out Consideration earned as of
the last Annual Measurement Period ending prior to the Date of Termination
("Earned Cash"). The Terminated Key Shareholder Shares and the Terminated Key
Shareholder Cash Earn-Out shall be canceled and shall not be placed in the Earn-
Out Pool or paid to the Shareholders Representative (as applicable).
The cash portion of the Contingent Earn-Out Consideration
(the "Future Cash Contingent Earn-Out") and the stock portion of the Contingent
Earn-Out
12
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
Consideration (the "Future Stock Contingent Earn-Out") that such terminated Key
Shareholder would have been entitled to receive had he or she been an employee
of Acorn after the Annual Measurement Period in which the Date of Termination
occurred shall not be placed in the Earn-Out Pool (as defined in Section 2.4.4)
or paid to the Shareholders Representative for allocation or distribution to the
remaining Shareholders.
The stock portion of any Contingent Earn-Out Consideration for
which a Minimum EBITDA Target has been met for the completed Annual Measurement
Period(s) ending prior to the Date of Termination ("Earned Stock") will
terminate and be canceled immediately and will not be placed in the Earn-Out
Pool (as defined in Section 2.4.4 below) for allocation or distribution to the
remaining Shareholders and neither such terminated Key Shareholder nor any other
Shareholder will have any right to receive such Earned Stock.
2.4.2. Upon Acorn's achievement of the Annual EBITDA Threshold,
up to two Key Shareholders may terminate their employment with Acorn with the
consent of the Chief Executive Officers of Acorn and Intek, respectively, which
consent will not be unreasonably withheld. Upon the voluntary termination by a
Key Shareholder of his or her employment with Acorn after achievement of the
Annual EBITDA Threshold and with the consent of the Acorn and Intek Chief
Executive Officers, such Key Shareholder shall be entitled to receive:
2.4.2.1. his or her portion of the Base Consideration
and the Sustained Profitability Consideration accrued as of the Date
of Termination;
2.4.2.2. his or her portion of the Earned Cash;
2.4.2.3. his or her portion of the Terminated Key
Shareholder Cash Earn-Out subject to Section 2.4.4 herein; and
2.4.2.4. the right to receive following Year 3 his or
her Earned Stock and the Terminated Key Shareholder Shares, subject to
Section 2.4.4.
The terminated Key Shareholder's Future Cash Contingent
Earn-Out shall be paid to the Shareholders Representative pursuant to
Section 2.2 for distribution to the remaining Shareholders and the Future
Stock Contingent Earn-Out shall be placed in the Earn-Out Pool for
allocation and distribution to the remaining Shareholders.
Notwithstanding the above, if after achievement of Annual EBITDA
Threshold a Key Shareholder either (A) is terminated for Cause by Intek or (B)
voluntarily terminates his or
13
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
her employment (other than by reason of his or her death, Disability or
Hardship, or by Intek without Cause or a material breach of the Employment
Agreement by Intek) but without the consent of the Acorn and Intek Chief
Executive Officers or after two or more Key Shareholders have previously
terminated their employment, then such terminated Key Shareholder will be
entitled to receive: (i) his or her portion of the Base Consideration and the
Sustained Profitability Consideration accrued as of the Date of Termination; and
(ii) his or her Earned Cash. The Terminated Key Shareholder Cash Earn Out and
the terminated Key Shareholder's Future Cash Contingent Earn-Out shall be paid
to the Shareholders Representative for distribution to the remaining
Shareholders, and the Earned Shares, Terminated Key Shareholder Shares and the
Future Stock Contingent Earn-Out shall be placed in the Earn-Out Pool for
allocation and distribution to the remaining Shareholders.
2.4.3. Upon the termination of a Key Shareholder's employment at
any time due to Hardship, death or Disability or a material breach of the
Employment Agreement by Intek or termination by Intek without Cause, such Key
Shareholder (or his or her estate or beneficiary) will be counted toward the 2
Key Shareholders who may leave after the Annual EBITDA Threshold is achieved
under Section 2.4.2 and will be entitled to receive:
2.4.3.1. his or her portion of the Base Consideration
and the Sustained Profitability Consideration accrued as of the Date
of Termination;
2.4.3.2. his or her Earned Cash;
2.4.3.3. his or her portion of the Terminated Key
Shareholder Cash Earn-Out;
2.4.3.4. the right to receive his or her portion of the
Terminated Key Shareholder Shares following Year 3 out of the Earn-Out
Pool; and
2.4.3.5. the right to receive following Year 3 his or
her Earned Shares.
Such terminated Key Shareholder (or his or her estate or
beneficiary) will not be entitled to receive any Contingent Earn-Out
Consideration which is earned or accrues after the end of the Annual Measurement
Period in which the Date of Termination occurred, whether paid in cash or stock.
The Future Cash Contingent Earn-Out shall be paid to the Shareholders
Representative and the Future Stock Contingent Earn-Out shall be placed in the
Earn-Out Pool for allocation or distribution to the remaining Shareholders,
subject to the other provisions of Section 2.4.4.
14
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
2.4.4. Upon the termination of employment for any reason of
or by a Key Shareholder, the decision of whether or not to hire a Replacement
Employee, and the person or persons to be hired (including his or her
compensation package), if any, will be made with the prior consent of the Chief
Executive Officer of Intek, which consent will not be unreasonably withheld. If
a Replacement Employee is recruited and/or hired to replace a terminated Key
Shareholder and he or she is granted stock options or stock as part of his or
her employment compensation with Acorn, a number of the Terminated Key
Shareholder Shares shall be allocated and reserved for issuance to the
Replacement Employee equal to the number of shares granted to the Replacement
Employee and the number of shares reserved for issuance for options granted to
the Replacement Employee exercisable as of the end of Year 3. In accordance with
the other provisions of this Section 2.4, the remaining Terminated Key
Shareholder Shares (if any) shall be designated and reserved by Intek (the "Earn
- -Out Pool") for allocation or distribution as so directed by the Shareholders to
the remaining Shareholders upon receipt of such Intek Shares following Year 3.
Further, the Terminated Key Shareholder Cash Earn-Out (if any) shall be
allocated first to pay for any recruiting fees, signing bonuses or similar
guaranteed payments (other than moving costs) to be paid in connection with the
hiring of the Replacement Employee.
2.4.5. The payment of any Terminated Key Shareholder Cash
Earn-Out that a terminated Key Shareholder is entitled to receive under this
Section 2.4 will be made within thirty (30) days of the date Intek determines
the amount of Contingent Earn-Out Consideration payable, if any, for the Annual
Measurement Period in which such Key Shareholder's employment is terminated,
less any amounts to be paid into Escrow in accordance with Section 8.8.3 herein.
2.4.6. Each Shareholder will consult with his or her own tax
advisor to determine the tax effect of each provision of this Agreement on the
Shareholder, including the possible application of Section 83 of the Code.
2.5 Closing.
-------
The Closing shall be effective as of the date hereof (the "Closing Date").
The Closing will take place at the offices of Chrisman, Bynum & Johnson, P.C.,
1900 Fifteenth Street, Boulder, Colorado 80302, or at such other place as the
parties may mutually agree.
2.5.1. Subject to the terms and conditions set forth in this
Agreement, at the Closing, the Shareholders shall deliver to Intek:
2.5.1.1. the certificates representing the Acorn Shares
held by each Shareholder, duly endorsed, or along with duly executed
stock powers;
15
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
2.5.1.2. Employment Agreements, together with all
exhibits thereto, in the form of Exhibit 6.1.1 executed by each of
the Key Shareholders and Acorn;
2.5.1.3. a certificate in the form attached hereto as
Exhibit 6.1.2 executed by the Shareholders and an officer of Acorn
certifying that each of the representations and warranties made in
ARTICLE 3 is accurate in all Material respects as of the Closing
Date and that each of the covenants, terms and conditions of this
Agreement have been complied with and performed in all Material
respects as of the Closing Date;
2.5.1.4. a certificate executed by the Secretary of Acorn
in the form attached hereto as Exhibit 6.1.6;
2.5.1.5. an Escrow Agreement in the form attached hereto
as Exhibit 8.8.3 executed by each of the Shareholders;
2.5.1.6. an Opinion executed by counsel to Acorn and the
Shareholders in the form attached hereto as Exhibit 6.1.7;
2.5.1.7. resignations of all officers and directors of
Acorn, from such positions (but not as employees) except those
persons continuing as directors or officers under Section 5.5
hereof;
2.5.1.8. a letter from Prospero LLC. ("Prospero") in the
form attached hereto as Exhibit 2.5.1.8 agreed and acknowledged by
Acorn, and the Transaction Advisor Fee Payment Agreement in the form
attached hereto as Exhibit 2.7 executed by Prospero and acknowledged
by Acorn and the Shareholders; and
2.5.1.9. an affidavit in the form attached hereto as
Exhibit 3.36 executed by Acorn and each of the Shareholders.
2.5.2. Subject to the terms and conditions set forth in this
Agreement, at the Closing, Intek shall deliver to the Shareholders:
2.5.2.1. each such Shareholder's portion of that amount
of the Purchase Price which is, as of the date of the Closing,
payable to the Shareholders pursuant to Schedule 2.2.2.B herein in
cash or immediately available funds;
2.5.2.2. Employment Agreements, together with all
16
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
exhibits thereto, in the form of Exhibit 6.1.1. executed by Intek;
2.5.2.3. a certificate in the form attached hereto as
Exhibit 6.2.2. executed by an officer of Intek certifying that each
of the representations and warranties made in ARTICLE 3 is accurate
in all Material respects as of the Closing Date and that each of the
covenants, terms and conditions of this Agreement have been complied
with and performed in all Material respects as of the Closing Date;
2.5.2.4. an Escrow Agreement in the form attached hereto
as Exhibit 8.8.3 executed by Intek;
2.5.2.5. an Opinion executed by counsel of Intek in the
form attached hereto as Exhibit 6.2.6;
2.5.2.6. the Transaction Advisor Fee Payment Agreement in
the form attached hereto as Exhibit 2.7 executed by Intek; and
2.5.2.7. a certificate executed by the Secretary of Intek
in the form attached hereto as Exhibit 6.2.5.
2.6 Transaction Costs. Except as set forth in Section 2.7 below, the
-----------------
parties will each be solely responsible for and bear all of their respective
expenses in connection with the negotiation, documentation or consummation of
the transactions contemplated in this Agreement including, without limitation,
expenses of legal counsel, accountants and other advisors, and any fees of any
finder or broker, whether or not such transactions are consummated. Without
limitation, this shall include the obligation of the Shareholders to pay the
legal fees of Wiggin and Dana and the obligation of Intek to pay the legal fees
of Chrisman, Bynum & Johnson, P.C.
2.7 Transaction Advisor Fees. In consideration for services rendered by
------------------------
Prospero in connection with the transactions contemplated by this Agreement,
Intek will issue to Prospero on behalf of Acorn the number of shares of Intek
common stock ("Transaction Advisor Shares") as set forth in the Transaction
Advisor Fee Payment Agreement attached hereto as Exhibit 2.7 and subject to the
terms and conditions of such Agreement Except as set forth in this Agreement,
Intek shall assume no liability for any taxes or other payments of Prospero,
Acorn or the Shareholders. Acorn and the Acorn Shareholders acknowledge the
acceptance by Prospero of the Transaction Advisor Shares in partial
consideration for services rendered by Prospero to Acorn. The Shareholders
agree to hold Intek harmless and to pay all costs associated with any Intek or
Acorn defense that may arise from any claim asserted by Prospero, or an
intermediary on its behalf, in connection with the payments to be made by the
Shareholders under the Engagement Letter with Prospero dated August 3, 1998 (as
amended). Intek agrees to hold the Shareholders harmless and to pay all costs
associated with any Shareholder defense that may arise from any
17
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
claim asserted by Prospero, or an intermediary on its behalf, in connection with
the consideration to be paid by Intek under the Transaction Advisor Fee Payment
Agreement.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF ACORN
---------------------------------------
AND THE SHAREHOLDERS
--------------------
Acorn and the Shareholders (as limited by ARTICLE 8) represent and warrant
to Intek as of the Closing:
3.1 Authorization Capitalization; Outstanding Shares. The authorized
------------------------------------------------
capital stock of Acorn on the date hereof consists of 5,000 shares of Class A
common stock, with a stated par value of $0.01 per share, of which 1,840 shares
are issued and outstanding and 5,000 shares of Class B (non-voting) common
stock, with a stated par value of $0.01 per share, of which no shares are issued
and outstanding. All of the issued and outstanding Shares of Acorn stock are
duly authorized, fully paid, validly issued and non-assessable, with no personal
liability attaching to the ownership hereof. Each Shareholder is the record and
beneficial owner of, and has marketable, legal and valid title to, the shares of
Acorn common stock as set forth on Schedule 3.1 free and clear of any liens,
charges, claims, security interests or encumbrances of any kind.
3.2. Organization; Good Standing; Power; Etc. Acorn: (i) is a
---------------------------------------
corporation duly organized, validly existing and in good standing under the laws
of the State of Delaware; (ii) is authorized or licensed to do business as a
foreign corporation and is in good standing in the jurisdictions listed in
Schedule 3.2; (iii) is not required to be authorized or licensed to do business
as a foreign corporation in any other jurisdiction (within or without the United
States) except jurisdictions in which Acorn's failure to qualify to do business
will have no Material adverse effect on the business, prospects, operations,
properties, assets or condition (financial or otherwise) of Acorn or, if Acorn
is not so qualified in any such jurisdiction, it can become so qualified in such
jurisdiction without any Material adverse effect; and (iv) has the requisite
power and authority to own, lease and operate its properties and to carry on its
business as currently conducted.
3.3 Agreements Relating to Stock; Options; Warrants; Restrictions on
----------------------------------------------------------------
Shares; Etc. Except as set forth on Schedule 3.3, neither Acorn nor any
- -----------
Shareholder, is a party to any written or oral agreement, understanding,
arrangement or commitment or bound by any certificate of incorporation, bylaw or
instrument (including options, warrants or convertible securities) which creates
any rights in any person with respect to shares of the capital stock or any
other securities of Acorn including any which relates to the voting of,
restricts the transfer of, requires Acorn or the Shareholder to issue or sell,
or creates rights in any person with respect to the capital stock or other
securities of Acorn (or warrants or rights with respect thereto). There exist
no options or
18
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
other rights to purchase, or rights to convert any securities or obligations
into, any shares of the capital stock or other securities of Acorn.
3.4 Charter and Bylaws; Officers and Directors. Complete and correct
------------------------------------------
copies of: (i) Acorn's corporate charter or articles of incorporation, as
amended to date ("Charter"), certified by the appropriate officials of the
jurisdiction of incorporation; and (ii) Acorn's Bylaws, as amended to date
("Bylaws"), are attached as Schedule 3.4.A. Such Charter and Bylaws are fully
in force and effect, and Acorn is not in violation of any of the provisions
thereof. A complete and correct list of all officers and directors of Acorn is
set forth in Schedule 3.4.B.
3.5 No Subsidiaries. Acorn does not own and Acorn has never owned, any
---------------
interest, directly or indirectly, in any other corporation, person, company,
limited liability company, business, trust, partnership, limited partnership,
joint venture, or other entity or association, except as listed on Schedule 3.5.
3.6 Authorizations and Enforceability. Each Shareholder and Acorn has
---------------------------------
all requisite power and authority to execute, deliver and perform this
Agreement, and any ancillary agreements hereto, and to consummate the
transactions contemplated hereby. This Agreement and the Documents have been
duly and validly authorized by Acorn, and have been duly and validly executed
and delivered by each Shareholder and by Acorn and constitute the valid and
binding obligation of each Shareholder and Acorn fully enforceable in accordance
with their respective terms, except as may be limited by principles of public
policy and except as indemnification provisions may be limited by securities
laws, and subject to laws of general application relating to bankruptcy,
insolvency and the relief of debtors and rules of law governing specific
performance, injunctive relief or other equitable remedies.
3.7 Effect of Agreement, Etc. The execution, delivery and performance of
------------------------
this Agreement and the Documents by each Shareholder and by Acorn and the
consummation of the transactions contemplated hereby will not, with or without
the giving of notice of the lapse of time, or both: (i) violate any provision of
law, statute, rule or regulation to which Acorn or any Shareholder is subject;
(ii) violate any judgment, order, writ or decree of any court, arbitrator or
governmental agency applicable to Acorn or any Shareholder; (iii) have any
effect on any of Acorn's permits, licenses, tariffs, orders or approvals or the
ability of Acorn to make use of such permits, licenses, tariffs, orders or
approvals or (iv) result in the breach of or conflict with any term, covenant,
condition or provision of, result in the modification or termination of,
constitute a default under, or result in the creation or imposition of, any
lien, security interest, charge or encumbrance upon any of the properties or
assets of Acorn or any Shareholder pursuant to any charter, bylaw, commitment,
contract or other agreement or instrument, including any of the Commitments (as
defined in Section 3.16) to which Acorn or any Shareholder is a party or by
which any of its assets or properties are or may be bound or affected or from
which Acorn or any Shareholder derives benefit, except as set forth in Schedule
3.7.
19
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
3.8 Restrictions; Burdensome Agreements. Except as set forth in Schedule
-----------------------------------
3.8, neither Acorn nor any Shareholder is a party to any contract, commitment or
agreement, and neither Acorn nor any of the Shareholders or any of their
respective properties and assets are subject to or bound or affected, by any
charter, bylaw or other corporate restriction, or any order, judgment, decree,
law, statute, ordinance, rule, regulation or other restriction of any kind or
character, which would: (i) prevent any Shareholder or Acorn from entering into
this Agreement or the Documents or from consummating the transactions
contemplated hereby; or (ii) have a Material adverse effect on the business,
properties, prospects or the condition, financial or otherwise, of Acorn. None
of Acorn's contracts or agreements are on terms more burdensome to Acorn than
typical contracts and agreements in its industry for companies the size and
scope of Acorn.
3.9 Government Consents. No consent, authorization or approval of, or
-------------------
exemption by, or filing with, any governmental, public or self-regulating body
or authority (including, but not limited to, any licensing authority with
jurisdiction over the services used or provided by Acorn) is required by any
Shareholder or by Acorn for consummation of this Agreement or any of the
instruments or agreements herein referred to, or the taking of any action herein
contemplated.
3.10 Compliance; Licenses and Permits.
--------------------------------
3.10.1. Acorn has all requisite corporate power and
authority, and all permits, licenses, tariffs, orders and approvals of
governmental and administrative authorities which are Material, to own, lease
and operate its properties and to carry on its business as presently or
previously conducted; all such presently existing permits, licenses, tariffs,
orders and approvals Material to the conduct of the business of Acorn are listed
in Schedule 3.10, are in full force and effect, and no suspension or
cancellation of any of them is pending or threatened.
3.10.2. Acorn has complied in all respects with, and is not
in violation in any respect of, all or any Legal Requirements (as defined below)
applicable to the business of Acorn as presently or previously conducted, or as
currently proposed to be conducted, except where such non-compliance or
violation has not had, and could not reasonably be expected to have, a Material
adverse effect upon Acorn. Acorn has all federal, state, local and foreign
governmental tariffs, orders, licenses and permits (collectively, "Permits")
which are required for the conduct of its business presently or previously
conducted by Acorn, which Permits are in full force and effect, and no
violations are outstanding or uncured with respect to any such Permits and no
proceeding is pending or, to the best of Acorn's knowledge, threatened to revoke
or limit any thereof. Acorn and the Shareholders have no knowledge or reason to
know of any such Permits with respect to any Acorn employees that are not in
full force and effect, or have violations outstanding or uncured with respect
thereto, or any proceedings pending or threatened to revoke or limit any such
Permits. No condition or event has occurred which, with notice or the passage of
time or both, would constitute a violation of a Legal
20
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
Requirement or Permit except where such noncompliance or violation has not had,
and could not reasonably be expected to have, a Material adverse effect upon
Acorn. "Legal Requirement" means any applicable law, rule, regulation, order or
ordinance. Acorn's current and currently contemplated activities and services
will not violate any Legal Requirement in such a fashion as to have a Material
adverse effect on Acorn.
3.11 Financial Statements; Absence of Undisclosed Liabilities.
--------------------------------------------------------
3.11.1. Acorn's most recent audited financial statements as
of and for the period ended December 31, 1998, and Acorn's unaudited balance
sheets and income statements dated as of August 31, 1999 (the "Acorn Financial
Statements"), are attached as Schedule 3.11.1 The Acorn Financial Statements
have been prepared in accordance with GAAP (without reference to Intek's
application thereof), and fairly present, in all Material respects, the
financial condition and results of operations of Acorn as of the dates
indicated. Without limitation, any reduction in the net book value of Acorn of
more than $50,000 is "Material" for purposes of this Section. The August 31,
1999 balance sheet is referred to as the "Balance Sheet" and August 31, 1999 is
referred to as the "Balance Sheet Date." The historical books and records of
Acorn for the fiscal year period ended December 31, 1998, have been sufficiently
prepared to permit the preparation of audited financial statements by Intek
after the Closing in accordance with the financial accounting rules applicable
in connection with any registered public offering of Intek securities under the
Securities Act of 1933, as amended. The books and records of Acorn for the
fiscal years ended December 31, 1997 and 1996 have been prepared in all Material
respects consistently with the financial accounting rules applied to the Acorn
books and records for fiscal year 1998, except that the for the fiscal years
1997 and 1996 the cash basis method of accounting was used.
3.11.2. Except to the extent reflected or reserved against
or otherwise disclosed in the Acorn Financial Statements or in Schedule 3.11.2,
as of the Balance Sheet Date, Acorn had no liabilities, debts or other
obligations of any nature, whether absolute, accrued, contingent or otherwise,
or whether due or to become due, including, without limitation, liabilities for
Taxes, in excess of $50,000 in any one case or which in the aggregate exceed
$100,000. Subsequent to the Balance Sheet Date, Acorn has not incurred any
liabilities, debts or obligations other than in the ordinary course of business
(and such ordinary course items do not in the aggregate exceed $50,000), except
as listed in Schedule 3.11.2, or otherwise disclosed herein including the
accounts payable report described below or in the Schedules hereto, and has
endeavored to properly record in its books of account all items of income and
expense and all other proper charges and accruals required to be made in
accordance with GAAP (without reference to Intek's application thereof. Since
the Balance Sheet Date, no debts or liabilities of or to Acorn have been
forgiven, settled or compromised, except for full consideration or except in the
ordinary course of business. To assist in disclosing the status of its debts
Acorn has delivered to Intek an accounts payable report, as prepared in the
ordinary course of Acorn's business, which report was created not more than five
(5) days before the date of this Agreement.
21
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
The parties recognize that in the ordinary course of business invoices arrive at
various times.
3.12 Tax Matters.
-----------
3.12.1. Acorn's fiscal year for income tax reporting
purposes ends December 31.
3.12.2. Acorn has timely filed (including extensions) all
Tax Returns that are required to have been filed by it with the appropriate
federal, state, county and local government agencies or instrumentalities, that
would have a Material adverse effect if not filed. Acorn has paid or established
reserves shown on the Balance Sheet (plus not more than $10,000 of additional
reserves subsequent to the Balance Sheet Date) for all income, franchise,
payroll and other Taxes. An estimate of accrued Taxes is set forth in Schedule
3.12. There is no pending dispute with any Taxing authority relating to any of
Acorn's Tax Returns. Acorn is not subject to any proposed Material liability for
any Tax to be imposed upon its properties or assets for which there is not an
adequate reserve reflected in the Acorn Financial Statements or accrued since
the Balance Sheet Date. No federal or state income or sales Tax Returns of Acorn
have been audited. Acorn has not executed or filed with any Taxing authority any
agreement extending the period for assessment or collection of any Taxes.
Complete and correct copies of the income tax returns of Acorn for fiscal years
ending in 1995, 1996, 1997, and 1998 as filed with the Internal Revenue Service
and all state taxing authorities, together with all related correspondence and
notices, have previously been delivered to Intek. Acorn has not consented to
having the provisions of Section 341(f) (which relates to collapsible
corporations) of the Code apply to it.
3.12.3. Acorn has never elected to be treated as a
Subchapter S corporation as provided by the Code.
3.13 Title to Properties; Absence of Liens and Encumbrances; Etc. Acorn
-----------------------------------------------------------
does not own any real property. Except as set forth in Schedule 3.13, Acorn
owns good and marketable title to the properties and assets used in its business
(including, without limitation, the assets reflected in the Acorn Financial
Statements, except as since sold or otherwise disposed of in the ordinary course
of business), free and clear of all mortgages, security interests, claims,
liens, charges, encumbrances, restrictions on use or transfer or other defects
in title. The fixed assets of Acorn reflected in the Acorn Financial Statements
are all located on real property owned or leased by Acorn and all personal
property located at or on such real property is owned or leased (as disclosed in
the Schedules) by Acorn. Acorn is not a bailee for any other entity, except as
set forth on Schedule 3.13. The leases and other agreements under which Acorn
holds, leases or is entitled to the use of any real property or personal
property involving lease payments of over $18,000 per year are set forth in
Schedule 3.16 (the "Scheduled Leases") and are in full force and effect, and all
rentals, royalties or other payments payable thereunder prior to the date hereof
22
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
have been duly paid. All "buy-out" prices under the Scheduled Leases are shown
on Schedule 3.16, regardless as to whether the lessee has any obligation to
purchase such property.
3.14 Facilities; Equipment and Condition. Schedule 3.14 sets forth a
-----------------------------------
correct and complete list of all of the furniture, fixtures or equipment having
a book value, before accumulated depreciation or amortization, of more than
$50,000 (or, in the case of any such equipment which is leased and does not have
a book value for purposes of Acorn's financial statements, in the opinion of
Acorn management has a fair market value in excess of $50,000), buildings,
plants, warehouses and other real estate owned or used by Acorn in the conduct
of its businesses ("Fixed Assets"), indicating whether such property is owned or
leased, and complete legal descriptions of all real property. The Fixed Assets
owned, operated or leased by Acorn are in good condition and repair (ordinary
wear and tear excepted) and suitable for the uses for which intended. All such
Fixed Assets are operated in conformity with all applicable laws, ordinances,
regulations, orders and other requirements relating thereto currently in effect,
scheduled to come into effect, or proposed.
3.15 Insurance. Schedule 3.15 contains a correct and complete
---------
description (including amounts, scope and coverage) of all of the policies of
insurance and fidelity or surety bonds carried by Acorn. All such policies are
in full force and effect. Acorn has not failed to give any notice or present
any claim under any insurance policy, fidelity bond or surety bond in due and
timely fashion. There are no outstanding requirements or recommendations by any
insurance company that issued a policy with respect to any of the properties and
assets owned or leased by Acorn or by any governmental authority requiring or
recommending any repairs or other work to be done on or with respect to any of
the properties and assets owned or leased by Acorn or requiring or recommending
any equipment or facilities to be installed on or in connection with any of the
properties or assets owned or leased by Acorn. The worker's compensation and
unemployment insurance ratings of Acorn have been made available to Intek.
There are no Material proposed premium increases on any of Acorn's insurance
policies and no conditions or circumstances applicable to the business of Acorn
which might result in such increase except as shown on Schedule 3.15.
3.16 Contracts. All contracts, agreements and instruments, to which
---------
Acorn is a party are valid, binding and in full force and effect in all Material
respects, and are valid, binding and enforceable by Acorn in accordance with
their respective terms, subject to the laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies. Acorn has
no knowledge or any reason to know of any default by any other party to such
contracts in any Material respect under such contracts, agreements or
instruments. Each of such Material contracts, agreements and instruments has
been listed on Schedule 3.16 attached hereto.
Except as set forth in Schedule 3.16, or another Schedule hereto, Acorn is
not a party to, nor are its properties and assets bound or affected by, any oral
or written:
23
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
3.16.1. contracts, agreements, or instruments providing for
payments by or to Acorn of $50,000 or more per year;
3.16.2. employment or consulting agreements which provide
for compensation at the rate of more than $50,000 per year (including all
salary, bonuses and commissions);
3.16.3. employment or consultant policies or agreements,
express or implied, placing any limits (other than a notice period not exceeding
30 days) on Acorn's right to terminate at will the employment or retention of
any employee or consultant;
3.16.4. agreement involving more than $50,000 guaranteeing,
indemnifying or otherwise becoming liable for the obligations or liabilities of
another, or involving more than $50,000 of compensating balances, or agreeing to
assure another person meets any financial covenant; or
3.16.5. agreement which restricts the conduct of business
anywhere in the world.
Correct and complete copies of all such agreements, plans, policies,
documents and arrangements (or, where they are oral, true and complete written
summaries thereof) (collectively referred to herein as the "Commitments") have
been delivered to Intek prior to the date hereof.
3.17 Litigation. Except as set forth in Schedule 3.17, there is no
----------
pending or, to the best of Acorn's knowledge, threatened claim, action, suit,
proceeding, arbitration, investigation or inquiry pending before any federal,
state, municipal, foreign or other court or any governmental, administrative or
self-regulatory body or agency, or any private arbitration tribunal which may
have any Material adverse effect upon the assets, properties or business of
Acorn or the transactions contemplated by this Agreement. Neither Acorn, nor
any officer, director, partner, agent or employee of Acorn has been permanently
or temporarily enjoined or barred by order, judgment or decree of any court or
other tribunal or any agency or self-regulatory body from engaging in or
continuing any conduct or practice in connection with the business engaged in by
Acorn. Except as set forth in Schedule 3.17, there is not in existence at
present any order, judgment or decree of any court or other tribunal or any
agency or self-regulatory body to which Acorn or the business, properties or
assets of Acorn are subject or by which they are bound. Acorn is not in
Material default under any order, license, tariff, regulation or demand of any
Federal, state, municipal, foreign or other governmental, administrative or
self-regulatory body or with respect to any order, writ, injunction or decree of
any court or arbitration body.
3.18 Intellectual Property and Other Intangible Assets.
-------------------------------------------------
24
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
3.18.1. Except as set forth in Schedule 3.18, Acorn (i) owns
or has the right to use, free and clear of all liens, claims and restrictions,
all patents, trademarks, service marks, trade names, copyrights, licenses and
rights, used in the conduct of its business as now conducted or as proposed to
be conducted without infringing upon the right or claimed right of any person
under or with respect to any of the foregoing, and (ii) is not obligated or
under any liability whatsoever to make any payments by way of royalties, fees or
otherwise to any owner of, licensor of, or other claimant to, any patent,
trademark, tradename, copyright or other intangible asset, with respect to the
use thereof or in connection with the conduct of its business or otherwise.
Acorn has not received any written communication alleging that Acorn or any of
its employees has violated or infringed upon, or, by conducting Acorn's business
as proposed, would violate or infringe upon, any patent, trademark, service
mark, trade name, copyright, license, or right of any other person or entity.
All patents, trademarks, service marks, tradenames, copyrights and licenses (and
applications therefor) owned or used by Acorn are listed on Schedule 3.18
hereto, and such schedule indicates which such rights are owned.
3.18.2. Except as set forth on Schedule 3.18.2, Acorn owns
or has the unrestricted right to use all trade secrets, including know-how,
inventions, designs, processes, computer programs and technical data required
for or incident to the development, manufacture, operation, sale and licensing
of all products and services sold or licensed or proposed to be sold or licensed
by Acorn (together with the rights listed in Schedule 3.18, such rights will be
hereinafter referred to collectively as the "Intellectual Property"), free and
clear of any rights, liens or claims of others, including without limitation
former employers of all employees of Acorn. All computer software which is in
any way used or to be used in conducting the business (except "off-the-shelf"
software, such as word processing and spreadsheet packages, to which Acorn has
express, written licenses) was created wholly by employees of Acorn, or was
created by independent contractor programmers who expressly, and in writing,
assigned to Acorn all rights, title and interest in such software, including all
copyright(s) and appurtenant rights.
3.18.3. No third party currently infringes, or has
threatened infringement, of any Intellectual Property owned, licensed or used by
Acorn as set forth in Schedule 3.18.
3.18.4. Except as disclosed in Schedule 3.18.4, Acorn has
not ever conveyed, or is currently under an obligation to convey, any right,
title or interest in or to any of the Intellectual Property to any third party
other than in the ordinary course of its business.
3.19 No Interest in Competitors; Etc. Except as set forth in Schedule
-------------------------------
3.19, none of the Key Shareholders, nor any officer or director of Acorn or any
immediate family member or spouse of any such person, or trust for their
benefit, directly or indirectly, owns any interest in (excluding the ownership
of securities representing less than 5% of any class of publicly traded
securities) or controls or is an employee, officer, director or partner of, or
participant in or consultant to, any corporation, partnership, limited liability
company, limited partnership, joint
25
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
venture, association or other entity which is in the same line of business as
Acorn or Intek, or a creditor, debtor, supplier, customer, landlord, tenant,
lessor or lessee, of Acorn, or has any type of business, commercial, consulting
or professional relationship with Acorn.
3.20 Books and Records. The books and records of Acorn are located at 4
-----------------
Corporate Drive, Shelton, Connecticut. The books of account and other financial
and corporate records of Acorn are in all Material respects complete and
correct, and are maintained in accordance with good business practices, as could
reasonably be expected for a company the size and scope of Acorn (provided,
however, that this representation does not diminish the representations in
Section 3.11). The minute books of Acorn, as made available to Intek and its
counsel, contain complete and accurate records of all meetings and accurately
reflect all other corporate action of the shareholders and directors (and
committees thereof) of Acorn through the date hereof.
3.21 Insider Transactions. Schedule 3.21 (when read with Schedule 3.19)
--------------------
sets forth: (i) the amounts and other essential terms of indebtedness or other
obligations, liabilities or commitments (contingent or otherwise), whether
written or oral, of Acorn to or from any past or present officer, director, or
shareholder or any person related to, controlling, controlled by or under common
control with any of the foregoing (other than for usual services performed in
connection with such person's employment with Acorn, the payment for which is
not yet due and does not constitute a bonus); and (ii) all proposed transactions
with such persons, together with the essential terms thereof.
3.22 Employees. Since August 1, 1999, there has been no resignation or
---------
termination of any officer or key employee of Acorn that has had or is expected
to have a Material adverse effect on Acorn. Acorn has received no
communication that any key employee or key consultant of Acorn is considering:
(i) terminating his or her employment or consultant status; or (ii) seeking a
substantial increase in compensation or benefit.
3.23 Union Contracts; Labor Relations; Etc. Acorn is not presently, and
-------------------------------------
has not been, party to any union or collective bargaining agreement. Acorn is
in compliance in all Material respects with all applicable laws, rules and
regulations respecting employment conditions and practices, has withheld all
amounts required by law or agreement to be withheld from the wages or salaries
of its employees and Acorn is not liable for arrears of wages or any taxes or
penalties for failure to comply with any of the foregoing. Acorn has not
engaged in any unfair labor practice, nor has Acorn discriminated on the basis
of race, religion, age or sex, or other protected category in its employment
conditions or practices, nor has Acorn taken any Material adverse action against
any employee or consultant in breach of any agreement or policy, express or
implied, oral or written, nor taken any Material adverse action against any
employee or consultant in violation of public policy. Except as set forth in
Schedule 3.23 or in another Schedule to this Agreement, there are no: (i)
charges or complaints of unfair labor practices, race, religion, age, sex or
other discrimination, breach of employment or consultant agreement or policy, or
breach of public policy pending or threatened against Acorn before any board,
26
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
department, commission, agency or court, nor does any basis therefor exist; (ii)
existing or threatened labor strikes, disputes, grievances, controversies or
other labor troubles affecting Acorn; or (iii) pending or threatened union
representation questions respecting the employees of Acorn.
3.24 Employee Benefit Plans. Except as listed on Schedule 3.24, Acorn
----------------------
does not have any employee benefit plan, stock option plan, stock appreciation
plan, stock purchase plan, profit sharing plan, or retirement or deferred
compensation plan (collectively "Plans"). Acorn has no liability (contingent or
otherwise) to any other person (including a Plan trust or Plan) in respect of
any profit sharing, retirement, deferred compensation or other employee benefit
plan that is maintained, sponsored or contributed to by another person.
3.25 Bank Accounts and Safe Deposit Arrangements. Schedule 3.25 sets
-------------------------------------------
forth a correct and complete list of each bank account, brokerage account,
similar account and safe deposit box maintained by Acorn, and the names of all
authorized signatories on such accounts.
3.26 Powers of Attorney. No person has any power of attorney to act on
------------------
behalf of Acorn in connection with any of the properties or business affairs of
Acorn.
3.27 No Finder. Except as provided for in Section 2.7, neither Acorn nor
---------
the Key Shareholders has taken any action which would give to any person a right
to a consultant's or finder's fee or any type of brokerage commission in
relation to or in connection with the transactions contemplated by this
Agreement.
3.28 No Material Adverse Change. Except as set forth in Schedule 3.28,
--------------------------
since the Acorn Balance Sheet Date:
3.28.1. Acorn has not entered into any Material transaction
which was not in the ordinary course of its business except as contemplated or
disclosed by this Agreement;
3.28.2. There has been no Material adverse change to the
business operations or financial condition of Acorn other than changes in the
ordinary course of its business, none of which, individually or in the
aggregate, has a Material adverse effect;
3.28.3. There has been no damage to, destruction of or loss
of physical property (whether or not covered by insurance) that has had a
Material adverse effect on the business or operations of Acorn;
3.28.4. There has been no resignation or termination of
employment of any officer or key employee of Acorn, and Acorn does not have any
actual knowledge or reason to know of the impending resignation or termination
of employment of any
27
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
officer or key employee of Acorn that would have a Material adverse effect on
the business of Acorn;
3.28.5. All loans or advances made by Acorn to any of its
employees, officers or directors are disclosed on Schedule 3.21, which Schedule
sets forth the name of such employee, officer or director, the loan amount, the
date of the loan, the maturity date and the other terms of each such loan.
3.28.6. Acorn has not made or granted any employee a bonus,
or any general or specific wage or salary increase, outside the ordinary course
of business (and in any event less than 10%), engaged any new officer, or
engaged any new employee outside the ordinary course of business;
3.28.7. Acorn has not made any increase in or commitment to
increase any employee benefits or adopted or made any commitments to adopt any
additional employee benefit plan;
3.28.8. Acorn has not declared or paid any distribution to
its Key Shareholders, whether in the nature of dividends or otherwise, or
purchased or redeemed any of its outstanding shares of capital stock or other
securities, or paid any debt for borrowed money to any Shareholder or any
affiliate of a Shareholder; and
3.28.9. Acorn has not issued or sold any shares of its
capital stock or any other securities, or granted any options or other rights
for the purchase of any shares of its capital stock or other securities.
3.29 Investment Representations. Each Shareholder individually
--------------------------
represents and warrants to Intek that:
3.29.1. he or she is acquiring Intek Shares, if applicable,
for his or her own account for investment, not for the interest of any other
person, not for resale to any other person and not with a view to or in
connection with a sale or distribution;
3.29.2. he or she has provided the information requested in
written due diligence requests of Intek to the Shareholder related to the
Shareholder, and that such information provided by him or her is true and
correct in all respects;
3.29.3. he or she has had an opportunity to ask questions of
and receive answers from representatives of Intek with respect to the
acquisition of the Intek Shares. Intek has made available to him or her all
documents requested and has provided answers to all such persons' questions
relating to receipt of the Intek Shares, including the Intek Financial
Statements (as defined in Section 4.7);
28
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
3.29.4. he or she acknowledges that, because the Intek
Shares will not have been registered under the Securities Act of 1933, as
amended (the "Act"), or applicable state securities laws, any resale
inconsistent with the Act may create liability on his or her part and/or the
part of Intek, and agrees not to assign, sell, pledge, transfer or otherwise
dispose of or transfer any of the Intek Shares unless registered under the
Securities Act and applicable state securities laws or he has delivered an
opinion of counsel satisfactory to Intek that such registration is not required;
3.29.5. he or she is able to bear the economic risk of an
investment in the Intek Shares and, by reason of his or her business or
financial experience or the business or financial experience of his or her
professional advisors who are unaffiliated with and who are not compensated by
Intek, directly or indirectly, has the capacity to protect his or her own
interests in connection with the transactions contemplated hereby; and
3.29.6. he or she acknowledges that all certificates of the
Intek Shares and the Spider Shares issued pursuant hereto, shall contain
substantially the following legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THEY
MAY NOT BE OFFERED OR TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE
UNLESS (I) A REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT IS IN EFFECT OR (II) THE CORPORATION HAS RECEIVED AN OPINION OF
COUNSEL, WHICH OPINION IS SATISFACTORY TO THE CORPORATION, TO THE EFFECT
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT
TO, AND ARE SUBJECT TO A SHARE PURCHASE AGREEMENT AMONG INTEK INFORMATION,
INC., ACORN INFORMATION SERVICES, INC. AND CERTAIN ACORN KEY SHAREHOLDERS
NAMED THEREIN, DATED ________________, 1999, AS AMENDED FROM TIME TO TIME,
AND A CERTAIN SHAREHOLDERS AGREEMENT AMONG INTEK INFORMATION, INC. AND
CERTAIN SHAREHOLDERS NAMED THEREIN, DATED ___________, ________ AS AMENDED
FROM TIME TO TIME COPIES OF SUCH AGREEMENTS ARE AVAILABLE AT THE OFFICES OF
THE ISSUER.
3.29.7. his or her state of residence and mailing address is
as shown on Schedule 3.29.7.
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
3.29.8. Each Shareholder hereby agrees that, to the extent such
Shareholder receives Intek Shares which become issuable pursuant to the terms
and conditions of this Agreement at any time subsequent to the date of the
Closing, such Shareholder will reaffirm, in writing for the benefit of Intek,
the representations set forth in this Section 3.29 as of the date of the
issuance of the Intek Shares.
3.29.9. Neither Acorn nor any Shareholder, nor any "associate" of
Acorn or any Shareholder as such term is defined in Rule 12b-2 of the Securities
Exchange Act of 1934, as amended, is, or has a relationship with, a member of
the National Association of Securities Dealers, Inc. ("NASD"), or is an officer,
director, registered representative, lender, employee or beneficial owner of 10%
or more of a NASD member or any corporation or entity which owns a 10% or
greater ownership interest in an NASD member.
3.30 Suppliers and Customers. Except as set forth in Schedule 3.30, there
-----------------------
are no Material agreements of over twelve (12) months in duration which commit
Acorn to carry on business at fixed prices or prices determined by an
established formula. No supplier or customer accounted for more than five
percent (5%) of Acorn's consolidated sales or purchases in either the past
fiscal year or in the interim period ended as of the Balance Sheet Date, and no
supplier or customer Material to Acorn's business has terminated its
relationship with Acorn, or has since the Balance Sheet Date decreased or
delayed Materially, or threatened to decrease or delay Materially, its services
or supplies to Acorn.
3.31 Securities Act, Etc. Neither Acorn, nor its respective officers,
-------------------
directors, or controlling persons (a) have been convicted within the ten years
preceding the date of this Agreement of any felony or misdemeanor of the types
described in Rule 262 (b)(1) under the Securities Act, (b) are subject to an
order, judgment or decree of the types described in Rule 262(b)(2) under the
Securities Act, (c) are subject to an order of the SEC of the types described in
Rule 262(b)(3) under the Securities Act, (d) have been suspended or expelled
from, or suspended or barred from association with a member of, a national
securities exchange or as described in Rule 262(b)(4) under the Securities Act
or (e) are subject to an order or injunction as described in Rule 262(b)(5)
under the Securities Act.
3.32 Lawyers and Accountants. Acorn and the Key Shareholders are not
-----------------------
relying upon any investigation made by Intek's counsel or accountants or the
presence of such counsel or accountants as an indication that counsel or the
accountants has reviewed or passed upon the representations, warranties,
projections or business plan of Intek or the wisdom of an investment in Intek.
3.33 Accounting Controls. Neither Acorn, nor any director, officer,
-------------------
agent, employee, consultant or other person associated with or acting on behalf
of any Acorn, has (a) used any corporate funds for unlawful contributions,
gifts, entertainment or other unlawful expenses
30
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
relating to political activity or (b) made any direct or indirect unlawful
payments to government officials or others from corporate funds or established
or maintained any unlawful or unrecorded funds.
3.34 Names. Since the date of its inception, Acorn has not used any trade
-----
name, d/b/a, or other name to identify itself, except Acorn Information
Services, Inc.
3.35 Material Misstatements or Omissions. No representations or
-----------------------------------
warranties by Acorn or any Key Shareholder in this Agreement, or any document,
exhibit, statement, certificate or schedule furnished to Intek by a representing
party pursuant hereto, or in connection with the transactions contemplated
hereby, intentionally contains any untrue statement of a Material fact, or
intentionally omits to state any Material fact necessary to make the statements
or facts contained herein or therein in the context in which they were made not
misleading. Any forecasts or projections, including in the Business Plan,
delivered by or on behalf of Acorn are not guarantees or representations as to
performance and Acorn and the Key Shareholders expressly disclaim any warranty
as to the profitability or future prospects of Acorn.
3.36 Not A United States Real Property Interest. Acorn has delivered to
------------------------------------------
Intek an affidavit in the form attached as Exhibit 3.36 hereto certifying that
Acorn is not and has never been a United States Real Property Holding Company as
defined in the Code.
3.37 Other. Acorn has delivered to Intek Certificates of the Secretary of
-----
State (or other authorized officer) of the State of Delaware certifying as of a
date within thirty (30) days before the Closing Date that Acorn is, as of such
date, in good standing and authorized to transact business as a domestic
corporation. Acorn has delivered to Intek Certificates of the Secretary of
State (or other authorized officer) of each jurisdiction in which Acorn is
qualified to do business as a foreign corporation, certifying as of a date
within thirty (30) days before the Closing Date that Acorn is, as of such date,
in good standing and authorized to transact business as a foreign corporation in
such jurisdiction. Acorn has delivered the written resignations, effective as
of the Closing, of all officers and members of the Board of Directors of Acorn
except those persons to remain as directors or officers, as applicable,
hereunder. The approvals and all consents from third parties and governmental
agencies (including under Blue Sky laws) required by Acorn, or a Shareholder
(other than approvals or consents required by Acorn the absence of which would
not have a Material adverse effect on the ability of Intek or Acorn to operate
their respective business after the Closing) required to consummate the
transactions contemplated hereby and any additional regulatory consents have
been obtained.
3.38 Year 2000 Compliance. In all Material respects, products used by
--------------------
Acorn, and products sold and/or licensed by Acorn in the conduct of its business
and all other products used in combination with products sold and/or licensed by
Acorn, are designed to be used prior to, during and after the calendar year
2000 A.D. and will be capable of accurately processing date data, without error,
delay or the need for manual input with respect to date data, specifically
31
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
including without limitation date data which represents or references the 20/th/
and 21/st/ centuries, including the years 1999 and 2000 and February 29, 2000.
Without limiting the generality of the foregoing:
(i) The equipment, hardware, software and intellectual properties
included in the Acorn assets will not abnormally end or provide invalid or
incorrect results as a results of date data, specifically including date data
which represents or references different centuries or more than one century.
(ii) The equipment, hardware, software and Intellectual Property owned,
licensed, leased or used by Acorn have been designed to ensure year 2000
compatibility, including, but not limited to, date data century recognition,
calculations which accommodate same century and multi-century formulas and date
values, and date data interface values that reflect the century.
(iii) The equipment, hardware, software and Intellectual Property owned,
licensed, leased or used include "Year 2000 capabilities". "Year 2000
capabilities" means the equipment, hardware, software and Intellectual Property:
(a) will manage and manipulate data involving dates, including single
century formulas and multi-century formulas, and will not cause an abnormally
ending scenario within the application or generate incorrect values or invalid
results involving such dates; and
(b) provides that all date-related user interface functionalities and
data fields include the indication of century; and
(c) provides that all date-related data interface functionalities
include the indication of century.
Intek expressly acknowledges that Acorn has relied on the representations
and warranties of third party vendors with respect to such vendors' products
used, sold or licensed by Acorn.
3.39 Due Diligence. Acorn has provided to Intek the information requested
-------------
in the due diligence request dated August 27, 1999, and the information so
provided was true and correct in all Material respects.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF INTEK
---------------------------------------
Intek represents and warrants (as limited by ARTICLE 8) to Acorn and the
Shareholders as follows as of the Closing:
32
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
4.1 Organization; Good Standing; Power; Etc. Intek (i) is a corporation
---------------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Delaware; (ii) is authorized or licensed to do business as a foreign
corporation and is in good standing in the jurisdictions listed in Schedule 4.1;
(iii) is not required to be authorized or licensed to do business as a foreign
corporation in any other jurisdiction (within or without the United States)
except jurisdictions in which Intek's failure to qualify to do business will
have no Material adverse effect on the business, prospects, operations,
properties, assets or condition (financial or otherwise) of Intek or, if Intek
is not so qualified in any such jurisdiction, it can become so qualified in such
jurisdiction without any Material adverse effect; and (iv) has the requisite
power and authority to own, lease and operate its properties and to carry on its
business as currently conducted.
4.2 Restrictions; Burdensome Agreements. Intek is not a party to any
-----------------------------------
contract, commitment or agreement, and its properties and assets are not subject
to or bound or affected, by any charter, bylaw or other corporate restriction,
or any order, judgment, decree, law, statute, ordinance, rule, regulation or
other restriction of any kind or character, which would: (i) prevent Intek from
entering into this Agreement or the Documents or from consummating the
transactions contemplated hereby; or (ii) have a Material adverse effect on the
business, properties, prospects or the condition, financial or otherwise, of
Intek. To the best of Intek's knowledge, none of Intek's contracts or
agreements are on terms more burdensome to Intek than typical contracts and
agreements in its industry for companies the size and scope of Intek.
4.3 Subsidiaries. Intek does not own and Intek has never owned, any
------------
interest, directly or indirectly, in any other corporation, person, company,
limited liability company, business, trust, partnership, limited partnership,
joint venture, or other entity or association, except Brokerage Administrators
Corporation, Intek Insurance, Inc., Intek Teleservices, Inc., and Spider.
4.4 Capitalization; Outstanding Shares. The authorized capital stock of
----------------------------------
Intek consists solely of 105,805,860 shares of Common Stock, with a stated par
value of $0.0001 per share, of which 40,506,547 shares are or will be issued and
outstanding (on an as converted to common stock basis) immediately prior to the
Closing and 63,321,322 shares of outstanding Preferred Stock, which have been
designated as Series A, Series B, Series C, Series D and Series E Preferred
Stock as set forth in the Capitalization Table attached hereto as in Schedule
4.4. The outstanding shares of capital stock of Intek have been duly authorized
and validly issued, and are fully paid and non-assessable. A complete and
accurate schedule listing all shareholders of Intek and the number of shares
held by each such shareholder on an as converted to common stock basis is set
forth in Schedule 4.4 and such Schedule will be updated as of the Closing by an
officer's certificate of Intek. As of the Closing and at all times thereafter,
Intek shall have reserved the maximum number of shares which could constitute
Intek Shares for issuance hereunder. Except as set forth in (i) Schedule 4.4;
(ii) the Intek Amended and Restated
33
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
Certificate of Incorporation, as amended; and (iii) the Amended and Restated
Shareholders Agreement, dated as of October 1, 1999, there are no preemptive
rights or rights of first refusal with respect to Intek's capital stock, and
there are no written or oral agreements, understandings, arrangements or
commitments, certificate of incorporation, bylaw or instrument (including
options, warrants or convertible securities) which creates any rights in any
person with respect to shares of the capital stock or any other securities of
Intek including any which relates to the voting of, restricts the transfer of,
requires Intek to issue or sell, or creates rights in any person with respect to
the capital stock or other securities of Intek (or warrants or rights with
respect thereto).
4.5 Charter and Bylaws; Officers and Directors. Complete and correct
------------------------------------------
copies of: (i) Intek's corporate charter or articles of incorporation, as
amended to date ("Intek Charter"), certified by the Secretary of State of
Delaware; and (ii) Intek's Bylaws, as amended to date ("Intek Bylaws"), are
attached as Schedule 4.5.A. Such Charter and Bylaws are fully in force and
effect, and Intek is not in violation of any of the provisions thereof. A
complete and correct list of all officers and directors of Intek is set forth in
Schedule 4.5.B.
4.6 Authorization. Intek has all requisite power and authority to
-------------
execute, deliver and perform this Agreement, and any ancillary agreements
hereto, and to consummate the transactions contemplated hereby. All corporate
action on the part of Intek, its directors and shareholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
Documents by Intek has been taken. This Agreement constitutes, and the
Documents constitute, valid and binding obligations of Intek, enforceable in
accordance with their respective terms, except as may be limited by principles
of public policy and except as indemnification provisions may be limited by
securities laws, and subject to laws of general application relating to
bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies. The Intek
Shares, when issued in compliance with the provisions of this Agreement at their
respective times of issuance, (i) will be validly issued, fully paid and non
assessable, will be free of any liens or encumbrances, and will not be subject
to any restrictions on transfer (except for those set forth in the Shareholders
Agreement or herein), provided, however, that such shares may be subject to
--------
restrictions on transfer under the state and/or federal securities laws as set
forth herein, and (ii) are not and will not be subject to any preemptive rights
or rights of first refusal except for those in the Shareholders Agreement, the
Intek Charter, as may be amended from time to time, and herein.
4.7 Financial Statements. Intek's audited balance sheets dated as of the
--------------------
fiscal years ended 1997 and 1998 and Intek's audited statements of operations
for the fiscal years ended 1997 and 1998, and Intek's unaudited balance sheet
and statement of operations for the interim period ended June 30, 1999 (the
"Intek Financial Statements") are attached as Schedule 4.7. The Intek Financial
Statements have been prepared in accordance with GAAP, and fairly present, in
34
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
all Material respects, the financial condition and results of operations of
Intek as of the dates indicated.
4.8 No Material Adverse Change. Since August 1, 1999 (the "Intek
--------------------------
Reference Date"), there has not been any Material adverse change in the
business, financial position or results of operation or prospects of Intek.
4.9 Material Liabilities. Except as described in the Intek Financial
--------------------
Statements, herein, or Schedule 4.9, Intek does not have any obligations or
liabilities (whether accrued, absolute or contingent) other than obligations or
liabilities incurred in the ordinary course of business since the Intek
Reference Date, in excess of $500,000 in any one case or which is Material to
Intek.
4.10 Material Contracts. All contracts, agreements and instruments to
------------------
which Intek is a party are valid, binding and in full force and effect in all
Material respects, and are valid, binding and enforceable by Intek in accordance
with their respective terms, subject to the laws of general application relating
to bankruptcy, insolvency and the relief of debtors and rules of law governing
specific performance, injunctive relief or other equitable remedies. Neither
Intek nor, to the best of Intek's knowledge, any other party to such contracts,
agreements or instruments is in default in any Material respect under such
contracts, agreements or instruments, except as listed on Schedule 4.10.
4.11 Compliance with Other Instruments, None Burdensome, Etc. Intek is
--------------------------------------------------------
not in violation of any Material term or provision of the Intek Charter or Intek
Bylaws, or any Material mortgage, indebtedness, indenture, contract, agreement,
instrument, judgment or decree, and to its knowledge is not in violation of any
order, statute, rule or regulation applicable to Intek. The execution, delivery
and performance of and compliance with this Agreement, and the issuance of the
Intek Shares, have not resulted and will not result in any violation of, or
conflict with, or constitute a default under, any of the terms of the Intek
Charter or Intek Bylaws or any corporate restriction or of any indenture,
mortgage, deed of trust, pledge, bank loan or credit agreement, or any
instrument, document or agreement by which Intek or its properties may be bound
or affected, or result in the creation of any mortgage, pledge, lien,
encumbrance or charge upon any of the properties or assets of Intek.
4.12 Litigation, Etc. Except as set forth in Schedule 4.12, there is no
---------------
claim, action, suit, proceeding, arbitration, investigation or inquiry pending
before any federal, state, municipal, foreign or other court or any
governmental, administrative or self-regulatory body or agency, or any private
arbitration tribunal, (or to the best of Intek's knowledge is there any threat,
or basis for, any such claim, action, suit, proceeding arbitration,
investigation or inquiry), which may have any Material adverse effect upon the
assets, properties or business of Intek or the transactions contemplated by this
Agreement. Neither Intek nor any officer, director, partner, agent or employee
of Intek has been permanently or temporarily enjoined or barred by order,
35
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
judgment or decree of any court or other tribunal or any agency or self-
regulatory body from engaging in or continuing any conduct or practice in
connection with the business engaged in by Intek. There is not in existence at
present any order, judgment or decree of any court or other tribunal or any
agency or self-regulatory body to which Intek or the business, properties or
assets, of Intek are subject or by which they are bound. Intek is not in
Material default under any order, license, tariff, regulation or demand of any
federal, state, municipal, foreign or other governmental, administrative or
self-regulatory body or with respect to any order, writ, injunction or decree of
any court or arbitration body.
4.13 Governmental Consents. No consent, approval or authorization of, or
---------------------
exemption by, or filing with any governmental, public or self regulatory body or
authority is required by Intek for the consummation of this Agreement or any of
the instruments or agreements referred to, or the taking of any action, herein
contemplated, except for the qualification (or taking such action as may be
necessary to secure an exemption from qualification, if available) of the
issuance of the Intek Shares under applicable Blue Sky laws or SEC rules and
regulations, which filings and qualifications, if required, will be accomplished
by Intek in a timely manner prior to or within ten (10) days after the date of
issuance of the Intek Shares).
4.14 Intek Tax Matters.
-----------------
4.14.1. Intek's fiscal year for income tax reporting
purposes ends December 31.
4.14.2. Intek has timely filed (including extensions) all
Tax Returns that are required to have been filed by it with appropriate federal,
state, county and local government agencies or instrumentalities, that would
have a Material adverse effect if not filed, except as provided in Schedule
4.14. Intek has paid or established reserves for all income, franchise, payroll
and other Taxes except as set forth in Schedule 4.14. There is no pending
dispute with any taxing authority relating to any of Intek's Returns. To the
best of Intek's knowledge, Intek is not subject to any proposed Material
liability for any Tax to be imposed upon its properties or assets for which
there is not an adequate reserve reflected in the Intek Financial Statements or
accrued since the date of the Intek Financial Statements. No federal or state
income or sales Tax Returns of Intek have been audited. An estimate of accrued
Taxes is set forth in Schedule 4.14. Intek has not executed or filed with any
Taxing authority any agreement extending the period for assessment or collection
of any Taxes. Intek has not consented to having the provisions of Section 341(f)
(which relates to collapsible corporations) of the Code apply to it.
4.14.3. Intek has never been taxed pursuant to Subchapter S
of the Code.
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<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
4.15 Offering. Subject to the accuracy of Acorn's and the Shareholders'
--------
representations in ARTICLE 3 hereof, which representations shall be reaffirmed
as of the date of any issuances of Intek Shares pursuant hereto, the offer, sale
and issuance of the Intek Shares constitute transactions exempt from the
registration requirements of Section 5 of the Securities Act and applicable Blue
Sky laws. Neither Intek nor any authorized agent acting on its behalf will take
any action hereafter that would cause the loss of such exemption.
4.16 Brokers or Finders. Except as set forth in Section 2.7 hereof,
------------------
Intek has not incurred, and will not incur, directly or indirectly, any
liability for brokerage or finders' fees or agents' commissions or any similar
charges in connection with this Agreement. Intek will indemnify and hold Acorn
and the Shareholders harmless for any breach of this Section 4.16.
4.17 Compliance; Licenses and Permits.
--------------------------------
4.17.1. Intek has all requisite corporate power and authority,
and all permits, licenses, tariffs, orders and approvals of governmental and
administrative authorities which are Material, to own, lease and operate its
properties and to carry on its business as presently or previously conducted.
All such presently existing permits, licenses, tariffs, orders and approvals
Material to the conduct of the business of Intek are in full force and effect,
and no suspension or cancellation of any of them is pending or, to the best of
Intek's knowledge, threatened.
4.17.2. Intek has complied in all respects with, and is not in
violation in any respect of, all or any Legal Requirements applicable to the
business of Intek as presently or previously conducted, or as currently proposed
to be conducted except where such non-compliance or violation has not had, and
could not reasonably be expected to have, a Material adverse effect upon Intek.
Intek (including to the best of Intek's knowledge all applicable employees) has
all Permits which are required for the conduct of its business presently or
previously conducted by Intek, which Permits are in full force and effect, and
no violations are outstanding or uncured with respect to any such Permits and no
proceeding is pending or, to the best of Intek's knowledge, threatened to revoke
or limit any thereof. No condition or event has occurred which, with notice or
the passage of time or both, would constitute a violation of a Legal Requirement
or Permit except where such noncompliance or violation has not had, and could
not reasonably be expected to have, a Material adverse effect upon Intek. To
the best of Intek's knowledge, its current and currently contemplated activities
will not violate any Legal Requirement in such a fashion as to have a Material
adverse effect on Intek.
4.18 Material Misstatements or Omissions. No representations or
-----------------------------------
warranties by Intek in this Agreement, or any Document, exhibit, statement,
certificate or schedule furnished by Intek to a Key Shareholder or Acorn
pursuant hereto, or in connection with the transactions contemplated hereby, to
the best of Intek's knowledge intentionally contain any untrue statement of a
Material fact, or intentionally omit to state any Material fact necessary to
make the
37
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
statements or facts contained herein or therein in the context in which they
were made not misleading.
4.19 Lawyers and Accountants. Intek is not relying upon any
-----------------------
investigation made by Acorn's counsel or accountants or the presence of such
counsel or accountants as an indication counsel or the accountants has reviewed
or passed upon the representations, warranties, projections or business plan of
Acorn or the wisdom of an investment in Acorn.
4.20 Effect of Agreement, Etc. The execution, delivery and performance
------------------------
of this Agreement by Intek and the consummation of the transactions contemplated
hereby will not, with or without the giving of notice of the lapse of time, or
both: (i) violate any provision of law, statute, rule or regulation to which
Intek is subject; (ii) violate any judgment, order, writ or decree of any court,
arbitrator or governmental agency applicable to Intek; (iii) have any effect on
any of Intek's permits, licenses, tariffs, orders or approvals or the ability of
Intek to make use of such permits, licenses, tariffs, orders or approvals,
except as set forth in Schedule 4.20; or (iv) result in the breach of or
conflict with any term, covenant, condition or provision of, result in the
modification or termination of, constitute a default under, or result in the
creation or imposition of, any lien, security interest, charge or encumbrance
upon any of the properties or assets of Intek pursuant to any charter, bylaw,
commitment, contract or other agreement or instrument to which Intek is a party
or by which any of its assets or properties are or may be bound or affected or
from which Intek derives benefit.
4.21 Other. Intek has delivered to Acorn Certificates of the Secretary
-----
of State (or other authorized officer) of the State of Delaware certifying as of
a date within thirty (30) days before the Closing Date that Intek is, as of such
date, in good standing and authorized to transact business as a domestic
corporation. Intek has delivered to Acorn Certificates of the Secretary of
State (or other authorized officer) of Delaware, Colorado, California and Kansas
certifying as of a date within thirty (30) days before the Closing that Intek
is, as of such date, in good standing and authorized to transact business as a
foreign corporation in such jurisdiction. Intek has obtained the approvals and
all consents from third parties and governmental agencies (including under Blue
Sky laws, except to the extent obligations to obtain such approvals and consents
are not yet required) required to consummate the transactions contemplated
hereby and any additional regulatory consents have been obtained (other than
approvals or consents required by Intek the absence of which would not have a
Material adverse effect on the ability of Intek or Acorn to operate their
respective business after the Closing).
ARTICLE 5
OTHER COVENANTS AND AGREEMENTS
------------------------------
Acorn, the Shareholders and Intek covenant that as of the Closing (and
continuing after the Closing as to the parties named in and covenants contained
in Sections 5.1, 5.9, 5.11, 5.12,
38
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
5.13, 5.14, 5.15, 5.16 and 5.17):
5.1 Access to Information.
---------------------
5.1.1. Financial Information. Intek shall:
---------------------
5.1.1.1. deliver to each of the Shareholders as soon as
practicable, but in any event within forty-five (45) days after available
to Intek, an income statement, balance sheet and statement of shareholder's
equity as of the end of such fiscal year, prepared in accordance with GAAP
and audited and certified by independent public accountants of nationally
recognized standing selected by Intek.
5.1.1.2. upon request, deliver to each Shareholder such
financial and other business information relating to Intek as Intek
routinely provides to Intek executives of similar responsibility and
compensation levels as the Key Shareholders who are not also members of the
Intek Executive Management Committee (as provided in Section 5.17 below);
and
5.1.1.3. make available for inspection at Intek's offices all
financial statements and other written materials relating to Intek's
financial condition that is distributed to the Intek Executive Management
Committee.
5.1.2. Inspection. Intek shall permit each Shareholder at such
----------
Shareholder's expense, to visit and inspect Intek's properties, to examine its
books of account and records and to discuss Intek's finances and accounts with
its officers, all at such reasonable times as may be requested by the
Shareholder and in accordance with applicable law.
5.1.3. Termination of Information and Inspection Covenants. The
---------------------------------------------------
covenants set forth in Section 5.1.1 and 5.1.2 herein shall terminate as to each
Shareholder and be of no further effect upon the effective date of an IPO or
when Intek first becomes subject to the periodic reporting requirements of the
Exchange Act (or similar provisions then in effect), or if such Shareholder is
no longer a holder of Intek Shares, whichever event shall first occur.
Notwithstanding the foregoing, Intek shall not be required to comply with the
requirements in Section 5.1.1.3 upon the termination of employment of any Key
Shareholder with Acorn for any reason.
5.2 Business Relationships. Acorn shall use all reasonable efforts to
----------------------
preserve present relationships with suppliers, customers, employees, vendors,
and others having relationships with the businesses of Acorn. Acorn will
conduct its operations and business only in the normal course of business
consistent with past practices and in compliance with all applicable laws,
statutes, rules, regulations, ordinances and orders.
39
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
5.3 No Shop. As an inducement to Intek to provide the Bridge Loan, Acorn
-------
executed and delivered to Intek a Standstill Agreement, dated June 4, 1999,
incorporated herein by reference and attached hereto as Exhibit 5.3, which
governs the rights and obligations of Acorn and Intek with respect to
discussions or agreements with other parties concerning the transactions
contemplated by this Agreement. Such Standstill Agreement remains in effect.
5.4 Amendments. Acorn agrees not to amend, revoke or suspend any
----------
provision in the Acorn Charter or Bylaws except as requested by Intek in
connection herewith.
5.5 Resignations and Closing Date Board. The Key Shareholders and Acorn
-----------------------------------
as of the Closing will have caused the resignation of all necessary officers and
directors, and the election of officers and directors, so that immediately after
the Closing the Board of Directors and officers of Acorn may be as contemplated
in Schedule 5.5.
5.6 Signature Cards. Acorn shall prepare new signature cards for each
---------------
bank, depository, savings, brokerage or similar account, of Acorn, effective as
of the Closing.
5.7 Additional Financial Statements. Acorn shall, on a monthly basis,
-------------------------------
deliver to Intek the reconciled bank statements, check registers, accounts
receivable aging reports and accounts payable aging reports of Acorn, prepared
in the ordinary course of business, but in no event shall any such monthly
statements be delivered later than thirty (30) days after the end of the
applicable period.
5.8 Satisfaction of Conditions. The parties hereto each shall use their
--------------------------
best efforts to satisfy any Conditions of Closing set forth in ARTICLE 6 herein
or in any other document executed in connection with this Agreement or the
transactions contemplated herein.
5.9 Tax Elections - Post Closing Change. No new elections with respect
-----------------------------------
to taxes or any changes in current elections with respect to taxes affecting
Acorn shall be made after the date of this Agreement without the prior written
consent of Intek.
5.10 This Section intentionally left blank.
-------------------------------------
5.11 Confidentiality. Intek, Acorn and each Shareholder acknowledge and
---------------
agree that each party will have access to certain "Confidential Information" (as
defined below) of the other parties, and in the future may gain additional
Confidential Information. For the purpose of this Agreement, "Confidential
Information" shall mean (x) information regarding the business of Intek or of
Acorn which is not generally known and which gives such entity an advantage over
competitors who do not know or use it, including but not limited to Intek's or
Acorn's plans for future products or developments and (y) confidential
information concerning third persons (including employees) which is not
generally known. Notwithstanding the foregoing, Confidential Information shall
not include: (i) information which is, or was at the time it was
40
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
disclosed, generally or readily obtainable by the public or the trade, (ii)
information which is publicly known or becomes known, through no fault or
activity of the party to whom the Confidential Information was disclosed, (iii)
information disclosed pursuant to the requirement of a court, administrative
agency, or other governmental body, or (iv) information which is disclosed
pursuant to applicable law, rule or regulation. Intek and Acorn (on a post-
Closing basis as to Confidential Information of the Shareholders), and each of
the Shareholders (as to Confidential Information of Intek and Acorn) agree at
all times to regard and preserve as confidential such Confidential Information,
and to refrain from publishing or disclosing any part of it and from using,
copying or duplicating it in any way or by any means whatsoever. Each of the
Shareholders agrees to certify the destruction of or to return any Confidential
Information to the owner of such Confidential Information upon request.
5.12 Covenant Not to Compete.
-----------------------
5.12.1. Covenant. In exchange for the consideration provided by
--------
Intek and the entering into of this Agreement, and in order to protect the trade
secrets of the Subject Company (as defined below), each Key Shareholder
severally, not jointly, hereby agrees with Intek that such Key Shareholder shall
not compete directly or materially with a Subject Company in the business of (i)
inbound or outbound telemarketing or teleservicing; (ii) outsourced
teleservicing; (iii) customer direct e-servicing business, which includes,
without limitation, the design, development, marketing and sale of business
tools (including business rules and processes) and computer software that assist
businesses and other organizations in selling products directly to consumers on
the Internet, or (iv) "data mining" by which demographic data is either gathered
or analyzed in order to direct or improve marketing or customer service
activities (collectively the "Business"), during the Non-Compete Period (as
defined below). The parties agree that they shall not during such period make
public statements in derogation of each other, except as may be required by law.
For the purposes of this Section, the term "Subject Company" shall mean Intek
and any direct or indirect subsidiaries, parents and affiliates of Intek
including Acorn. Competing directly or materially with the Subject Company shall
mean (a) either (i) engaging or (ii) having a material interest (any ownership
or profit interest over 5% always being material), directly or indirectly, as
owner, employee, officer, director, partner, venturer, shareholder, capital
investor, consultant, agent, principal, advisor or otherwise, either alone or in
association with others, in the operation of any individual or entity engaged in
(b) the Business within Canada or the continental United States, including the
California counties which would appear here if each county in California was
listed here. Competing directly or materially with the Subject Company, as used
in this Agreement, shall be deemed not to include an ownership interest as an
inactive investor, which for purposes of this Section shall mean the beneficial
ownership of less than five percent (5%) of the outstanding shares of any series
or class of securities of any competitor of the Subject Company, which shares
are publicly traded in the securities markets. The Key Shareholders agree that
the Business is inherently nationwide in scope.
41
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
5.12.2. The Key Shareholders each acknowledge that he or she has
had or will have contacts with employees and/or customers of the Subject
Company. Accordingly, the Key Shareholders each covenant and agree that during
the term of the Non-Compete Period, he or she will not (i) solicit or hire any
of the employees of a Subject Company who were employed by a Subject Company at
or within one month before the Closing or during the Key Employee's employment
by a Subject Company, (ii) interfere with the relationship of the Subject
Company with any such employees, or (iii) personally target or solicit, or
assist another to target or solicit, customers of Acorn for activities related
to the Business, or attempt to influence any of the customers of the Subject
Company not to do business with the Company.
5.12.3. Remedies. Each of the Key Shareholders acknowledges and
--------
agrees that his or her obligations provided herein are necessary and reasonable
in order to protect the Subject Company and its business, and each Key
Shareholder expressly agrees that monetary damages may be inadequate to
compensate the Subject Company for any breach by any Key Shareholder of his or
her covenants and agreements set forth herein. Accordingly, each Key Shareholder
agrees and acknowledges that, in addition to any other remedies that may be
available, in law, in equity or otherwise, the Subject Company, and any
successor or assign thereof, shall be entitled to obtain specific performance of
this Section.
5.12.4. Term. The term of the Covenant Not to Compete set forth
----
herein (the "Non-Compete Period") shall begin on the Closing Date and end either
(i) if the Date of Termination is before the EBITDA Threshold is achieved, the
longer of one (1) year after the Date of Termination or three (3) years after
the Closing Date; or (ii) if the Date of Termination is after the EBITDA
Threshold is achieved, the earlier of one (1) year after the Date of Termination
or three (3) years after the Closing Date. Notwithstanding the foregoing
provisions of this Section 5.12, the Covenant Not to Compete may be reduced in
scope, geographic area or time as to a particular Key Shareholder pursuant to
the written employment agreements that have been attached as Exhibit 6.1.1. A
Key Shareholder shall have no obligation under this Section 5.12 if the Intek
Chief Executive Officer consents, which consent shall not be unreasonably
withheld, to a Key Shareholder's employment or performance of services for a
business that does not directly compete with the Business. This provision does
not prohibit the Subject Company and any other person from entering into any
other covenant not to compete or other agreement, including the Employment
Agreements, with different provisions and the obligations of the Key
Shareholders under this Section 5.12 are independent from any such other
covenant not to compete or other agreements.
5.12.5. Severability. Should any one or more of the provisions of
------------
this Section 5.12 be determined to be illegal or unenforceable, then such
illegal or unenforceable provision shall be modified by the proper court or
arbitrator to the extent necessary and possible to make such provision
enforceable, and such modified provision and all other provisions of this
Section and of each other agreement entered into pursuant to this Section shall
be given effect separately from the provision or portion thereof determined to
be illegal or unenforceable and
42
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
shall not be affected thereby. If any of the provisions of Section 5.12 relating
to the scope, periods or geographic area of restriction shall be deemed to
exceed the maximum scope, periods of time or geographic area which a court of
competent jurisdiction would deem enforceable, the scope, times and geographic
area shall, for the purposes of Section 5.12, be deemed to be the maximum scope,
time periods and geographic area which a court of competent jurisdiction would
deem valid and enforceable in any state in which such court of competent
jurisdiction shall be convened. The invalidity or unenforceability of any such
provision in one jurisdiction shall not affect its validity or enforceability in
another jurisdiction.
5.13 Governmental Filings. If any filings are required under federal,
--------------------
state or other securities laws for the delivery of the stock portion of the
Contingent Earn-Out Consideration or for the delivery of the Intek or Spider
Shares, the parties will cooperate in such filings.
5.14 Good Faith. The parties will act in good faith in connection with
----------
the matters described herein.
5.15 Existing Acorn Loans; Bridge Loan.
---------------------------------
5.15.1. Chase and Fleet Loans. Upon the earlier of Acorn's
---------------------
achievement of Sustained Profitability or November 30, 1999, Intek will obtain a
release of the Key Shareholders from their obligations under their personal
guaranties on loans provided to Acorn by The Chase Manhattan Bank ("Chase") and
Fleet Bank ("Fleet"). Acorn will not make any prepayments on the Chase and
Fleet loans without Intek's prior written consent; provided, however, that
--------
Intek's consent will not be required to make interest payments on the Chase and
Fleet loans and principal payments necessary to maintain the minimum draw under
such loans.
5.15.2. Bridge Loan. Upon the earlier of Acorn's achievement of
-----------
Sustained Profitability or November 30, 1999, Intek will (a) release the Key
Shareholders from their obligations under their personal guaranties of the
Bridge Loan and (b) reduce the interest rate on the Bridge Loan to six percent
(6%) per annum effective as of the month following achievement of Sustained
Profitability or November 30, 1999 (whichever is earlier) and until the Bridge
Loan is paid in full.
5.15.3. Acorn Officers Loans. Upon the achievement of Sustained
--------------------
Profitability by Acorn and cumulative EBITDA from June 1, 1999 as reported by
Acorn of an amount equal to or greater than $1,500,000, the Acorn Officers Loans
will be repaid in full by Acorn. If Acorn fails to achieve either or both of
these tests by January 1, 2001, then the Acorn Officers Loans will be will be
paid in full by Intek or Acorn on January 1, 2001.
5.16 Unwind Provision; Changes in Control; Intek IPO.
-----------------------------------------------
5.16.1. If, within three (3) years from the Closing, Intek
becomes
43
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
insolvent or sells all or substantially all of the stock or assets of Acorn to a
third party, the Key Shareholders will have a right of first refusal to purchase
the stock or assets of Acorn as the case may be on the same price and terms as
the proposed sale, or Acorn's appraised value if Intek is insolvent and Acorn is
not being sold.
5.16.2. In the event of a Change in Control of Intek or an
IPO of Intek securities:
a. the stock portion of the Contingent Earn-Out
Consideration payable under Section 2.2 (and subject to Section 2.4) for any
prior years during the Earn Out Period shall be delivered to the Key
Shareholders within thirty (30) days of such event free and clear of any liens,
charges, security interests or encumbrances of any kind other than the
Shareholders Agreement or other agreements generally applicable to Intek's
common stock.
b. for any full year Contingent Earn-Out
Consideration payable under Section 2.2 (and subject to Section 2.4) for the
year in which the Change in Control or IPO occurs, the cash portion will be paid
to the Shareholders Representative (less any amounts to be paid into Escrow
pursuant to Section 8.8.3 herein) and the stock portion will be delivered to the
Shareholders upon the calculation by Intek of the Contingent Earn-Out
Consideration payable for that full year but not later than thirty (30) days
after Intek's determination of the amount of such Earn-Out Consideration.
5.17 Board Observer; Executive Management Committee.
----------------------------------------------
5.17.1. Venkat Sharma, as of the Closing, shall be designated as
a nonvoting observer on the Intek Board of Directors and will be entitled to
attend Board meetings. Observer status on the Intek Board of Directors will
terminate if the Acorn Key Shareholders sell more than fifty percent (50%) of
their Intek Shares or upon an IPO of Intek's securities, or upon an Intek Change
in Control.
5.17.2. Venkat Sharma and Shoba Murali, as of the closing, shall
be designated members of the Intek Executive Management Committee ("EMC") and
will be entitled to participate in EMC meetings. Solely at the discretion of
Intek's Chief Executive Officer, EMC participation may terminate if the Acorn
Key Shareholders sell more than fifty percent (50%) of their Intek Shares, upon
Intek Change in Control or if the individual ceases being an Acorn employee.
5.17.3. The above rights shall terminate as to any person who
has been terminated as an Acorn employee for Cause (as defined in the Employment
Agreement), or who has violated the confidentiality, non-compete or another
material term of this Agreement.
44
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
ARTICLE 6
CONDITIONS OF CLOSING
---------------------
6.1 Intek's Conditions of Closing. The obligation of Intek to consummate
-----------------------------
the Closing shall be subject to and conditioned upon the satisfaction at the
Closing of each of the following conditions and no other conditions (any of
which maybe waived in writing by Intek, in whole or in part):
6.1.1. Employment Agreements. Intek shall have received
---------------------
executed Employment Agreements, in substantially the form attached hereto as
Exhibit 6.1.1, signed by Intek and each of the Key Shareholders.
6.1.2. Representations and Warranties. All representations and
------------------------------
warranties of Acorn and the Shareholders shall be true and correct in all
Material respects as of the Closing as though such representations and
warranties had been made on and as of that date, and certificates to the
foregoing effect, in substantially the form attached hereto as Exhibit 6.1.2,
dated as of the date of the Closing and signed by the President or any Vice
President of Acorn, on behalf of Acorn, and by each of the Shareholders,
individually, shall have been delivered to Intek.
6.1.3. Performance of Obligations. All of the terms, covenants
--------------------------
and conditions of this Agreement to be complied with and performed by Acorn and
the Shareholders on or before the Closing shall have been duly complied with and
performed in all Material respects on or before the date of the Closing, and
certificates to the foregoing effect, substantially in the form attached hereto
as Exhibit 6.1.2, dated as of the date of the Closing and signed by the
President or any Vice President of Acorn, on behalf of Acorn, and by each of the
Shareholders, individually, shall have been delivered to Intek.
6.1.4. Consents and Approvals. All necessary consents of and
----------------------
filings required to be obtained or made by Acorn relating to the consummation of
the transactions contemplated herein shall have been obtained and made.
6.1.5. Certified Certificate of Incorporation and Certificate of
---------------------------------------------------------
Good Standing. Acorn shall have delivered to Intek (i) Acorn's Certificate of
- -------------
duly certified by the Secretary of State of Delaware no less than
thirty (30) days prior to the date of Closing and (ii) a certificate, dated as
of a date no earlier than thirty (30) days prior to the date of Closing, duly
issued by the Secretary of State of Delaware, certifying that Acorn is in good
standing and authorized to do business.
6.1.6. Secretary's Certificate. Intek shall have received a
-----------------------
certificate, substantially in the form attached hereto as Exhibit 6.1.6, dated
as of the Closing Date and signed by the Secretary of Acorn, certifying as to
(i) the authenticity of the signatures
45
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
of the President or any Vice President of Acorn who is authorized to act on
behalf of Acorn with respect to the transactions contemplated by this Agreement,
and (ii) the truth and correctness of attached copies of Acorn's Certificate of
Incorporation (including amendments thereto), Bylaws (including amendments
thereto), and resolutions of the board of directors and shareholders of Acorn
approving Acorn's execution and delivery of this Agreement and the consummation
of the transactions contemplated hereby.
6.1.7. Opinion of Counsel. Intek shall have received an opinion
------------------
from counsel for Acorn and the Shareholders, dated as of the date of Closing, in
substantially the form attached hereto as Exhibit 6.1.7.
6.1.8. Additional Documents. Intek shall have received such
--------------------
other documents as Intek may reasonably request to evidence the accuracy of any
representation or warranty made by Acorn or the Shareholders, or the performance
of or compliance with any covenants or obligations required by Acorn or the
Shareholders, or to otherwise facilitate the consummation of any of the
transactions contemplated by this Agreement.
6.1.9. Termination of Agreements Pertaining to Acorn Stock.
---------------------------------------------------
Intek shall have received evidence of the expiration or termination of any and
all agreements (other than with Intek) relating in any way to the Acorn Shares
or ownership thereof.
6.2 Acorn's Conditions of Closing. The obligation of Acorn and the
-----------------------------
Shareholders to consummate the Closing are subject to and conditioned upon the
satisfaction at the Closing of each of the following conditions and no other
conditions (any of which may be waived in writing by Acorn and the Shareholders,
in whole or in part):
6.2.1. Employment Agreements. The Key Shareholders shall have
---------------------
received Acorn Employment Agreements, in substantially the form attached hereto
as Exhibit 6.1.1, signed by Intek.
6.2.2. Representations and Warranties. All representations and
------------------------------
warranties of Intek shall be true and correct in all Material respects as of the
Closing as though such representations and warranties had been made on and as of
that date, and certificates to the foregoing effect, substantially in the form
attached hereto as Exhibit 6.2.2, dated as of the date of the Closing and signed
by the President or any Vice President of Intek, shall have been delivered to
Acorn and the Shareholders.
6.2.3. Performance of Obligations. All of the terms, covenants
--------------------------
and conditions of this Agreement to be complied with and performed by Intek on
or before the Closing shall have been duly complied with and performed in all
Material respects on or before the date of the Closing, and certificates to the
foregoing effect, substantially in the form attached hereto as Exhibit 6.2.2,
dated as of the date of the Closing and signed by the President or any
46
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
Vice President of Intek, shall have been delivered to Acorn the Shareholders.
6.2.4. Certified Articles of Incorporation and Good
--------------------------------------------
Standing Certificate. Intek shall have delivered to Acorn and the Shareholders
- --------------------
(i) Intek's Certificate of Incorporation, duly certified by the Secretary of
State of Delaware no less than thirty (30) days prior to the Closing Date and
(ii) a certificate, dated as of a date no earlier than thirty (30) days prior to
the Closing Date, duly issued by the Secretary of State of Delaware, certifying
that Intek is in good standing and authorized to do business.
6.2.5. Secretary's Certificate Acorn and the Shareholders
-----------------------
shall have received a certificate, substantially in the form attached hereto as
Exhibit 6.2.5, dated as of the Closing Date and signed by the Secretary of
Intek, certifying as to (i) the authenticity of the signatures of the President
or any Vice President of Intek who is authorized to act on behalf of Intek with
respect to the transactions contemplated by this Agreement, and (ii) the truth
and correctness of attached copies of Intek's Certificate of Incorporation
(including amendments thereto), Bylaws (including amendments thereto), and
resolutions of the board of directors of Intek approving Intek entering into
this Agreement and the consummation of the transactions contemplated hereby.
6.2.6. Opinion of Counsel. Acorn and the Shareholders shall
------------------
have received an opinion from counsel for Intek, dated as of the date of
Closing, in substantially the form attached hereto as Exhibit 6.2.6.
6.2.7. Transaction Fee. Intek shall have paid a Transaction
---------------
Fee in accordance with Section 2.7 above.
6.2.8. Additional Documents. Acorn and the Shareholders
--------------------
shall have received such other documents as Acorn and the Shareholders may
reasonably request to evidence the accuracy of any representation or warranty
made by Intek, or the performance of or compliance with any covenants or
obligations required by Intek, or to otherwise facilitate the consummation of
any of the transactions contemplated by this Agreement.
6.2.9. Consent to Registration Right. Intek shall have
-----------------------------
received the consent of holders of registration rights with respect to Intek
Shares, as required prior to a grant of registration rights to the Shareholders,
if any, pursuant to Section 2.2.4 above.
ARTICLE 7
AMENDMENT
---------
This Agreement may be amended by Intek, Acorn and the Shareholders by
action taken by the respective Boards of Directors of Intek and Acorn and by the
Shareholders individually at
47
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
any time before or after approval hereof by the Shareholders, but no amendment
after approval by the Shareholders of Acorn shall be made which changes any of
the principal terms of this Agreement. This Agreement may not be amended except
by an instrument in writing signed on behalf of Intek, Acorn and the
Shareholders.
ARTICLE 8
INDEMNIFICATION
---------------
8.1 Shareholders' General Indemnification Covenants. Subject to the
-----------------------------------------------
provisions of this ARTICLE 8, the Shareholders, jointly and severally in
proportion to their respective ownership of the Acorn Shares as of the Closing
Date, shall indemnify, defend, save and keep Intek and its affiliates (including
Acorn), and their respective officers, directors, successors and assigns
(collectively, the "Intek Indemnitees"), harmless against and from all
liability, demands, claims, actions or causes of action, assessments, losses,
fines, penalties, costs, damages and expenses, including without limitation,
reasonable attorneys' fees, court costs and other fees, disbursements and
expenses, including any diminution in the value of Acorn or the Acorn Shares
held by Intek, (collectively "Damages"), sustained or incurred by any of the
Intek Indemnitees as a result of, arising out or by virtue of any
misrepresentations, breach of any warranty or representation, or non-fulfillment
of any agreement or covenant on the part of Acorn or the Shareholders, whether
contained in this Agreement, any Document or any exhibit or schedule hereto or
thereto, or any written statement or certificate furnished or to be furnished to
Intek pursuant hereto or in any closing document delivered by Acorn or the
Shareholders to Intek in connection herewith. Such obligations apply regardless
of the presence of a Third Party Claim (as defined below). For purposes of
determining the amount of Damages for which indemnification is provided
hereunder (but not for the purpose whether a breach of a representation,
warranty or covenant has occurred), each of the representations, warranties and
covenants made by any party in this Agreement or in any certificate or other
instrument delivered pursuant hereto, including, without limitation, the
Documents, shall be deemed to have been made without the inclusion of
limitations or qualifications as to materiality such as the word "Material," if
with the inclusion of such limitation or qualification the representation,
warranty or covenant was breached.
8.2 Procedures for Indemnification Pursuant to Section 8.1.
------------------------------------------------------
8.2.1. Promptly following the receipt by a Intek Indemnitee of notice
of a demand, claim, action, assessment or proceeding made or brought by a third
party, including a governmental agency (a "Third Party Claim") or Intek
receiving notice of the basis of a claim for Damages, the Intek Indemnitee
receiving the notice of the Third Party Claim or knowledge of the basis for a
claim: (i) shall notify the Shareholders of its existence, setting forth the
facts and circumstances of which such Intek Indemnitee has received notice or
knowledge; and (ii) if the Intek Indemnitee giving such notice is a person
entitled to indemnification under this ARTICLE
48
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CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
8 (an "Indemnified Party"), specifying the basis hereunder upon which the
Indemnified Party's claim for indemnification is asserted; provided, however,
-------- -------
that a failure to provide prompt notification shall not prevent or prejudice a
claim under this ARTICLE 8 except to the extent such failure has prejudiced the
rights or defenses of the Shareholders.
8.2.2. The Indemnified Party shall, upon reasonable notice by the
Shareholders, tender the defense of a Third Party Claim to the Shareholders. If
the Shareholders accept responsibility for the defense of a Third Party Claim,
then the Shareholders shall have the right to contest, defend and litigate the
Third Party Claim and shall have the exclusive right, in their discretion
exercised in good faith and upon the advice of counsel, and subject to the
consent of the Indemnified Party (which shall not be unreasonably withheld) to
settle any such matter, either before or after the initiation of litigation,
provided that at least ten (10) days prior to any such settlement, they shall
- --------
give written notice of their intention to settle to the Indemnified Party. The
Indemnified Party shall have the right to be represented by counsel at its own
expense in any defense conducted by the Shareholders.
8.2.3. Notwithstanding the foregoing, in connection with any
settlement negotiated by the Shareholders, no Indemnified Party shall be
required to: (i) enter into or be bound by or obligated under any settlement (a)
that does not include the delivery by the claimant or plaintiff to the
Indemnified Party of a release from all liability in respect of such claim or
litigation, (b) if the Indemnified Party shall, in writing to the Shareholders
within the ten (10) day period prior to such proposed settlement, unreasonably
withhold its consent with respect to such settlement proposal as contemplated by
Section 8.2.2, and desire to have the Shareholders tender the defense of such
matter back to the Indemnified Party, or (c) that requires an Indemnified Party
to take any unreasonable affirmative actions as a condition of such settlement;
or (ii) consent to the entry of any judgment that does not include a full
dismissal of the litigation or proceeding against the Indemnified Party with
prejudice; provided, however, that should the Indemnified Party disapprove of a
-------- -------
settlement proposal pursuant to clause (b) above, the Indemnified Party shall
thereafter have all of the responsibility for defending, contesting and settling
such Third Party Claim but shall not be entitled to indemnification by the
Shareholders to the extent that, upon final resolution of such Third Party
Claim, the Shareholders' liability to the Indemnified Party but for this proviso
exceeds what the liability to the Indemnified Party would have been if the
Shareholders were permitted to settle such Third Party Claim in the absence of
the Indemnified Party exercising its right under clause (b) above.
8.2.4. If, in accordance with the foregoing provisions of this
Section 8.2, an Indemnified Party shall be entitled to indemnification against a
Third Party Claim, and if the Shareholders shall fail to accept the defense of a
Third Party Claim which has been tendered in accordance with this Section 8.2,
the Indemnified Party shall have the right, without prejudice to its rights of
indemnification hereunder, in its discretion exercised in good faith and upon
the advice of counsel, to contest, defend and litigate such Third Party Claim,
and may settle such Third Party Claim, either before or after the initiation of
litigation, at such time and upon such
49
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
terms as the Indemnified Party deems fair and reasonable, provided at least ten
(10) days prior to any such settlement, written notice of its intention to
settle is given to the Shareholders. If, pursuant to this Section 8.2, the
Indemnified Party defends or settles a Third Party Claim for which it is
entitled to indemnification hereunder, as hereinabove provided, the Indemnified
Party shall be reimbursed by the Shareholders for the reasonable attorneys'
fees, expert fees and other expenses of defending the Third Party Claim which
are incurred from time to time, forthwith following the presentation to
Shareholders of itemized bills for said attorneys' fees, court costs and other
expenses. No failure by the Shareholders to acknowledge in writing their
indemnification obligations under this ARTICLE 8 shall relieve them of such
obligations to the extent they exist.
8.3 Certain Information. The parties hereto shall furnish or cause to be
-------------------
furnished to each other (at reasonable times and at no charge) upon request as
promptly as practicable such information (including access to books and records)
pertinent to Acorn, the Shareholders, or Intek and assistance relating to Acorn
or Intek as is reasonably necessary for the preparation, review and audit of
financial statements, the preparation, review, audit and filing of any Tax
Return, the preparation for any audit or the prosecution or defense of any
claim, suit or proceeding relating to any proposed adjustment or which may
result in Shareholders or Intek being liable under the indemnification
provisions of this ARTICLE 8.
8.4 Release by Shareholders. Shareholders, as of the Closing Date, hereby
-----------------------
release and discharge Acorn and its officers and directors from, and agree and
covenant that in no event will Shareholders commence any litigation or other
legal or administrative proceeding against, Acorn or any of its officers or
directors, either in law or equity, relating to any and all claims and demands,
known and unknown, suspected and unsuspected, disclosed and undisclosed, for
damages, actual, consequential, or otherwise, past, present and future, arising
out of or in any way connected with their ownership of the equity securities of
Acorn or any employment or consulting relationship (other than for wages or
employee benefits accrued but not yet paid, or under debts for borrowed money as
listed on a Schedule hereto) prior to or at the Closing Date. Except for this
Agreement and the agreements entered into hereunder, as of the Closing without
further action, all shareholders, voting, preemptive, buy-sell, first refusal or
similar rights, employment or consulting rights, by agreement or statute, of a
Shareholder of Acorn, shall terminate as to securities of Acorn and as to Acorn.
This Section shall in no way release, waive or extinguish claims that any
Shareholder or Acorn has or will have against Intek arising in the past, present
or future, including under this Agreement and the agreements entered into
hereunder.
8.5 Indemnification by Intek. Subject to the provisions of this ARTICLE
------------------------
8, Intek agrees to indemnify, defend and hold each of the Shareholders harmless
against, and will reimburse the Shareholders on demand for, any Damages (as
defined in Section 8.1) sustained or incurred by any of the Shareholders as a
result of, arising out of or by virtue of any misrepresentation, breach of any
warranty or representation, or non-fulfillment of any agreement
50
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
or covenant on the part of Intek, whether contained in this Agreement, any
Document or any exhibit or schedule hereto or thereto or any written statement
or certificate furnished or be to furnished to Intek pursuant hereto or in any
Document delivered by Intek to Acorn or the Shareholders in connection herewith.
The procedures set forth in Sections 8.2 and 8.3 shall be applied mutatis
-------
mutandis to any claim under this Section by a Shareholder, and the Shareholders
- --------
shall be the "Intek Indemnitees" and "Indemnified Party" for such purposes and
Intek shall be the "Shareholders." Such obligations apply regardless of the
presence of a Third Party Claim.
8.6 Exclusive Remedy. The remedies provided in this ARTICLE 8 are, to the
----------------
extent permitted by law, the sole and exclusive remedies related to
representations, warranties or covenants made or to be performed at or before
the Closing, and there are no other remedies otherwise available to any of the
parties, for any claim by one party against any other party under this Agreement
or with respect to the transactions contemplated by it related to
representations, warranties or covenants made or to be performed at or before
the Closing, except for equitable injunctive relief. No party shall make any
claim under any theory, in tort, contract, statute or otherwise, which could not
be brought directly hereunder due to the time or dollar limitations set forth in
Section 8.8.
8.7 No Rights of Shareholders Against Acorn. No Shareholder has any claim
---------------------------------------
or cause of action, directly, by contribution, by subrogation or otherwise,
against Acorn for any matter for which a Shareholder must provide
indemnification, defense or hold harmless hereunder or under any other document
or agreement.
8.8 Limits on Indemnification; Escrow.
---------------------------------
8.8.1. Neither Intek, Acorn nor the Shareholders shall
assert any claim for indemnification hereunder against the other until such time
as, and solely to the extent that, the aggregate of all claims which such party
may have against the other shall exceed $75,000 (the "Indemnification
Threshold"). For purposes of determining whether a claim is subject to
indemnification under this ARTICLE 8, and counted toward the Indemnification
Threshold, claims which in the aggregate are Material shall be counted toward
the Indemnification Threshold and indemnifiable hereunder even if any such
claims individually are not Material.
8.8.2. No indemnification payment hereunder shall exceed
the aggregate maximum Purchase Price payable hereunder in cash and Intek Shares,
valued at $3.00 per share (adjusted for stock splits, stock dividends, stock
combinations, and recapitalizations, and without adjustment for the Spider spin
off), whether actually paid or not as of the date of the claim for
indemnification, such amount to be calculated net of Taxes payable on receipt of
such cash and Intek Shares less any Tax benefit as a result of the
indemnification payment.
8.8.3. Key Shareholders' Escrow. Intek and the Key
------------------------
51
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
Shareholders shall enter into an agreement in the form of Exhibit 8.8.3 with a
mutually agreed upon escrow agent for the creation of an interest-bearing escrow
account (the "Escrow") into which an amount equal to ten percent (10%) of the
Purchase Price paid (exclusive of the Base Consideration) within the a period
expiring fifteen (15) months after the Closing (the "Escrow Consideration") will
be placed. The Escrow Consideration will be held in the Escrow until the
expiration of eighteen (18) months after the Closing, at which time the portion
of the Escrow Consideration which remains in the Escrow and is not reserved
against for the payment of any indemnification claims made by Intek prior to
such expiration, along with accrued interest and less the cost of establishing
and maintaining the Escrow, shall be disbursed to the Key Shareholders according
to each Key Shareholder's proportionate ownership of such Escrow Consideration
as of such date of disbursement. Intek shall make claims initially against, and
such claims shall be paid by, the Escrow and only after that Escrow
Consideration has been exceeded will a claim be made against the Key
Shareholders.
8.8.4. Indemnity obligations hereunder may be satisfied
through the payment of cash or the delivery of Intek Shares, or a combination
thereof. Solely for purposes of calculating the value of the Intek Shares
received or delivered pursuant hereto for indemnification purposes (including
for purposes of determining the Indemnification Threshold and the amount of any
indemnity paid), Intek Shares shall be valued at $3.00 per share (adjusted for
stock splits, stock dividends, stock combinations, and recapitalizations, and
without adjustment for the Spider spin off).
8.8.5. Intek shall have the right, upon written notice, to
offset indemnification amounts due to it pursuant to this Agreement against
payments due to the Shareholders under this Agreement or any contract
contemplated by, or referred to in, this Agreement except for Base Compensation
payable under and as defined in the Employment Agreements.
8.8.6. Notwithstanding any other term of this Agreement, no
Shareholder shall be liable under this Section 8.8 for an amount which exceeds
the amount of proceeds received by such Shareholders in cash and Intek Shares,
valued at $3.00 per share (as adjusted pursuant to Section 8.8.4), in connection
with the sale of the Acorn stock.
8.8.7. The foregoing limitations on damages do not apply to
violations of Sections 5.11 ("Confidentiality") or 5.12 ("Covenant Not to
Compete").
ARTICLE 9
MISCELLANEOUS
-------------
9.1 Notice. Any notice required or permitted hereunder shall be in
------
writing and shall be sufficiently given if (i) personally delivered, (ii) mailed
by certified or registered United
52
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
States mail, return receipt requested, or (iii) sent by recognized air express
courier for next business day delivery, addressed as follows:
If to Intek: Intek Information Inc.
5619 DTC Parkway, 12/th/ Floor
Englewood, CO 80111
Attn: Timothy C. O'Crowley
Telephone: (303) 357-3000
Facsimile: (303) 323-4213
Copy to: Chrisman, Bynum & Johnson, P.C.
1900 15th Street
Boulder, CO 80302
Attn: G. James Williams, Jr.
Telephone: (303) 546-1300
Facsimile: (303) 449-5426
If to the Key Shareholders: Acorn Information Services, Inc.
4 Corporate Drive
Shelton, CT 06484
Telephone: (800) 279-3889
Facsimile: (203) 225-7610
Copy to: Wiggin & Dana
Three Stamford Plaza
Stamford, CT 06901
Attn: William A. Perrone
Telephone: (203) 363-7604
Facsimile: (203) 363-7676
If to the Richard Wayne: Richard Wayne
55 Valley Road
Easton, CT
Telephone:
Facsimile:
(or to such other address as any party shall specify by written notice so
given), and shall be deemed to have been delivered as of the date so personally
delivered, three business days after so mailed, or one business day after the
date delivered to the air express courier.
9.2 Execution of Additional Documents. The parties hereto will at any
---------------------------------
time, and from time to time after the Closing Date, upon reasonable request of
the other party, execute,
53
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
acknowledge and deliver all such further acts, deeds, assignments, transfers,
conveyances, powers of attorney and assurances as may be required to carry out
the intent of this Agreement, and to transfer and vest title to any securities
being transferred hereunder, and to protect the right, title and interest in and
enjoyment of all of the securities transferred, delivered and conveyed pursuant
to this Agreement; provided, however, that this Agreement shall be effective
--------
regardless of whether any such additional documents are executed.
9.3 Binding Effect; Benefits. This Agreement shall be binding upon and
------------------------
shall inure to the benefit of the parties hereto and their respective heirs,
successors, executors, administrators and assigns. Notwithstanding anything
contained in this Agreement to the contrary, nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto or their respective heirs, successors, executors, administrators and
assigns any rights, remedies, obligations or liabilities under or by reason of
this Agreement.
9.4 Entire Agreement. This Agreement, together with the exhibits,
----------------
schedules and other documents contemplated hereby, constitute the final written
expression of all of the agreements between the parties, and is a complete and
exclusive statement of those terms. It supersedes all understandings and
negotiations concerning the matters specified herein. Any representations,
promises, warranties or statements made by either party that differ in any way
from the terms of this Agreement and the exhibits, schedules and other documents
contemplated hereby, shall be given no force or effect. The parties
specifically represent, each to the other, that there are no additional or
supplemental agreements between them related in any way to the matters herein
contained unless specifically included or referred to herein. No addition to or
modification of any provision of this Agreement shall be binding upon any party
unless made in writing. This Agreement does not, however, supersede the Bridge
Loan, or the security agreement and personal guarantees execution in connection
therewith, nor does it supersede Standstill Agreement, dated June 4, 1999,
between Acorn and Intek, which is incorporated herein by reference.
9.5 Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Colorado exclusive of the conflict of
law provisions thereof.
9.6 Arbitration; Consent to Jurisdiction. Except as provided below in
------------------------------------
this paragraph, any and all disputes arising under or related to this Agreement
shall be submitted to binding arbitration before the American Arbitration
Association ("AAA") in accordance with its rules of Commercial Arbitration. The
decision of the arbiter shall be final and binding upon the parties, and it may
be entered in any court of competent jurisdiction. The arbitration shall take
place in Chicago, Illinois. The arbiter shall be bound by the laws of the State
of Colorado applicable to all relevant privileges and the attorney work product
doctrine. The arbiter shall have the power to grant equitable relief where
applicable under Colorado law and shall not be entitled to make an award of
punitive damages. The arbiter
54
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
shall issue a written opinion setting forth its decision and the reasons
therefor within thirty (30) days after the arbitration proceeding is concluded.
The obligation of the parties to submit any dispute arising under or related to
this Agreement to arbitration as provided in this Section shall survive the
expiration or earlier termination of this Agreement. Notwithstanding the
foregoing, any party may seek an injunction or other appropriate relief from a
court of competent jurisdiction to preserve or protect the status quo with
respect to any matter pending conclusion of the arbitration proceeding, but no
such application to a court shall in any way be permitted to stay or otherwise
impede the progress of the arbitration proceeding.
The Shareholders, Intek, and Acorn hereby consent to the jurisdiction
of the AAA and the courts of the State of Illinois and the United States
District Courts for the Northern District of Illinois, as well as to the
jurisdiction of all courts from which an appeal may be taken from such courts,
for the purpose of any arbitration, suit, action or other proceeding arising out
of any of their obligations arising hereunder or with respect to the
transactions contemplated hereby and expressly waive any and all objections they
may have as to venue in any of such courts.
9.7 Attorneys' Fees and Costs. In the event of any arbitration or
-------------------------
litigation being filed or instituted between two or more of the parties
concerning this Agreement, the Prevailing Party will be entitled to receive from
the other party or parties its attorneys' fees, experts' fees, costs and
expenses, whether or not such controversy, claim or action is prosecuted to
judgment or other form of relief. The "Prevailing Party" is that party which is
awarded judgment or other legal or equitable relief as a result of trial or
arbitration, or who receives or is entitled to receive a payment of money from
the other party in settlement of claims asserted by such party. If both parties
receive a judgment or other award of relief, the court or the arbiter shall
determine which party is the Prevailing Party, taking into consideration the
merits of the claims asserted by each party, the relative values of the
judgments or other forms of relief received by each party, and the relative
equities between the parties.
9.8 Survival. All of the terms, covenants, conditions, warranties and
--------
representations contained in this Agreement and any Document shall survive the
execution hereof and the Closing hereunder in accordance with their terms and
all representations and warranties shall survive for forty (40) months following
the Closing.
9.9 Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
9.10 Headings. Headings of the Sections of this Agreement are for the
--------
convenience of the parties only, and shall be given no substantive or
interpretive effect whatsoever.
9.11 Waivers. Intek, the Shareholders, or Acorn may, by written notice
-------
to the other: (i) extend the time for the performance of any of the obligations
or other actions of the other under
55
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
this Agreement; (ii) waive any inaccuracies in the representations or warranties
of the other contained in this Agreement or in any document delivered pursuant
to this Agreement; (iii) waive compliance with any of the conditions or
covenants of the other contained in this Agreement; or (iv) waive performance of
any of the obligations of the other under this Agreement. Except as provided in
the preceding sentence, no action taken pursuant to this Agreement, including
without limitation, any investigation by or on behalf of any party, shall be
deemed to constitute a waiver by the party taking such action of compliance with
any representations, warranties, covenants or agreements contained in this
Agreement. The waiver by any party hereto of a breach of any provision hereunder
shall not operate or be construed as a waiver of any prior or subsequent breach
of the same or any other provision hereunder nor as a waiver of any claim for
breach of representation, warranty or covenant.
9.12 Merger of Documents. This Agreement and all agreements and
-------------------
documents contemplated hereby constitute one agreement and are interdependent
upon each other in all respects.
9.13 Incorporation of Exhibits and Schedules. All exhibits and schedules
---------------------------------------
attached hereto are by this reference incorporated herein and made a part hereof
for all purposes as if fully set forth herein.
9.14 Severability. If for any reason whatsoever any one or more of the
------------
provisions of this Agreement shall be held or deemed to be inoperative,
unenforceable or invalid as applied to any particular case or in all cases, such
circumstances shall not have the effect of rendering such provision invalid in
any other case or of rendering any of the other provisions of this Agreement
inoperative, unenforceable or invalid.
9.15 Assignability. Neither this Agreement nor any of the parties'
-------------
rights or obligations hereunder shall be assignable by any party hereto without
the prior written consent of the other parties hereto. No assignment shall
relieve a party of its obligations hereunder.
9.16 No Action for Failure to Deliver Opinions, Etc. No party shall have
----------------------------------------------
any claim or right of action against the legal counsel or accountants of the
other party for the failure or refusal of such counsel or accountants to deliver
any opinion, certification or letter requested hereunder.
56
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
9.17 Effectiveness of Agreement. Notwithstanding any other provision
--------------------------
herein, the parties acknowledge and agree that for consolidated financial
accounting purposes and for purposes of calculating EBITDA against the Minimum
EBITDA Targets, the effective date of this Agreement, and the transactions
contemplated herein, shall be deemed to be October 1, 1999. For all other
purposes, including the indemnification obligations and the date as of which
representations and warranties are made hereunder, this Agreement shall become
effective and binding on the parties hereto on the date when signed and
delivered by each of the parties hereto. There are no third party beneficiaries
of this Agreement.
9.18 Reference to Shareholders Agreement. This Agreement refers to the
-----------------------------------
Shareholders Agreement. The parties acknowledge that they have reviewed and
understand the Shareholders Agreement, including, without limitation, the
provisions regarding amendment and termination, and that the Shareholders
Agreement may be amended from time to time or may be terminated in accordance
with the terms of the Shareholders Agreement and Section 2.2.5 herein, whether
before or after the time Intek Shares are issued.
9.19 Action by Shareholders. Any consent, approval or similar act which
----------------------
requires the act of the "Shareholders" or the "Key Shareholders" is authorized
if approved by those Shareholders holding 80% or more of the Acorn Shares before
the Closing.
9.20 Shareholder Family LLC's. Notwithstanding anything to the contrary
------------------------
herein, certain Shareholders have transferred their Acorn Shares to the limited
liability companies listed on the signature page hereof for estate planning
purposes (the "Shareholder Family LLC's"). All ownership interests of the
Shareholder Family LLC's are held by the respective Shareholder and his or her
spouse, lineal descendents and/or immediate family members, and no transfer,
assignment or disposition of any membership or ownership interest in, or
admission of new members to, a Shareholder Family LLC, other than to the spouse,
line descendent and/or immediate family members of the respective Shareholder,
may be made without the prior written consent of Intek. All of the rights of
the respective Shareholder hereunder shall inure to, and all of the obligations
(including the indemnification obligations under ARTICLE 8) of the respective
Shareholder hereunder shall bind, the Shareholder Family LLC, and any permitted
assignees thereof, to which a Shareholder Transferred his or her Acorn Shares.
The Shareholder Family LLC's shall execute and deliver a copy of the
Shareholders Agreement upon receipt of any Intek Shares hereunder.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
57
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
IN WITNESS WHEREOF, the parties hereby execute this Share Purchase
Agreement as of the date first written above.
INTEK INFORMATION, INC., ACORN INFORMATION SERVICES, INC.,
a Delaware corporation a Delaware corporation
By: __________________________ By: ___________________________
Timothy O'Crowley, President Venkat Sharma, President
By: __________________________ By: ___________________________
Its: Secretary Its: Assistant Secretary
KEY SHAREHOLDERS:
_______________________________
Venkat Sharma
_______________________________
Shoba Murali
_______________________________
Raja Ramnarayan
_______________________________
Sunil Gupta
SHAREHOLDER
_______________________________
Richard Wayne
58
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS APPLIED FOR
SHAREHOLDER FAMILY LLC'S:
Sharma Family LLC
By: _________________________________
Its: _________________________________
Murali Family LLC
By: _________________________________
Its: _________________________________
Ramnarayan Family LLC
By: _________________________________
Its: _________________________________
59
<PAGE>
Exhibit 2.1.1
FORM
EMPLOYMENT AGREEMENT
(_____________________)
Exhibit 6.1.1
This EMPLOYMENT AGREEMENT is made as of October 30, 1999 by and between
Intek Information, Inc., a Delaware corporation (the "Company" or "Intek"),
Acorn Information Services, Inc., a Delaware corporation ("Acorn"), and
_________________, an individual residing in __________, _________ Connecticut
("Employee").
WHEREAS, concurrently herewith, the Company is purchasing all of the
capital stock of Acorn pursuant to that certain Share Purchase Agreement among
the Company, Acorn, the Employee and others of even date herewith (the "Share
Purchase Agreement"); and
WHEREAS, the Company desires to employ the Employee as an employee of the
Company and as ________________ of Acorn, and Employee desires to serve as an
employee of the Company and as ________________ of Acorn upon the following
terms and conditions and effective as of October 1, 1999 (the "Effective Date").
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants herein, the
parties agree as follows:
1. Employment. Upon the terms and subject to the conditions of this Agreement,
----------
the Company hereby employs and Acorn employs, and the Employee hereby
agrees to serve, as an employee of the Company and as ________________ of
Acorn.
2. Term. Subject to Section 5 hereof, the term of Employee's employment under
----
this Agreement shall be for a period of three (3) years commencing on the
Effective Date and terminating on the third anniversary thereof. This
Agreement shall automatically extend for successive one-month periods after
the initial three (3) year term unless terminated as provided herein. The
initial three (3) year period and any extensions are collectively referred
to herein as the "Term".
3. Compensation.
------------
A. Base Salary. The Company shall, commencing on the Effective Date and
-----------
during the Term, pay to the Employee, and the Employee agrees to
accept, a base salary of $________ per year, less applicable
withholding taxes, payable in accordance with the customary practices
of the Company, but not less than monthly, plus such salary increases
as approved by the Board of Directors of the Company. The annual base
salary, excluding all bonus payments, as in effect from time to time,
is referred to herein as the "Base Salary".
<PAGE>
B. Signing Bonus. On the date hereof, the Company shall pay Employee a
-------------
signing bonus (which shall be subject to withholding and other similar
taxes) of $________as described in Exhibit A.
C. Spider Stock. On the date hereof, the Company shall deliver to
------------
Employee three hundred eighty-eight thousand one hundred fifty-five
(388,155) shares of common stock of Spider Technologies, Inc., a
Delaware corporation ("Spider Stock"), which shall be subject to the
Stock Restriction Agreement attached hereto as Exhibit B. Employee
agrees to make a timely Section 83(b) election with the Internal
Revenue Service with respect to the Spider Stock, and a failure to do
so constitutes a material breach of this Agreement permitting the
Company to terminate this Agreement for "Cause".
D. Consideration. Employee agrees to accept the above amounts and the
-------------
benefits described in this Agreement in full payment for the services
to be rendered by him hereunder; provided, however, that the Company's
Board of Directors or its Compensation Committee and Employee will
meet no later than six (6) months after the Effective Date and again
on each anniversary of the Effective Date to discuss an increase in
Base Salary. There is no assurance any increase in Base Salary will
occur. In no event shall Base Salary decrease.
4. Duties.
------
A. Employee has been retained to occupy a position that constitutes part
of the professional, management and executive staff of the Company and
Acorn, whose duties will include the formulation and execution of
management policy.
B. The Employee shall during the Term:
(i) devote his full normal working time, energies and attention to
the duties of his employment as they may be established from time
to time by the Board of Directors of the Company and/or Acorn
consistent with the position and office occupied by Employee,
except that Employee may spend time managing Employee's personal,
financial and legal affairs and, upon the prior written consent
of the ________________ of the Company (which consent shall not
be unreasonably withheld), serving on corporate, civic or
charitable boards and committees, provided that such approval
shall be deemed to have been given if the ________________ of the
Company does not notify Employee that Employee may not so serve
within fifteen (15) business days of receipt of Employee's notice
of Employee's intent to serve on such boards or committees, and
further provided that in any event such time does not
unreasonably interfere with Employee's performance of his duties
hereunder;
(ii) comply with all reasonable rules, regulations and administrative
directions now or hereafter established by the Company;
2
<PAGE>
(iii) not engage in any activity or employment which materially
conflicts with or has a material adverse affect on, the present
or prospective business of the Company (including its
subsidiaries) and Employee's performance of his duties for the
Company or Acorn; and
(iv) notwithstanding the foregoing, if reasonably requested by the
Company, perform services for and/or be an officer of one or
more Intek subsidiaries, to the extent such duties are
consistent with Employee's executive position.
C. It is expressly understood and agreed that the Employee's continuing
with the same level of involvement to serve on any boards and
committees (i) on which he is serving or with which he is otherwise
associated on the Effective Date, and/or (ii) his service on any other
boards and committees of which he notifies the ________________ of the
Company and the Company gives prior written approval (which approval
will not be unreasonably withheld and shall be deemed to have been
given if the ________________ of the Company does not notify Employee
that Employee may not so serve within fifteen (15) business days of
receipt of Employee's notice), shall not be deemed to interfere with
the performance of the Employee's services to the Company.
D. Unless Employee consents otherwise in writing, which consent will not
be unreasonably withheld, the principal location for the performance
of his duties hereunder shall be at Acorn's offices in Shelton,
Connecticut.
5. Termination.
-----------
A. Mutual Agreement. Notwithstanding the provisions of Sections 1 and 2
----------------
hereof, this Agreement may be terminated at any time by the mutual
written agreement of the Company and Employee.
B. Termination of Employment Other Than by Employee. Notwithstanding the
------------------------------------------------
provisions of Sections 1 and 2 hereof, this Agreement may be
terminated prior to the expiration of the Term by the Company only
upon the occurrence of any of the following events:
(i) Death. Upon the death of the Employee.
-----
(ii) Disability. The inability of the Employee to perform his duties
----------
in any material respects on account of injury, illness or other
incapacity for the longest of (i) ninety (90) consecutive days,
or (ii) ninety (90) days in a three hundred sixty-five (365) day
period, or (iii) any longer period prescribed by any applicable
law, and the Board of Directors of the Company reasonably
determines that Employee has been unable to perform his duties
for such period as a result of injury, illness or other
incapacity ("Disability").
(iii) Cause. For "Cause", which shall be limited to:
-----
3
<PAGE>
(1) the Employee is convicted or indicted of a felony, or of a
criminal offense involving any act or acts of moral turpitude or
any crime other than a vehicle offense that materially impairs
the Company's business, goodwill or reputation;
(2) the Employee has committed any material act of dishonesty with
respect to the Company, or any of the Company's subsidiaries or
affiliates, that materially impairs the Company's business,
goodwill or reputation and that is not the result of an
inadvertent or innocent mistake;
(3) willful malfeasance or nonfeasance of duty by the Employee
hereunder that materially injures the reputation, business or
business relationships of the Company or any of its subsidiaries
or any of their respective officers, directors or employees;
(4) the Employee materially breaches any term of this Agreement and
such action or failure to act is not remedied or cured, or
reasonable steps to fully effect such remedy or cure are not
commenced, within twenty (20) days of Employee's receipt of
written notice from the Company of such material breach;
(5) willful or prolonged absence from work by the Employee (other
than by reason of Disability) or material failure, neglect or
refusal by the Employee to perform his duties and
responsibilities without the same being remedied or corrected
upon twenty (20) days prior written notice; or
(6) a failure to properly and timely make the Section 83(b) election
provided for above regarding the Spider Stock.
C. Without Cause. Notwithstanding the provisions of Sections 1 and 2 hereof,
-------------
the Company may terminate this Agreement at any time without Cause upon
thirty (30) days prior written notice to the Employee, in which case the
Company shall pay the Employee the amounts set forth in Section 5G(iv)
below.
D. Termination of Employment by Employee. Notwithstanding the provisions of
-------------------------------------
Sections 1 and 2 hereof, this Agreement may be terminated prior to the
expiration of the Term by the Employee as follows:
(i) General. The Employee may terminate his employment at any time on
-------
ninety (90) days written notice, provided, however, that the Company
-------- -------
may, in its sole discretion, elect to accelerate Employee's
termination under this Subsection by giving the Employee written
notice of its desire for the Employee to terminate his employment at
any time after thirty (30) days after receipt of Employee's notice of
termination hereunder.
4
<PAGE>
(ii) Hardship. The Employee may terminate his employment immediately and
--------
without prior notice due to a significant and long term family
medical emergency or similar hardship ("Hardship").
(iii) Good Reason. The Employee may terminate his employment at any time
-----------
for Good Reason by giving Notice of Termination pursuant to Section
5.D. within sixty (60) days after the Employee has actual notice of
the occurrence of any of the following events (each or collectively,
"Good Reason") (provided the Company and Acorn do not cure such
event, or commence reasonable steps to fully effect such a remedy or
cure, on a retroactive basis to the extent possible within twenty
(20) days following its receipt of the Employee's Notice of
Termination):
(1) The Employee's Base Salary, bonuses and/or other compensation are
reduced or not paid for any reason other than in connection with
the termination of his employment.
(2) The Company otherwise materially breaches, or is unable to
perform its obligations under this Agreement and such breach is
not remedied or cured, or reasonable steps to fully effect a
remedy or cure have not commenced, within twenty (20) days of the
Company's receipt of written notice from Employee of such
material breach.
(3) For any reason, other than in connection with the termination of
Employee's employment for Cause, the Company materially reduces
any benefit provided to the Employee below the level of such
benefit provided generally to other actively employed executives
of the Company of similar compensation and responsibility levels,
unless the Company agrees to fully compensate the Employee for
any such material reduction.
E. Notice of Termination. Any termination of the Employee's employment by the
---------------------
Company hereunder, or by the Employee other than termination upon the
Employee's death, shall be communicated by written Notice of Termination to
the other party. For purposes of this Agreement, a "Notice of Termination"
means a notice that shall indicate the specific termination provision
relied upon in this Agreement, and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for termination of the
Employee's employment under the specified provision or provisions.
F. Date of Termination. "Date of Termination" means:
-------------------
(i) If the Employee's employment is terminated by his death, the date of
his death.
(ii) If the Employee's employment is terminated by the Company as a result
of Disability pursuant to Section 5.B.(ii), the date that is thirty
(30) days after Notice of Termination is given.
5
<PAGE>
(iii) If the Employee terminates his employment for Good Reason pursuant to
Section 5.D(iii) the date that is twenty (20) days after Notice of
Termination is given (provided that the Company does not cure such
event during the twenty (20) day period).
(iv) If the parties terminate Employee's employment pursuant to Section
5(A) or if the Company terminates Employee's employment pursuant to
Section 5(C) or if Employee terminates his employment for Hardship
pursuant to Section 5(D)(ii), the date of Employee's last day of
work.
(v) If the Employee terminates his employment pursuant to Section
5(D)(i), the date that is ninety (90) days after Notice of
Termination is given, or such last day of employment as may be
specified by the Company in its notice to the Employee under Section
5(D)(i).
(vi) If the Employee's employment is terminated by the Company either for
Cause pursuant to Section 5(B)(iii), the date on which the Notice of
Termination is given.
G. Amounts Payable Upon Termination of Employment or During Disability.
-------------------------------------------------------------------
(i) Death. If the Employee's employment is terminated by his death, the
-----
Employee's beneficiary, as designated by the Employee in writing with
the Company prior to his death, shall be entitled to the following
payments and benefits (collectively, "Termination Payments"): (i) any
Base Salary that is accrued but unpaid, any bonus that is earned but
unpaid pursuant to the applicable terms and provisions of such bonus
plan, any vacation that is accrued but unused, and any business
expenses that are unreimbursed -- all, as of the Date of Termination;
and (ii) any benefit following the Date of Termination which may be
provided under the benefit plans, policies and programs described in
Section 7 in the amounts and for the time periods set forth in the
applicable terms and provisions of such plans. In the absence of a
beneficiary designation by the Employee, or, if the Employee's
designated beneficiary does not survive the Employee, or if required
by law, the Termination Payments shall be paid to the Employee's
estate.
(ii) Disability.
----------
During any period that the Employee fails to perform his duties
hereunder as a result of a Disability ("Disability Period"), the
Employee shall continue to receive his Base Salary at the rate then
in effect for such period until his employment is terminated pursuant
to Section 5(B)(ii) less any payments received pursuant to disability
policies or benefits (whether of the Company, Acorn or governmental);
and
Upon his termination of employment because of Disability, the
Employee shall be entitled to the Termination Payments as if the
Employee has died on his Date of
6
<PAGE>
Termination. In the event of the Employee's death prior to the time
that all Termination Payments have been paid, such payments and
benefits shall be paid to the Employee's beneficiary as designated
pursuant to Section 5(G)(i), or, in the absence of a beneficiary
designation or the designated beneficiary does not survive the
Employee, to the Employee's estate.
(iii) Hardship or Mutual Agreement. In the event the parties mutually
----------------------------
agree to terminate this Agreement or Employee terminates his
employment due to Hardship before the expiration of the Term,
including any extension thereof, the Employee shall be entitled to
the Termination Payments as if the Employee had died on his Date of
Termination.
(iv) Termination by Company Without Cause or Termination by Employee for
-------------------------------------------------------------------
Good Reason. In the event the Company terminates the Employee's
-----------
employment without Cause pursuant to Section 5(c) or the Employee
terminates his employment for Good Reason before the expiration of
the Term, including any extension thereof, the Employee shall be
entitled to the following payments and benefits:
(1) The Termination Payments as if the Employee had died on his Date
of Termination;
(2) Employee's Base Salary then in effect from and after the Date of
Termination through the earlier of (i) the expiration of the Term
-------
and (ii) the date twelve (12) months after the Date of
Termination (the "Initial Severance Period"), less all applicable
payroll deductions, including deductions for federal, state,
local and Social Security taxes (the "Initial Severance
Payments"). The Initial Severance Payments shall be paid in
accordance with the provisions of Section 3; and
(3) In Intek's sole discretion (based on factors such as, without
limitation, Employee diligently searching for future employment,
his reasonable cooperation with Intek during the Initial
Severance Period relating to activities Employee was actively
engaged in prior to the Date of Termination and Employee
refraining from any act or failure to act intended to materially
injure the reputation, business relationships or operations of
the Company), Employee's Base Salary then in effect from and
after the expiration of the Initial Severance Period through the
earlier of (i) the expiration of the Term, (ii) the date twelve
(12) months after the expiration of the Initial Severance Period,
and (iii) the date Employee commences other employment that, in
Employee's sole discretion, is suitable and comparable to his
employment with the Company (the "Extended Severance Period"),
less all applicable payroll deductions, including deductions for
federal, state, local and Social Security taxes (the "Extended
Severance Payments"). The Severance Payments shall be paid in
accordance with the provisions of Section 3.
7
<PAGE>
During the Initial Severance Period, payment of any life
insurance or other benefit of employment which may be provided
under the benefit plans, policies and programs described in
Section 7 will terminate on the Date of Termination (other than
COBRA at the Employee's expense).
During the Initial Severance Period and the Extended Severance
Period, the Company shall provide the Employee at the Company's
expense customary full executive level outplacement services with
a mutually acceptable outplacement firm for a period of up to
twelve (12) months after the Date of Termination to assist
Employee with his post-termination search for employment,
provided that in no event shall the Company be required to pay an
amount greater than fifteen percent (15%) of Employee's then
current Base Salary. In lieu of such outplacement services,
Employee may request equitable payment in cash or request that
the Company provide at its own expense for a period of up to
twelve (12) months (and in an amount that does not exceed the
amount that would have been payable by the Company under the
immediately preceding sentence) a mutually acceptable office,
together with secretarial assistance and customary office
facilities and services, for the purpose of facilitating
Employee's search for new employment. Employee acknowledges and
agrees that he will be responsible for the payment of all taxes
that are applicable in connection with the payments made by the
Company under this section.
In order to obtain payments pursuant to Subsections G(iv)(2) and
G(iv)(3) above, Employee shall submit a request for Severance Payments
identical to Exhibit C hereof following the last day of his
employment. The Company shall have no obligation to pay any such
payments unless and until the Employee shall have submitted such
request. The payments made hereunder, if any, shall be made on a
monthly basis at the time of the Company's regular payroll and shall
not be reduced by compensation the Employee may receive from other
sources.
(v) Termination by Employee Other Than for Good Reason, Hardship, Mutual
--------------------------------------------------------------------
Agreement or Termination by Company for Cause. In the event that the
---------------------------------------------
Employee voluntarily terminates his employment (other than for Good
Reason, Hardship or Mutual Agreement) or the Company terminates his
employment for Cause, the Employee shall not be entitled to any
compensation except as set forth below:
(1) Any Base Salary that is accrued but unpaid, any vacation that is
accrued but unused, any bonuses that are earned but unpaid
pursuant to the terms and provisions of such bonus plans, and any
business expenses that are unreimbursed -- all, as of the Date of
Termination; and
(2) Any other rights and benefits (if any) provided under plans and
programs of the Company (excluding any bonus program), determined
in accordance with the applicable terms and provisions of such
plans and programs.
8
<PAGE>
6. Expenses. The Company shall reimburse the Employee in accordance with the
--------
Company's regular procedures in effect from time to time (but at least
monthly) for all reasonable and necessary business expenses incurred by him
in the performance of his duties hereunder, provided that Employee shall
render to the Company such accounts and vouchers covering expenditures as
the Company reasonably requires or as are necessary for tax purposes, and
shall follow normal Company policy on expenses.
7. Vacation; Benefits. During the Term:
------------------
A. Employee shall be eligible to participate in the benefit plans made
generally available to employees of the Company having similar
responsibility and compensation levels as Employee to the extent not
duplicative of compensation or benefits provided expressly herein.
Employee expressly acknowledges that the Company may alter, modify,
suspend or terminate any such benefit plans at any time and for any
reason, or no reason.
B. Employee shall be entitled to four (4) weeks vacation time annually
with pay, the time of which shall be determined in Employee's
discretion and shall not unreasonably interfere with Employee's
performance of his duties hereunder; and
C. Employee will receive an automobile allowance of $________ per month
and automobile insurance so long as premium levels are in accordance
with standard rates for safe drivers.
8. Non-Competition.
---------------
A. The Company, Acorn and the Employee recognize that the Employee has
been retained to occupy a position that constitutes part of the
professional, management, and executive staff of the Company and
Acorn, whose duties will include the formulation and execution of
management policy. The Employee, for and in consideration of the
payments, rights and benefits provided herein, agrees that during the
Non-Compete Period (defined below), the Employee shall not compete
directly or materially with a Subject Company in the business of (i)
inbound or outbound telemarketing or teleservicing; (ii) outsourced
teleservicing; (iii) customer direct e-servicing business, which
includes, without limitation, the design, development, marketing and
sale of business tools (including business rules and processes) and
computer software that assists businesses and other organizations in
selling products directly to consumers on the Internet, or (iv) "data
mining" by which demographic data is either gathered or analyzed in
order to direct or improve marketing or customer service activities
(collectively the "Business"), during the Non-Compete Period. For
purposes of this Section, the "Non-Compete Period" shall begin on the
Closing Date (as defined in the Purchase Agreement) and end either:
(i) if the Date of Termination is before the EBITDA Threshold (as
defined in the Purchase Agreement) is achieved, the longer of one (1)
year after the Date of Termination or three (3) years after the
Closing Date; or (ii) if the Date of Termination is after the EBITDA
Threshold is achieved, one (1) year after the Date of Termination. The
parties agree that they shall not during such period make public
statements in derogation of each other,
9
<PAGE>
except as may be required by law. For the purposes of this Section,
the term "Subject Company" shall mean Intek and any direct or indirect
subsidiaries, parents and affiliates of Intek including Acorn.
Competing directly or materially with the Subject Company shall mean
(a) either (i) engaging or (ii) having a material interest (any
ownership or profit interest over 5% always being material), directly
or indirectly, as owner, employee, officer, director, partner,
venturer, shareholder, capital investor, consultant, agent, principal,
advisor or otherwise, either alone or in association with others, in
the operation of any individual or entity engaged in (b) the Business
within Canada or the continental United States, including the
California counties which would appear here if each county in
California was listed here. Competing directly or materially with the
Subject Company, as used in this Agreement, shall be deemed not to
include an ownership interest as an inactive investor, which for
purposes of this Section shall mean the beneficial ownership of less
than five percent (5%) of the outstanding shares of any series or
class of securities of any competitor of the Subject Company, which
shares are publicly traded in the securities markets. The Key
Shareholders agree that the Business is inherently nationwide in
scope.
B. Notwithstanding the foregoing, Employee shall have no obligation under
this Section 8 after termination if (i) both (1) (A) the Employee has
terminated this Agreement for Good Reason or the Company has
terminated this Agreement without Cause, and (B) the Company has
obligations to make post-termination continued Base Salary payments
under this Agreement, and (2) after twenty (20) days notice by the
Employee to the Company that the Company has failed to make such post-
termination payments, the Company has not cured such failure to make
payments; or (ii) if the Intek ________________ consents, which
consent shall not be unreasonably withheld, to Employee's employment
or performance of services for a business that does not directly
compete with Intek.
C. Upon the termination of the Employee's employment with the Company,
and for one year thereafter, upon written request of the Company, the
Employee shall promptly provide the Company a Certificate of
Compliance with this Section 8, which Certificate shall include
information regarding Employee's employment or agency relationships
with third parties engaged in a business which is directly or
materially in competition with the Business to the extent not
prohibited by confidentiality agreements with third parties. The
Company agrees to keep confidential and not to use or disclose any
information that Employee provides regarding Employee's employment or
agency relationships with third parties.
D. The Employee agrees that the restrictions contained in this Section 8
are reasonable as to time and geographic scope because of the nature
of the Business and the Employee agrees, in particular, that the
geographic scope of this restriction is reasonable because companies
engaged in the Business compete on a nationwide basis. The Employee
acknowledges that the Company is in direct competition with all other
companies engaged in the Business throughout the continental United
States, Canada, and other markets in which the Company may be
conducting business at the time the Employee's
10
<PAGE>
employment with the Company is terminated, and because of the nature
of the Business, the Employee agrees that the covenants contained in
this Section 8 cannot reasonably be limited to any smaller geographic
area.
E. The provisions of this Section 8 shall survive termination of this
Agreement for any reason.
9. Non-Raid.
--------
A. The Employee acknowledges that the Company has invested substantial
time and effort in assembling its present staff of personnel.
Accordingly, Employee covenants and agrees that during the term of the
Non-Compete Period, he will not (i) solicit or hire any of the
employees of a Subject Company who were employed by a Subject Company
at or within one month before or during the Employee's employment by a
Subject Company, (ii) interfere with the relationship of the Subject
Company with any such employees, or (iii) personally target or
solicit, or assist another to target or solicit, customers of the
Subject Company for activities related to the Business or influence,
or attempt to influence any of the customers of the Subject Company
not to do business with the Company.
B. Notwithstanding the foregoing, Employee shall have no obligation under
this Section 9 after termination if both (i) (A) the Employee has
terminated this Agreement for Good Reason or the Company has
terminated this Agreement without Cause, and (B) the Company has
obligations to make post-termination continued Base Salary payments
under this Agreement, and (ii) after twenty (20) days notice by the
Employee to the Company that the Company has failed to make such post-
termination payments, the Company has not cured such failure to make
payments.
C. The Employee agrees that the restrictions contained in this Section 9
are reasonable as to time and geographic scope because of the nature
of the Business and the Employee agrees, in particular, that the
geographic scope of this restriction is reasonable because companies
engaged in the Business compete on a nationwide basis. The Employee
acknowledges that the Company is in direct competition with all other
companies engaged in the Business throughout the continental United
States, Canada, and other markets in which the Company may be
conducting business at the time the Employee's employment with the
Company is terminated, and because of the nature of the Business, the
Employee agrees that the covenants contained in this Section 9 cannot
reasonably be limited to any smaller geographic area.
10. Blue Pencil Provision. Employee acknowledges that the scope, periods and
---------------------
geographic area of restriction imposed by Section 8 and Section 9 are fair
and reasonable and are reasonably required for the protection of the
Company. If any part or parts of Section 8 or Section 9 shall be held to be
unenforceable or invalid, the remaining parts thereof shall nevertheless
continue to be valid and enforceable as though the invalid portion or
portions were not a part hereof. If any of the provisions of Section 8 and
Section 9 relating to the scope, periods or
11
<PAGE>
geographic area of restriction shall be deemed to exceed the maximum scope,
periods of time or area which a court of competent jurisdiction would deem
enforceable, the scope, times and area shall, for the purposes of Section 8
and Section 9, be deemed to be the maximum scope, time periods and area
which a court of competent jurisdiction would deem valid and enforceable in
any state in which such court of competent jurisdiction shall be convened.
The invalidity or unenforceability of any provision hereof in one
jurisdiction shall not affect its validity or enforceability in another
jurisdiction.
11. Confidentiality. Employee acknowledges that Employee may have access to
---------------
certain information related to the business, operations, future plans and
customers of the Company, the disclosure or use of which could cause the
Company substantial losses and damages. Accordingly, Employee covenants
that during the term of Employee's employment with the Company and
thereafter Employee will keep confidential all such information and
documents furnished to Employee by or on behalf of the Company and not use
the same to Employee's advantage, except to the extent such information or
documents are lawfully obtained from other sources on a non-confidential
(as to the Company) basis or are in the public domain through no fault on
Employee's part or is consented to in writing by the Company or are
disclosed to the extent required by a court, administrative agency,
government body, or applicable law, rule or regulation. Upon termination of
Employee's employment, Employee shall return to the Company all records,
lists, files, disks, documents, media and other Company property which are
in Employee's possession and which relate to the Company or its business.
12. Right to Injunctive Relief. Employee agrees and acknowledges that a
--------------------------
violation of the covenants contained in Sections 8, 9, or 11 of this
Agreement will cause irreparable damage to the Company, and that it may be
impossible to estimate or determine the damage that will be suffered by the
Company in the event of a breach by Employee of any such covenant.
Therefore, Employee further agrees that in the event of any violation or
immediately threatened violation of such covenants, the Company shall be
entitled as a matter of course to seek an injunction from any court of
competent jurisdiction restraining such violation or threatened violation
by Employee, such right to an injunction to be cumulative and in addition
to whatever other remedies the Company may have.
13. Indemnification; Insurance. The Company shall provide for the coverage of
---------------------------
Employee under the Company's standard directors' and officers' insurance
policy to protect Employee against any expense, liability or loss by reason
of the fact that Employee is or was a director or officer of the Company,
to the fullest extent permitted by applicable law and the terms and
conditions of such policy.
14. Integration; Forum. This Agreement together with the Stock Restriction
------------------
Agreement and the Share Purchase Agreement shall constitute the entire
agreement between the parties. This Agreement shall be governed by the laws
of Colorado, excluding laws on choice of law. This Agreement specifically
supersedes any employment arrangements, or other compensation arrangement
(including bonus, option, appreciation, benefit or commission arrangements)
with Acorn. Any litigation regarding this Agreement shall only be brought
and heard in the
12
<PAGE>
federal or state courts located in Chicago, Illinois, which courts shall
apply the laws of the State of Colorado, excluding laws on choice of law,
and no transfer of venue outside such area shall be permitted. If the
Company is enforcing any provision hereof which is similar to a provision
in the Share Purchase Agreement (including, but not limited to, non-
compete, confidentiality and no-hire provisions) and Employee was a party
to such Share Purchase Agreement, the Company may require the resolution of
such issues to be decided in the arbitration or litigation conducted under
such Share Purchase Agreement. Termination of this Agreement or any
provision hereof, including Sections 8, 9, or 11, shall not affect any
similar provision in the Share Purchase Agreement, including any non-
compete covenant; provided, however, that the provisions of Sections 8 and
-------- -------
9 hereof relating to the time periods for the effectiveness of the
agreements addressed in such sections, shall control over a longer time
period in the corresponding provision of the Share Purchase Agreement. In
all other respects the agreements in the Share Purchase Agreement
(including, but not limited to, non-compete, confidentiality and no-hire
provisions) are separate and independent of this Agreement.
15. Unenforceability. If any paragraph or subparagraph of this Agreement or any
----------------
part thereof shall be unenforceable under any applicable laws,
notwithstanding such unenforceability the remainder of this Agreement shall
remain in full force and effect.
16. Attorneys' Fees; Costs. In the event of any legal or arbitration action or
----------------------
proceeding to enforce or interpret the provisions hereof, the prevailing
party shall be entitled to reasonable attorneys' fees and costs, and other
costs and expenses incurred in the action or proceeding, whether or not the
proceeding results in a final judgment. All costs and expenses, including
without limitation attorneys' fees and costs, incurred in connection with
the negotiation, preparation, execution, delivery and enforcement of this
Agreement and consummation of the transactions contemplated hereby shall be
paid by the party incurring such costs and expenses.
17. Survival. Terms which by their terms or sense are to survive termination
--------
hereof (including Sections 5, 8, 9, 11 and 12) shall so survive.
18. Notice. Any notice, direction or instruction required or permitted to be
------
given hereunder shall be given in writing and may be given by facsimile
transmission or similar method if confirmed by mail as herein provided; by
mail if sent postage prepaid by registered mail, return receipt requested;
or by hand delivery to any party at the address of the party set forth
below. If notice, direction or instruction is given by facsimile
transmission or similar method or by hand delivery, it shall be deemed to
have been given or made on the day on which it was given, and if mailed,
shall be deemed to have been given or made on the third business day
following the day after which it was mailed. Any party may, from time to
time, by like notice give notice of any change of address and in such
event, the address of such party shall be deemed to be changed accordingly.
If to the Company: Intek Information Inc.
5619 DTC Parkway, 12/th/ Floor
13
<PAGE>
Englewood, CO 80111
Attn: Timothy C. O'Crowley
Telephone: (303) 357-3000
Facsimile: (303) 323-4213
Copy to: Chrisman, Bynum & Johnson, P.C.
1900 15th Street
Boulder, CO 80302
Attn: G. James Williams, Jr.
Telephone: (303) 546-1300
Facsimile: (303) 449-5426
If to the Employee: _____________________________
PERSONAL AND CONFIDENTIAL
c/o Acorn Information Services, Inc.
4 Corporate Drive
Shelton, CT 06484
Telephone: (800) 279-3889
Facsimile: (203) 225-7610
Copy to: Wiggin & Dana
Three Stamford Plaza
301 Tresser Blvd.
Attn: William A. Perrone
Telephone: (203) 363-7604
Facsimile: (203) 363-7676
19. Inventions. Employee hereby agrees to assigns, and hereby assigns, to the
----------
Company all of Employee's interest (including copyrights and patent rights)
in any ideas, concepts, know-how, inventions, discoveries, works of
authorship, and the like ("Inventions"), which are conceived or made by
Employee during the term of Employee's employment with the Company or his
previous employment by Acorn, and which are or were developed on Company
time or with Company facilities, whether or not related to the Business.
Further, even if not developed on Company time or with Company facilities,
any Invention (conceived by or made by Employee during the term of
employment with the Company) is hereby assigned if it relates to or is
suggested by the Business. Employee also agrees that, independent of any
assignment, Employee's work is a work for hire and the Company owns all
right, title and interest in all Inventions, and all copyrights, patent
rights, and the like, concerning the Inventions. Employee will, from time
to time, execute such confidentiality and invention assignment agreements
as are generally signed by similarly situated Company employees.
20. Amendments; Waivers. This Agreement cannot be changed, modified or amended,
-------------------
and no provision or requirement hereof may be waived, without consent in
writing of the parties hereto.
14
<PAGE>
21. Counterparts. This Agreement may be executed in two or more counterparts,
------------
each of which shall be deemed to be an original. It shall not be necessary
when making proof of this Agreement to account for more than one
counterpart.
22. Acorn as Substitute for Intek; Joint and Several Liability. Acorn and
----------------------------------------------------------
Intek acknowledge and agree that they are jointly and severally liable for
their duties under this Agreement. Throughout this Agreement references are
made to the Company performing certain acts. The Company may cause Acorn to
perform (in whole or in part) any act to be performed by the Company
hereunder; provided, however, that no such assignment or delegation of
duties shall relieve Acorn or Intek of their joint and several liability
hereunder.
[Signature page follows.]
15
<PAGE>
IN WITNESS WHEREOF, the parties have executed this EMPLOYMENT AGREEMENT as of
the date first above written.
INTEK INFORMATION, INC. ACORN INFORMATION SERVICES, INC.
By: __________________________ By:__________________________________
Timothy O'Crowley Title: ______________________________
___________________
EMPLOYEE
__________________________________
EXHIBIT A
---------
In the event Acorn achieves Sustained Profitability by August 31, 1999, the
Company will pay Employee $________, less applicable taxes and withholding. The
bonus will be paid within thirty (30) days of Closing. "Sustained
Profitability" has the meaning set forth in the Share Purchase Agreement.
The Company's obligation to pay such signing bonus shall immediately expire in
the event Employee's employment is terminated for any reason set forth in the
attached Employment Agreement prior to the date such bonus is payable by
Company.
16
<PAGE>
EXHIBIT B
---------
Stock Restriction Agreement
17
<PAGE>
EXHIBIT C
---------
Request for Post-Employment Allowance
This request for severance allowance is made by _________________ (hereinafter
"the Employee") pursuant to the provisions of the Employment Agreement (the
"Agreement") between the Employee on the one hand, and Intek Information, Inc.
and Acorn Information Services, Inc. on the other (hereinafter collectively "the
Company").
1. In consideration of the execution of this request for post-employment
allowance, the Company agrees to pay me the amounts and provide me with the
benefits as set forth in Subsections G(iv)(2) and (3) of the Agreement.
2. In return for these payments and benefits, I fully and finally release, waive
and discharge all charges, claims and causes of action of any sort known to me
that I may have against any person (including the Company, its directors,
officers, employees, agents and owners), including but not limited to, claims
arising from or related to my employment or termination of my employment, any
age, race, any unlawful employment practices of any kind, or otherwise, whether
such claims arise under federal, state, local, common, contract (including, but
not limited to, the Agreement), tort or other laws or regulations, specifically
including Title VII of the Civil Rights Act of 1964 as amended by the Equal
Employment Opportunity Act of 1972 and the Age Discrimination in Employment Act,
42 U.S.C. Section 1981.
3. I represent and warrant that I have returned all property of the Company in
my possession, including but not limited to, documents, manuals, pertinent
business contacts (names and addresses), shareholder lists, software, computers
and computer disks, notes, keys, cellular phone, and other articles or equipment
I used in the course of my employment that were provided to me by the Company.
4. It is understood that the Company does not admit the existence or validity of
any such claims or any liability of any sort nor has the Company made any
agreement or promise to do or omit to do any act or thing not herein set forth.
5. I agree that I will not disclose this document or its terms or provisions
without first obtaining the written consent of the Company except to the extent
such information is lawfully obtained from other sources on a non-confidential
(as to the Company) basis or are in the public domain through no fault on
Employee's part, and except to my accountants, attorneys and immediate family
members.
6. I understand that this Request shall be governed by Colorado law.
7. I have read and completely understand this request and recognize that it
constitutes a general release and waiver of all claims, and I agree that this is
an acceptable compromise of any such
18
<PAGE>
claims described in this request and knowingly and voluntarily intend to be
bound by these provisions without any further promises or consideration by the
Company.
____________________________________ Date __________________
19
<PAGE>
EXHIBIT TO FORM OF EMPLOYMENT AGREEMENT
EMPLOYEE STOCK RESTRICTION AGREEMENT
This EMPLOYEE STOCK RESTRICTION AGREEMENT (the "Agreement") is made as of
the 4th day of November, 1999, by and between INTEK INFORMATION, INC., a
Delaware corporation (the "Company"), and ________________________ ("Employee").
RECITALS
--------
WHEREAS, the Company, Acorn Information Services, Inc., a Delaware
corporation ("Acorn"), Employee, a former shareholder and an employee of Acorn,
and certain other shareholders of Acorn (the "Acorn Shareholders") have entered
into a Share Purchase Agreement dated as of the date hereof (the "Purchase
Agreement") for the purchase by the Company of all of the outstanding capital
stock of Acorn from the Acorn Shareholders. All capitalized terms used, but not
otherwise defined, herein shall have the meaning ascribed to them in the
Purchase Agreement.
WHEREAS, Employee and the Company have entered into an Employment Agreement
of even date herewith (the "Employment Agreement") pursuant to which Employee is
entitled to receive [________________] shares of common stock of Spider
Technologies, Inc., a Delaware corporation and previously wholly owned
subsidiary of the Company ("Spider"), subject to the terms and conditions of
this Agreement.
WHEREAS, the [________________] shares of common stock of Spider, par
value $0.0001 per share, Employee is entitled to receive under the Employment
Agreement (the "Employee Shares") are subject to the restrictions contained in
this Agreement.
WHEREAS, in consideration of the Employment Agreement and the execution by
certain other employees of the Company and Acorn of similar agreements pursuant
to the Purchase Agreement, Employee desires to participate in the stock
restriction plan which this Agreement embodies.
NOW, THEREFORE, the parties agree as follows:
1. Delivery of Spider Common Stock. Employee and the Company agree that
-------------------------------
in consideration for services rendered and to be rendered by Employee to Acorn,
the Company has delivered to Employee [________________] shares of Spider
common stock subject to the terms and conditions of this Agreement. If the spin
off transaction between Intek and Spider (the "Spider Spin Off") closes on or
before the Closing Date (as defined in the Purchase Agreement) or at the
Company's election even if the Spider Spin Off has not occurred, the Company
shall exercise its warrant to purchase shares of Spider common stock and, upon
receipt of certificates evidencing such shares, shall deliver a
1
<PAGE>
duly endorsed certificate to Employee representing [___________] shares of
Spider common stock free and clear of any liens, charges, claims or encumbrances
of any kind (other than this Agreement, the Spider Shareholders Agreement and
the Purchase Agreement) as compensation for certain services rendered and to be
rendered by Employee to Acorn. If the Spider Spin Off does not close on or
before the Closing Date, and the Company does not elect to deliver the Spider
common stock, the Company shall deliver to Employee a warrant entitling Employee
to receive [___________] shares of Spider common stock (subject to the same risk
of forfeiture as the Employee Shares as provided below) upon the closing of the
Spider Spin Off or 25 days after the date hereof, whichever is earlier;
provided, however, that in the event the Spider Spin Off is terminated prior to
- -------- -------
such 25-day period, such warrant shall terminate automatically upon such
termination of the Spider Spin Off and Employee shall not be entitled to receive
any shares of Spider common stock.
2. Escrow of Employee Shares. Employee shall deposit the
-------------------------
certificate representing the Employee Shares (or the warrant as the case may be)
with Wiggin & Dana (the "Escrow Agent") to be held in escrow (the "Escrow") in
accordance with the terms of this Agreement and a mutually acceptable escrow
agreement entered into with the Escrow Agent. The certificate will be held in
Escrow until the expiration of the risk of forfeiture to which the Employee
Shares are subject as provided below, which in any event shall be no later than
30 days after the end of the close of the books of account of the Company for
the period ending on the third anniversary of the date of this Agreement (or
upon earlier expiration of the risk of forfeiture with respect to the Employee
Shares upon an acceleration event as described in Section 5.16 of the Purchase
Agreement) (the "Disbursement Date"). If all or any portion of the Employee
Shares is forfeited (as provided below), the Company will issue on or prior to
the Disbursement Date a new certificate in the name of Employee to the escrow
agent representing the number of Vested Employee Shares (defined below) for
disbursement to employee out of Escrow at the Disbursement Date. Subject to
Section 4, the Escrow Agent shall deliver to Employee the certificate
representing the Vested Employee Shares on the Disbursement Date.
As used herein, "Vested Employee Shares" means a number of shares of
Spider common stock equal to the number of shares of Intek common stock Employee
is entitled to receive under Section 2.2 of the Purchase Agreement in Year 1 (as
defined in the Purchase Agreement), subject to Sections 2.4 and 5.16 of the
Purchase Agreement, and adjusted for all stock splits, stock dividends, stock
combinations and recapitalizations of Spider common stock and Intek common
stock, respectively (and any securities issued in respect thereof) (an
"Adjusting Event"). "Unvested Employee Shares" means the Employee Shares that
are not Vested Employee Shares.
As used in this Agreement, the Employee Shares includes any and all
proceeds and products of the Employee Shares whether by dividend, distribution,
as consideration for a merger, or otherwise. In the event such proceeds or
products includes cash, any cash shall be placed in a mutually acceptable escrow
account with a financial
2
<PAGE>
institution or similar party pursuant to an escrow agreement containing
substantially the terms as the Escrow Agreement entered into by the Company and
the Acorn Shareholders under the Purchase Agreement (provided that such escrow
shall not be created for indemnification claim purposes). Employee shall be
entitled to receive on the Disbursement Date the amount of such products or
proceeds in proportion to the number of Vested Employee Shares Employee is
entitled to receive on such date.
As a condition to receipt of the Employee Shares hereunder, Employee
agrees to execute and deliver to Spider a copy of any shareholders agreement
that is executed by the holders of seventy percent (70%) or more of the
outstanding common stock of Spider (the "Shareholders Agreement").
3. Section 83(b) Election. The Employee Shares received by Employee
----------------------
hereunder are subject to a risk of forfeiture as defined in Section 83(b) of the
Internal Revenue Code of 1986, as amended. Such risk of forfeiture shall
terminate at the same time and in the same manner as the shares of Intek common
stock payable pursuant to Section 2.2 (Contingent Earn-Out Consideration) and
Section 2.4 (Effect of Employee Departures and Minimum EBITDA Threshold) of the
Purchase Agreement. Employee agrees to promptly and timely file with the
----------------------------------------------------
Internal Revenue Service and the Company a Section 83(b) election with respect
- ------------------------------------------------------------------------------
to the Spider shares received by him hereunder and Employee acknowledges that he
- --------------------------------------------------------------------------------
understands the consequences of such filing. Employee agrees that he is solely
- -------------------------------------------
responsible for making such election and that he shall have no recourse against
the Company or its advisors with respect to such election.
4. Employee Shares Upon Termination of Employment. In the event
----------------------------------------------
that Employee shall cease to be an employee of Acorn at any time prior to three
(3) years from the date hereof, Employee shall be entitled to receive the Vested
Employee Shares on the Disbursement Date, except that a number of Employee
Shares shall be placed in the Earn-Out Pool (as defined in the Purchase
Agreement) equal to the shares of Intek common stock placed in the Earn-Out Pool
for Year 1 as Earn-Out Consideration pursuant to Section 2.4 of the Purchase
Agreement and shall be issued in the same manner as the Intek shares. Any
Employee Shares that are not placed in the Earn-Out Pool pursuant to this
Section 4, and that are not Vested Employee Shares, shall be deemed Unvested
Employee Shares and subject to the rights of the Company under Section 5 herein.
5. Unvested Employee Shares. Upon the earlier of the Disbursement
------------------------
Date or the Date of Termination, Employee shall automatically sell and transfer
to the Company at a price of $0.013 per share, as adjusted for any Adjusting
Events (the "Purchase Price"), all of the Unvested Shares as of the Disbursement
Date or the Date of Termination (as applicable) that are not placed in the Earn-
Out Pool as provided in Section 4 herein, without further consideration and
without written notice to such effect.
Unless the Company affirmatively elects not to purchase the Unvested
Shares within sixty (60) days following the Disbursement Date (or the Date of
3
<PAGE>
Termination if earlier), or if the number of Unvested Employee Shares shall not
have been determined as of such time, then within thirty (30) days of the date
on which the Company makes such determination, the Unvested Employee Shares
shall be deemed to have been purchased by the Company. The Company shall pay
the Purchase Price at the closing of such sale, which closing shall occur within
the sixty (60) day period (or thirty day extended period, as applicable)
referenced in the preceding sentence. A failure of the Company to make any
payment under this Section 5 shall not void the transfer of the Spider common
stock to the Company, but will only result in a monetary claim by Employee
against the Company for the amount of such payment. References to Employee
herein shall be deemed to include Employee's legal representative, estate or
beneficiary in the case of Employee's death or Disability (as defined in the
Employment Agreement). If the Company affirmatively elects not to purchase the
Unvested Shares, such Unvested Shares shall be deemed Vested Shares and Employee
shall be entitled to receive such shares on the later of the Disbursement Date
or upon notice from the Company of its election not to purchase the Unvested
Shares.
Upon payment of the Purchase Price (in cash) in accordance with this
Agreement, Employee and the Company shall notify the Escrow Agent of such
payment and Escrow Agent shall deliver the certificate representing the Unvested
Employee Shares to the Company. The escrow agreement with the Escrow Agent
shall terminate as of the Disbursement Date. All transfer taxes and expenses
shall be paid by Employee.
4
<PAGE>
6. Transfer by Employee. Employee may not sell, transfer, gift,
--------------------
assign, pledge, encumber or otherwise dispose ("Transfer") of any of his
Employee Shares during his lifetime until such shares are Vested Employee
Shares, unless to another Acorn Shareholder, to an immediate family member or
other trust or entity formed for estate planning purposes, or pursuant to
Section 5 or with the prior written consent of the Company, which consent may be
withheld for any reason or for no reason. Any Transfer of Employee Shares until
such shares are Vested Shares, whether voluntary or involuntary or by operation
of law, which is made in violation of this Section 6 (other than a Transfer
resulting from a merger or similar event required by applicable law to be
approved by a vote of the shareholders of Spider) shall be null and void and
have no effect, and the Company shall not recognize any such Transfer or
recognize the transferee as the holder of such Employee Shares for any purpose.
If Employee Transfers his Employee Shares in accordance with this Section 6,
then such Transfer may be consummated subject to the restrictions in the
Shareholders Agreement; provided, however, that any transferee thereof shall
-------- -------
become a party to this Agreement, shall execute and deliver a counterpart of
this Agreement and shall agree to be subject to the restrictions and obligations
hereunder. Employee agrees and acknowledges that any Transfer of his Vested
Employee Shares shall be subject to and made in accordance with the terms of the
Shareholders Agreement.
7. No Other Liability. No party hereto shall have by reason hereof
------------------
any liability to the other on account of a termination of Employee's employment
with the Company for any reason, except for any liability which may (or may not)
be established by a separate written mutual agreement signed by the parties,
including, but not limited to, the Employment Agreement or the Purchase
Agreement.
8. Restrictive Legend. Employee consents to the placement of an
------------------
appropriate restrictive legend on the certificate evidencing the Employee Shares
and any certificates issued in replacement or exchange therefor. In addition to
any restrictive legend required under the Spider Shareholders Agreement,
Employee understands that the restrictive legend shall be substantially in the
following form:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED FOR
INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933. SUCH SHARES MAY NOT BE SOLD OR TRANSFERRED IN THE
ABSENCE OF SUCH REGISTRATION OR AN EXEMPTION THEREFROM UNDER SAID
ACT. THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE
TRANSFERRED EXCEPT IN ACCORDANCE WITH THE RESTRICTIONS CONTAINED
IN AN EMPLOYEE STOCK RESTRICTION AGREEMENT DATED
__________________, 1999, A COPY OF WHICH OBTAINED AT NO COST BY
WRITTEN REQUEST TO THE SECRETARY OF THE CORPORATION AT ITS
CORPORATE HEADQUARTERS.
5
<PAGE>
The Company agrees to remove such restrictive legend upon the issuance of
Vested Shares to Employee on the Disbursement Date.
9. Other. The terms of this Agreement shall apply to any additional
-----
shares of Spider common stock issued to or received by Employee in connection
with a stock dividend, stock split, or other distribution of Spider stock. All
certificates representing shares hereinafter issued Employee shall bear the
legend provided in Section 8. If there shall be any change in the capital stock
of Spider through merger, consolidation, reorganization, recapitalization,
reincorporation, stock dividend, or other change in the corporate structure of
Spider, the restrictions contained in this Agreement shall apply with equal
force to the new or additional securities, or both, if any are received by
Employee in exchange for, or by virtue of his ownership of, the Employee Shares.
An appropriate adjustment shall also be made to the Purchase Price set forth in
Section 4 upon the occurrence of any such events.
10. Rights as Shareholder. Subject to the provisions of this Agreement,
---------------------
Employee shall, during the term of this Agreement, be entitled to all rights and
privileges of a shareholder of Spider with respect to the Employee Shares.
11. Notice. Any notice required or permitted under this Agreement shall
------
be given in writing and shall be deemed effectively given upon personal delivery
or three (3) business days after deposit in the United States Post Office, by
registered or certified mail, with postage and fees prepaid, addressed to the
Company at its principal office and to Employee at his address as carried on the
Company's records, or at such other address as such party may designate by ten
(10) days' advance written notice to the other party hereto.
12. Assignment. This Agreement shall inure to the benefit of the
----------
successors and assigns of the Company and, subject to the restrictions on
transfer set forth in this Agreement, be binding upon Employee, his heirs,
administrators, successors and assigns.
13. Survival. The rights and obligations of the Company and of Employee
--------
under this Agreement shall survive any merger or sale of all or substantially
all of the capital stock or assets of Spider, or a public offering of Spider
capital stock.
14. Governing Law. This Agreement shall be governed by and construed
-------------
under the internal laws of the State of Colorado, without regard to the choice
of law rules therein.
6
<PAGE>
15. Arbitration. Except as provided below in this paragraph, any and all
-----------
disputes arising under or related to this Agreement shall be submitted to
binding arbitration before the American Arbitration Association ("AAA") in
accordance with its rules of Commercial Arbitration. The decision of the
arbiter shall be final and binding upon the parties, and it may be entered in
any court of competent jurisdiction. The arbitration shall take place in
Chicago, Illinois. The arbiter shall be bound by the laws of the State of
Colorado applicable to all relevant privileges and the attorney work product
doctrine. The arbiter shall have the power to grant equitable relief where
applicable under Colorado law and shall not be entitled to make an award of
punitive damages. The arbiter shall issue a written opinion setting forth its
decision and the reasons therefor within thirty (30) days after the arbitration
proceeding is concluded. The obligation of the parties to submit any dispute
arising under or related to this Agreement to arbitration as provided in this
Section shall survive the expiration or earlier termination of this Agreement.
Notwithstanding the foregoing, any party may seek an injunction or other
appropriate relief from a court of competent jurisdiction to preserve or protect
the status quo with respect to any matter pending conclusion of the arbitration
proceeding, but no such application to a court shall in any way be permitted to
stay or otherwise impede the progress of the arbitration proceeding.
The Company and Employee hereby consent to the jurisdiction of the AAA
and the courts of the State of Illinois and the United States District Courts
for the Northern District of Illinois, as well as to the jurisdiction of all
courts from which an appeal may be taken from such courts, for the purpose of
any arbitration, suit, action or other proceeding arising out of any of their
obligations arising hereunder or with respect to the transactions contemplated
hereby and expressly waive any and all objections they may have as to venue in
any of such courts.
16. Section Titles. Section titles are for descriptive purposes only and
--------------
shall not control or alter the meaning of this Agreement as set forth in the
text.
17. Further Assurances. The parties shall execute and deliver such
------------------
further instruments and do such further acts and things as may be required to
carry out the intent and purposes of this Agreement.
18. Directly or Indirectly. Where any provision in this Agreement refers
----------------------
to action to be taken by any person, or which such person is prohibited from
taking, such provision shall be applicable whether the action in question is
taken directly or indirectly by such person.
19. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original of this Agreement.
20. Entire Agreement. This Agreement together with the other agreements
----------------
and instruments entered into in connection herewith constitutes the entire
agreement among the parties hereto with respect to the transactions contemplated
herein, and
7
<PAGE>
supersedes all other prior understandings or agreements between
Employee and the Company with respect to such transactions.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
8
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Restricted Stock
Agreement as the date first written above.
COMPANY: INTEK INFORMATION, INC.
A Delaware corporation
By: _______________________
Title: ____________________
EMPLOYEE: ____________________________
Print Name: ________________
9
<PAGE>
EXHIBIT 8.8.3
ESCROW AGREEMENT
----------------
THIS AGREEMENT is made as of the 30th day of October, 1999 by and among
Venkat Sharma, Shoba Murali, Raja Ramnarayan, Sunil Gupta, Richard Wayne, the
Sharma Family LLC, the Murali Family LLC and the Ramnarayan Family LLC
(collectively, the "Shareholders"), Intek Information, Inc., a Delaware
corporation ("Buyer"); and Colorado State Bank and Trust ("Escrow Agent"), a
Colorado Corporation. All capitalized terms used, but not otherwise defined
herein shall have the meanings ascribed to them in the Purchase Agreement.
WHEREAS, contemporaneously with the execution hereof, the Shareholders and
Buyer will enter into that certain Share Purchase Agreement whereby Buyer will
purchase all of the issued and outstanding capital stock of Acorn ("Purchase
Agreement"); and
WHEREAS, pursuant to the Purchase Agreement, the parties have agreed to
place a portion of the purchase price in escrow upon the terms and conditions
herein.
In consideration of the mutual covenants and agreements contained in this
Agreement, the parties hereto agree as follows:
1. Receipt of Escrow Fund for Purchase Price. Upon the payment by
-----------------------------------------
Buyer to the Shareholders of the Sustained Profitability Consideration and the
cash portion of the Contingent Earn-Out Consideration in the amounts and at the
times set forth in the Purchase Agreement, Buyer shall deliver on the date of
such payments for a period expiring fifteen (15) months after the Closing Date a
bank cashier's check, certified check, wire transfer or other immediately
available funds in an amount which shall equal ten percent (10%) of such amounts
paid to the Shareholders on each such date, payable to the order of Escrow Agent
(the "Fund"). The Base Consideration and the stock portion of the Contingent
Earn-Out Consideration payable under the Purchase Agreement shall not be subject
to this Agreement and shall not be delivered to Escrow Agent as part of the
Fund. Escrow Agent agrees to hold the Fund pursuant to the terms and
conditions of this Agreement. Escrow Agent shall invest the Fund in an
interest-bearing account. Interest earned on the Fund shall be paid to, and
reported as interest by, the recipient of the Fund.
2. Release of Escrow for Purchase Price. Escrow Agent shall release
------------------------------------
and deliver the Fund together with accrued interest, to the Shareholders on
October 30, 2001, being the date that is eighteen (18) months after the Closing
Date ("Claim Expiration Date"), unless on or prior to the Claim Expiration Date,
Escrow Agent shall have received a Claim Notice (as defined in and in accordance
with Section 3 below) from Buyer, in which case disbursement will be as provided
herein. Upon release by Escrow Agent of the Fund, as provided for herein, this
Agreement shall terminate and Escrow Agent shall be discharged of any further
duties hereunder.
3. Claim Notice. If Buyer has a Claim for Damages for which Buyer
------------
believes it is entitled to indemnification under Article 8 of the Purchase
Agreement and which Buyer believes should be paid out of the Fund, prior to the
Claim Expiration Date Buyer shall deliver to each of
<PAGE>
the Shareholders and on the Escrow Agent a written request ("Claim Notice")
setting forth the amount of indemnity claimed ("Claim Amount") and in reasonable
detail the basis therefor. If a Claim Notice is timely made, Escrow Agent shall
promptly furnish each of the Shareholders with a copy of such Claim Notice in
accordance with the notice provisions hereof and shall proceed in the following
manner:
(a) If within thirty (30) days of Escrow Agent's
receipt of the Claim Notice, the Buyer shall
deliver to the Escrow Agent joint written
instructions duly executed by Shareholders and
Buyer, the Escrow Agent shall release and deliver
the Funds in accordance with such written notice.
Escrow Agent shall have no obligation to verify
the accuracy or validity of the signatures on such
written instructions.
(b) If within thirty (30) days of Escrow Agent's
receipt of the Claim Notice, the Buyer or any
Shareholder shall deliver to the Escrow Agent and
on each of the Shareholders or Buyer (as
applicable) a written demand for arbitration in
accordance with Section 9 below, the Escrow Agent
shall withhold the Claim Amount until such
arbitration shall have been concluded. Upon
conclusion of such arbitration, Escrow Agent shall
make distribution of the amount awarded to Buyer
in such arbitration, if any, and release and
deliver the balance of the Claim Amount to the
Shareholders if the Claim Expiration Date has
passed (unless the Fund is the subject of another
Claim Notice) or return the balance to the Fund if
the Claim Expiration Date has not passed.
(c) If on the thirtieth (30/th/) day following Escrow
Agent's receipt of the Claim Notice, Escrow Agent
has received neither written instructions nor
demand for arbitration in accordance with Sections
3(a) or 3(b) above, the Escrow Agent shall release
and deliver the amount claimed in the Claim Notice
of the Fund together with accrued interest thereon
to the Buyer and shall continue to hold the
balance of the Fund pursuant to the terms of this
Agreement unless and until Escrow Agent receives
another Claim Notice hereunder, or this Agreement
expires or is terminated by written consent of the
parties hereto.
2
<PAGE>
If Escrow Agent should at any time be confronted with
inconsistent claims or demands by the parties hereto, Escrow
Agent shall have the right to initiate arbitration proceedings
pursuant to Section 9 hereunder.
4. Disbursement at Claim Expiration Date. As to any amount for which a
-------------------------------------
Claim Notice has not been made before the Claim Expiration Date, the Escrow
Agent shall immediately release and deliver the balance of the Fund plus accrued
interest thereon to the Shareholders in accordance with Section 5 herein.
5. Sellers' Disbursements and Action. Escrow Agent shall make
---------------------------------
distributions of the Sustained Profitability Consideration and the cash portion
of the Contingent Earn-Out Consideration to each Shareholder in the percentages
set forth in the attached Exhibits B, which Exhibit shall be amended by the
Shareholders promptly upon any change to such percentages. Any action of the
Shareholders hereunder requires only the approval or consent of persons
representing 80% in interest of the percentages listed in Exhibit B (as the same
may be amended) and the Shareholders' payment and indemnification obligations
(if several and not joint) shall be in the same proportion as such percentages.
6. Notices. All notices and other communications required or permitted
-------
under this Agreement shall be deemed to have been duly given and made if in
writing and if served either by personal delivery to the party for whom intended
or by deposit with Federal Express or other overnight delivery service which
guarantees next day delivery, signature required, bearing the address shown in
this Agreement for, or such other address as may be designated in writing
hereafter by, such party:
If to any Shareholder: the address set forth on Exhibit A hereto
with a copy to Wiggin & Dana
Three Stamford Plaza
Stamford, CT 06901
Attn: William A. Perrone
Telephone: (203) 363-7604
Facsimile: (203) 363-7676
If to Buyer: Intek Information Inc.
5619 DTC Parkway, 12th Floor
Englewood, CO 80111-3017
Attention: Timothy C. O'Crowley
Telephone: (303) 357-3000
Facsimile: (303) 323-4213
3
<PAGE>
with a copy to: Chrisman, Bynum & Johnson
1900 Fifteenth Street
Boulder, CO 80302
Attention: G. James Williams
Telephone: (303) 546-1300
Facsimile: (305) 449-5426
If to Escrow Agent: Colorado State Bank & Trust
1600 Broadway
Denver, CO 80202
Attention: Sara Swain
Telephone: 303-864-7222
Facsimile: 303-864-7300
A notice given in accordance with this Section 6 shall be deemed effective on
the same business day if delivered personally or on the following business day
if sent by Federal Express or other overnight delivery service in accordance
with this Section 6.
7. Performance of Escrow Agent's Duties. Escrow Agent undertakes to
------------------------------------
perform only such duties as are expressly set forth herein (or required by
applicable law), and no additional duties or obligations shall be implied
hereunder. In performing its duties under this Agreement, or upon the claimed
failure to perform any of its duties hereunder, Escrow Agent shall not be liable
to anyone for any damages, losses or expenses which may be incurred as a result
of Escrow Agent so acting or failing to so act; provided, however, that Escrow
-------- -------
Agent shall not be relieved from liability for damages to the extent a court of
competent jurisdiction or arbitrator pursuant to Section 9 herein determines by
final order that such damages arose out of the gross negligence, bad faith or
willful misconduct of Escrow Agent under this Agreement. Escrow Agent shall in
no event incur any liability with respect to (a) any action taken or omitted to
be taken in good faith upon advice of legal counsel, which may be counsel to any
party hereto, given with respect to any question relating to the duties and
responsibilities of Escrow Agent hereunder or (b) any action taken or omitted to
be taken in reliance upon any instrument delivered to Escrow Agent and believed
by it to be genuine and to have been signed or presented by the proper party or
parties. Except as set forth in Section 3(a) above, Escrow Agent shall not be
bound in any way by any agreement or contract between the Shareholders and
Buyer, whether or not Escrow Agent has knowledge of any such agreement or
contract, including, but not limited to the Purchase Agreement.
4
<PAGE>
Escrow Agent may execute any of its powers or responsibilities hereunder
and exercise any rights hereunder either directly or by or through its agents or
attorneys. Escrow Agent shall not be responsible for and shall not be under a
duty to examine or pass upon the validity, binding effect, execution or
sufficiency of this Agreement or of any agreement amending or supplementing this
Agreement.
8. No Security Interests. The Shareholders and Buyer each warrant to and
---------------------
agree with Escrow Agent that, unless otherwise expressly set forth in this
Agreement, there is no security interest in the Fund or any part of the Fund; no
financing statement under the Uniform Commercial Code of any jurisdiction is on
file in any jurisdiction claiming a security interest in or describing, whether
specifically or generally, the Fund or any part of the Fund; and Escrow Agent
shall have no responsibility at any time to ascertain whether or not any
security interest exists in the Fund or any part of the Fund or to file any
financing statement under the Uniform Commercial Code of any jurisdiction with
respect to the Fund or any part thereof.
9. Dispute Resolution. Except as provided below in this paragraph, any
------------------
and all disputes arising under or related to this Agreement shall be submitted
to binding arbitration before the American Arbitration Association ("AAA") in
accordance with its rules of Commercial Arbitration. The decision of the
arbiter shall be final and binding upon the parties, and it may be entered in
any court of competent jurisdiction. If the Escrow Agent is a party to the
arbitration, the arbitration shall take place in Denver, Colorado, the arbiter
shall be bound by the laws of the State of Denver, Colorado applicable to all
relevant privileges and the attorney work product doctrine, and the arbiter
shall have the power to grant equitable relief where applicable under Colorado
law and shall not be entitled to make an award of punitive damages. The arbiter
shall issue a written opinion setting forth its decision and the reasons
therefor within thirty (30) days after the arbitration proceeding is concluded.
The obligation of the parties to submit any dispute arising under or related to
this Agreement to arbitration as provided in this Section shall survive the
expiration or earlier termination of this Agreement. Notwithstanding the
foregoing, any party may seek an injunction or other appropriate relief from a
court of competent jurisdiction to preserve or protect the status quo with
respect to any matter pending conclusion of the arbitration proceeding, but no
such application to a court shall in any way be permitted to stay or otherwise
impede the progress of the arbitration proceeding.
In the event of any arbitration being filed or instituted between the
parties concerning this Agreement, the prevailing party will be entitled to
receive from the other party or parties its attorneys' fees, experts' fees,
witness fees, costs and expenses, court costs and other reasonable expenses,
whether or not such controversy, claim or action is prosecuted to judgment or
other form of relief.
Buyer and the Shareholders specifically agree that arbitration shall
be invoked under this Agreement only if Escrow Agent is a necessary party and
that if the matter to be
5
<PAGE>
decided is the validity of a claim under Article 8 of the Purchase Agreement
that the arbitration provisions of the Purchase Agreement will control and
govern the dispute.
As an additional consideration for and as an inducement for Escrow
Agent to act hereunder, it is understood and agreed that, in the event of any
disagreement between the parties to this Agreement or among them or any other
person(s) resulting in adverse claims and demands being made in connection with
or for any money or other property or rights involved in or affected by this
Agreement, Escrow Agent shall be entitled, at the option of Escrow Agent, to
refuse to comply with the demands of such parties, or any of such parties, so
long as such disagreement shall continue. In such event, Escrow Agent shall
make no delivery or other disposition of the Fund or any parts of such Fund.
Anything herein to the contrary notwithstanding, Escrow Agent shall not be or
become liable to such parties or any of them for the failure of Escrow Agent to
comply with the conflicting or adverse demands of such parties or any of such
parties.
Escrow Agent shall be entitled to continue to refrain and refuse to
deliver or otherwise dispose of the Fund or any part therefore or to otherwise
act hereunder, as stated above, unless and until:
(i) the rights of such parties have been finally settled by binding
arbitration or duly adjudicated in a court having jurisdiction of the
parties and the Fund; or
(ii) the parties have reached an agreement resolving their
differences and have notified Escrow Agent in writing of such agreement and
have provided Escrow Agent with indemnity satisfactory to Escrow Agent
against any liability, claims or damages resulting from compliance by
Escrow Agent with such agreement.
In the event of a disagreement between such parties as described above, Escrow
Agent shall have the right, in addition to the rights described above and at the
option of Escrow Agent, to tender into the registry or custody of any court of
competent jurisdiction, all money and other property or rights comprising the
Fund and may take such other legal action as may be appropriate or necessary, in
the opinion of Escrow Agent. Upon such tender, the parties hereto agree that
Escrow Agent shall be discharged from all further duties under this Agreement;
provided, however, that the filing of any such legal proceedings shall not
deprive Escrow Agent of its compensation earned hereunder prior to such filing
and discharge of Escrow Agent of its duties hereunder.
6
<PAGE>
10. Escrow Agent's Fees.
-------------------
The Shareholders and Buyer shall share equally the fees, costs and
expenses (including reasonable attorneys' fees) of Escrow Agent incurred in
connection with this Agreement. In the event Escrow Agent is required to
perform extraordinary services in connection with the arbitration of any dispute
as set forth in Section 9 above, the non-prevailing party shall pay the
reasonable compensation for Escrow Agent's extraordinary services and reimburse
Escrow Agent for all costs and expenses reasonably incurred in connection with
such arbitration.
11. Resignation of Escrow Agent.
---------------------------
Escrow Agent may resign at any time from its obligations under this
Agreement by providing written notice to the parties hereto. Such resignation
shall be effective on the date set forth in such written notice which shall be
no earlier than thirty (30) days after such written notice has been given. In
the event no successor escrow agent has been appointed on or prior to the date
of such resignation is to become effective, Escrow Agent shall be entitled to
tender into the custody of a court of competent jurisdiction all assets then
held by it hereunder and shall thereupon be relieved of all further duties and
obligations under this Agreement. Escrow Agent shall have no responsibility for
the appointment of a successor escrow agent hereunder. Such resignation shall
not deprive Escrow Agent of its compensation earned prior thereto.
12. Indemnification.
---------------
Escrow Agent shall have no obligation to take any legal action in
connection with this Agreement or towards its enforcement, or to appear in,
prosecute or defend any action or legal proceeding which would or might involve
it in any cost, expense, loss or liability unless security and indemnity, as
provided in this paragraph, shall be furnished.
The Shareholders (as to one half) and Buyer (as to one half) severally
(not jointly) agree to indemnify Escrow Agent and its officers, directors,
employees and agents and save Escrow Agent and its officers, directors employees
and agents harmless from and against any and all Claims (as hereinafter defined)
and Losses (as hereinafter defined) which may be incurred by Escrow Agent or
any of such officers, directors, employees or agents as a result of Claims
asserted against Escrow Agent or any of Escrow Agent's officers, directors,
employees or agents as a result of or in connection with Escrow Agent's capacity
as such under this Agreement by any person or entity. For the purposes hereof,
the term "Claims" shall mean all claims, lawsuits, causes of action or other
legal actions and proceedings of whatever nature brought against (whether by way
of direct action, counterclaim, cross action or impleader) Escrow Agent or any
of Escrow Agent's officers, directors, employees or agents, even if groundless,
false or fraudulent, so long as the claim, lawsuit, cause of action or other
legal action or proceeding is alleged or determined, directly or indirectly, to
arise out of, result from, relate to or be based
7
<PAGE>
upon, in whole or in part: (a) the acts or omissions of the Shareholders or
Buyer, (b) the appointment of Escrow Agent as escrow agent under this Agreement,
or (c) the performance by Escrow Agent of its powers and duties in accordance
with this Agreement; and the term "Losses" shall mean losses, costs, damages,
expenses, judgments and liabilities of whatever nature (including but not
limited to attorneys', accountants' and other professionals' fees, litigation
and court costs and expenses and amounts paid in settlement), directly or
indirectly resulting from, arising out of or relating to one or more Claims.
Upon the written request of Escrow Agent or any such officer, director, employee
or agent (each referred to hereinafter as an "Indemnified Party"). The
Shareholders (as to one-half) and Buyer (as to one-half) severally (not jointly)
agree to assume the investigation and defense of any Claim, including the
employment of counsel acceptable to the applicable Indemnified Party and the
payment of all expenses related thereto. The Shareholders and Buyer hereby agree
that the indemnifications and protections afforded Escrow Agent in this section
shall survive the termination of the Agreement. The Shareholders and Buyer have
no indemnification obligation in respect of Escrow Agent's action, or failure to
take action, in bad faith.
13. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Colorado, without regard to the choice
of law rules therein.
14. Miscellaneous. The headings herein are for convenience only and shall
-------------
not be of substantive effect. This Agreement shall be binding upon and shall
inure to the benefit of the parties hereto and their respective legal
representatives, heirs, successors and assignees. This Agreement together with
the Purchase Agreement constitutes the entire agreement among the parties with
respect to the subject matter hereof and supersedes all prior negotiations,
understandings and writings (or any part thereof) whether oral or written
between any of the parties relating to the subject matter of this Agreement.
This Agreement may be executed in one ore more counterparts, each of which shall
be deemed an original, and all of which taken together shall constitute one and
the same instrument.
[signature page follows]
8
<PAGE>
IN WITNESS WHEREOF, the parties hereto have signed this Escrow Agreement as
of the date first above written.
SHAREHOLDERS: /s/ Venkat Sharma
----------------------------------
Venkat Sharma
----------------------------------
/s/ Shoba Murali
----------------------------------
Shoba Murali
/s/ Raja Ramnarayan
---------------------------------
Raja Ramnarayan
/s/ Sunil Gupta
----------------------------------
Sunil Gupta
/s/ Richard Wayne
---------------------------------
Richard Wayne
THE SHARMA FAMILY LLC
/s/ Venkat Sharma
----------------------------------
Venkat Sharma, Manager
THE MURALI FAMILY LLC
/s/ Shoba Murali
----------------------------------
Shoba Murali, Manager
THE RAMNARAYAN FAMILY LLC
/s/ Ramnarayan
-----------------------------------
Raja Ramnarayan, Manager
9
<PAGE>
BUYER: INTEK INFORMATION, INC.
By: /s/ Timothy O'Crowley
-------------------------------
Its: Chief Executive Officer
-------------------------------
ESCROW AGENT: /s/
---------------------------------------
By: ___________________________________
Its: __________________________________
10
<PAGE>
EXHIBIT A
---------
SHAREHOLDERS
Venkat Sharma
25 Wimbleton Lane
Easton, CT
Ph: (203) 225-7600 (office)
Fax: (203) 459-2896 (home)
SSN: ###-##-####
Shoba Murali
12 River Knoll Road
Westport, CT
SSN: ###-##-####
Raja Ramnarayan
25 Highland Road
Westport, CT 06880
SSN: ###-##-####
Sunil Gupta
305 Judd Road
Easton, CT 06612
SSN: ###-##-####
Richard Wayne
55 Valley Road
Easton, CT 06612
SSN: ###-##-####
The Sharma Family LLC
25 Wimbleton Lane
Easton, CT
EIN#: 06-1552928
The Murali Family LLC
12 River Knoll Road
Westport, CT
EIN#: 06-1552802
11
<PAGE>
The Ramnarayan Family LLC
25 Highland Road
Westport, CT 06880
EIN#: 06-1551577
12
<PAGE>
EXHIBIT B
---------
SHAREHOLDERS' PERCENTAGES FOR
SUSTAINED PROFITABILITY CONSIDERATION
<TABLE>
<S> <C>
Venkat Sharma 31.7935%
Sharma Family LLC 10.5978%
Shoba Murali 20.3261%
Murali Family LLC 13.5870%
Raja Ramnarayan 12.7174%
Ramnarayan Family LLC 6.3587%
Sunil Gupta 2.1739%
Richard Wayne 2.4456%
SHAREHOLDERS' PERCENTAGES
FOR CONTINGENT EARN-OUT CONSIDERATION
<S> <C>
Venkat Sharma 29.1116%
Shoba Murali 18.2262%
Raja Ramnarayan 12.3500%
Sunil Gupta 10.0000%
Richard Wayne 2.2500%
The Sharma Family LLC 9.7039%
The Murali Family LLC 12.1833%
The Ramnarayan Family LLC 6.1750%
</TABLE>
13
<PAGE>
EXHIBIT 2.7
TRANSACTION ADVISOR FEE PAYMENT AGREEMENT
This TRANSACTION ADVISOR FEE PAYMENT AGREEMENT (the "Agreement") effective
October 1, 1999 is made by and among INTEK INFORMATION, INC., a Delaware
corporation (the "Company"), PROSPERO LLC., a Connecticut limited liability
company ("Prospero"), PROSPERO HOLDINGS LLC, a Connecticut limited liability
company ("Prospero Holdings"), Acorn Information Services, Inc. a Delaware
corporation ("Acorn") and certain shareholders of Acorn who are signatories to
this Agreement (collectively the "Acorn Shareholders") in connection with a
Share Purchase Agreement by and among the Company, Acorn and the Acorn
Shareholders of even date herewith (the "Purchase Agreement").
W I T N E S S E T H
-------------------
A. Prospero and Acorn are parties to that certain letter agreement dated
August 3, 1998 as amended December 2, 1998 (together, the "Engagement Letter").
B. Prospero has provided Acorn with certain investment banking services
in connection with the Engagement Letter (the "Prospero Services"), including
without limitation advice regarding the sale of all of the outstanding capital
stock of Acorn to the Company under the terms and conditions of the Purchase
Agreement.
C. Concurrently herewith, Acorn and Prospero are entering into a letter
agreement regarding fee payment (the "Fee Payment Letter Agreement").
D. In connection with the Purchase Agreement and the Fee Payment Letter
Agreement and on the terms and conditions set forth in this Agreement, the
Company and the Acorn Shareholders have each agreed to pay a portion of the
amount payable by Acorn to Prospero in consideration for the Prospero Services.
E. Prospero desires to assign its right to payment for the Prospero
Services to Prospero Holdings.
NOW, THEREFORE, in consideration of the mutual premises and covenants
contained herein, and for other good and valuable consideration, the sufficiency
of which is hereby acknowledged, the parties agree as follows:
1. Transaction Advisor Fees. In consideration for the Prospero Services,
------------------------
Intek will at the closing of the next round of private financing by the Company
(the "Financing"), issue to Prospero Holdings on behalf of Acorn such number of
shares of Intek common stock equal to the quotient obtained by dividing $100,000
by the price per share of Series F Preferred Stock of Intek at the time of the
closing of such Financing ("Transaction Advisor Shares"). If the Financing
does not close by December 31,
<PAGE>
1999, the Company shall issue to Prospero Holdings such number of shares of
Intek common stock equal to $100,000 divided by the per share price of $1.61, as
may be adjusted for any stock splits, stock dividends, stock combinations or
recapitalizations, other than the spin off by the Company of Spider
Technologies, Inc. common stock (the "Spider Shares"). Prospero (including
Prospero Holdings) shall not be entitled to receive any Spider Shares as part of
or upon issuance of the Transaction Advisor Shares hereunder. The Company shall
have no obligation to register the Transaction Advisor Shares except piggyback
registration rights as set forth in the Form of Registration Rights Agreement
attached hereto as Exhibit A (the "Registration Rights Agreement"), and shall
have no obligation to register the Transaction Advisor Shares in violation of
any applicable law or regulation.
Notwithstanding the foregoing, upon the occurrence of a Change in Control (as
defined in the Purchase Agreement) prior to the earlier of the close of the
Financing or December 31, 1999, the Company shall issue to Prospero Holdings
such number of Transaction Advisor Shares obtained by dividing $100,000 by the
per share price of $1.61. The Company shall issue such shares immediately prior
to the closing of a transaction that results in a Change in Control.
Upon issuance of the Transaction Advisor Shares to Prospero Holdings, the
Company and Prospero Holdings shall enter into the Registration Rights
Agreement.
2. No Further Liability. Except for the fees for the Prospero Services,
--------------------
neither Acorn nor the Acorn Shareholders are indebted to Prospero or Prospero
Holdings for any amount. Upon (i) execution of this Agreement and (ii) receipt
of the Fee Balance (as defined in the Fee Payment Letter Agreement), Acorn and
the Acorn Shareholders shall have no further liability to Prospero or Prospero
Holdings. Upon (i) execution of this Agreement and (ii) receipt by Prospero
Holdings of the Transaction Advisor Shares, the Company shall have no further
liability to Prospero or Prospero Holdings. The Company shall assume no
liability for any taxes or other payments of Prospero or Prospero Holdings,
Acorn or the Acorn Shareholders in connection with services rendered by
Prospero. Prospero acknowledges that payment of the Transaction Advisor Shares
is being made on behalf of Acorn (and not on behalf of the Company), which is
Prospero's sole client with respect to the transactions contemplated by the
Purchase Agreement.
3. Shareholders Agreement. As a condition to receipt of the Transaction
----------------------
Advisor Shares, Prospero (and Prospero Holdings as applicable) shall execute and
deliver to the Company, and agree to be bound by the terms and conditions of,
the Shareholders Agreement of the Company then in effect and shall execute and
deliver such Shareholders Agreement and a subscription agreement to the Company
prior to the delivery of Transaction Advisor Shares hereunder. Prospero and
Prospero Holdings each acknowledges that the Shareholders Agreement may be
amended from time to time or may be terminated, whether before or after the time
Transaction Advisor Shares are issued, in accordance with the terms of the
Shareholders Agreement.
2
<PAGE>
4. Investor Representations. Prospero and Prospero Holdings each represents
------------------------
it is currently an "accredited investor" as defined in Regulation D promulgated
by the Securities and Exchange Commission and shall so represent at the time of
receipt of any Transaction Advisor Shares. Prospero and Prospero Holdings each
further represents that it has had an opportunity to ask questions of and
receive answers from representatives of the Company with respect to the
acquisition of the Transaction Advisor Shares and that the Company has made
available to Prospero and Prospero Holdings all documents requested and has
provided answers to all such questions relating to receipt of the Transaction
Advisor Shares. Prospero and Prospero Holdings each acknowledges that, because
the Transaction Advisor Shares will not have been registered under the
Securities Act of 1933, as amended (the "Act"), or applicable state securities
laws, any resale inconsistent with the Act may create liability on its part
and/or the part of Intek, and agrees not to assign, sell, pledge, transfer or
otherwise dispose of or transfer any of the Intek Shares unless registered under
the Securities Act and applicable state securities laws or he has delivered an
opinion of counsel satisfactory to Intek that such registration is not required.
Neither Prospero nor Prospero Holdings nor any "associate" of Prospero or
Prospero Holdings as such term is defined in Rule 12b-2 of the Securities
Exchange Act of 1934, as amended, or has a relationship with, a member of the
National Association of Securities Dealers, Inc. ("NASD"), or is an officer,
director, registered representative, lender, employee or beneficial owner of 10%
or more of a NASD member or any corporation or entity which owns a 10% or
greater ownership interest in an NASD member.
5. Restrictive Legend. Prospero and Prospero Holdings each acknowledges that
------------------
the certificate representing the Transaction Advisor Shares shall bear
substantially the following restrictive legend:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"). THEY
MAY NOT BE OFFERED OR TRANSFERRED BY SALE, ASSIGNMENT, PLEDGE OR OTHERWISE
UNLESS (I) A REGISTRATION STATEMENT FOR THE SECURITIES UNDER THE SECURITIES
ACT IS IN EFFECT OR (II) THE CORPORATION HAS RECEIVED AN OPINION OF
COUNSEL, WHICH OPINION IS SATISFACTORY TO THE CORPORATION, TO THE EFFECT
THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE SECURITIES ACT."
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ISSUED PURSUANT
TO, AND ARE SUBJECT TO A CERTAIN SHAREHOLDERS AGREEMENT AMONG INTEK
INFORMATION, INC. AND CERTAIN SHAREHOLDERS NAMED THEREIN, DATED OCTOBER 1,
1999 AS AMENDED FROM TIME TO TIME. A COPY OF SUCH
3
<PAGE>
AGREEMENT IS AVAILABLE AT THE OFFICES OF THE CORPORATION."
6. Notice. Any notice required or permitted hereunder shall be in writing and
------
shall be sufficiently given if (i) personally delivered, (ii) mailed by
certified or registered United States mail, return receipt requested, or (iii)
sent by recognized air express courier for next business day delivery, addressed
to the parties at the addresses set forth on the signature page hereof and shall
be deemed to have been delivered as of the date so personally delivered, three
business days after so mailed, or one business day after the date delivered to
the air express courier.
7. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of Colorado exclusive of the conflict of
law provisions thereof.
8. Arbitration; Attorneys' Fees.Arbitration; Consent to Jurisdiction. Any and
---------------------------- ------------------------------------
all disputes arising under or related to this Agreement shall be submitted to
binding arbitration in accordance with the Arbitration provision contained in
the Purchase Agreement. In the event of any arbitration or litigation being
filed or instituted between two or more of the parties concerning this
Agreement, the Prevailing Party will be entitled to receive from the other party
or parties its attorneys' fees, experts' fees, costs and expenses, whether or
not such controversy, claim or action is prosecuted to judgment or other form of
relief. The "Prevailing Party" is that party which is awarded judgment or other
legal or equitable relief as a result of trial or arbitration, or who receives
or is entitled to receive a payment of money from the other party in settlement
of claims asserted by such party. If both parties receive a judgment or other
award of relief, the court or the arbiter shall determine which party is the
Prevailing Party, taking into consideration the merits of the claims asserted by
each party, the relative values of the judgments or other forms of relief
received by each party, and the relative equities between the parties.
9. Counterparts. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original but all of which shall
constitute one and the same instrument.
10. Entire Agreement. This Agreement and the documents referenced herein
----------------
constitute the entire agreement between the parties regarding the matters
herein.
11. Unenforceability. If any paragraph or subparagraph of this Agreement
----------------
or any part thereof shall be unenforceable under any applicable laws,
notwithstanding such unenforceability the remainder of this Agreement shall
remain in full force and effect.
12. Amendments; Waivers. This Agreement cannot be changed, modified or
-------------------
amended, and no provision or requirement hereof may be waived, without consent
in writing of the parties hereto.
4
<PAGE>
[Signature Page Follows]
5
<PAGE>
IN WITNESS WHEREOF, the parties hereby execute this TRANSACTION ADVISOR FEE
PAYMENT AGREEMENT as of the date first written above.
PROSPERO LLC. INTEK INFORMATION, INC.
By: /s/ Daniel J. Donovan By: /s/ Timothy C. O'Crowley
------------------------------- ----------------------------------
Daniel J. Donovan, Managing Member Timothy C. O'Crowley, President
265 Post Road West 5619 DTC Parkway, 12/th/ Floor
Westport, CT 06880 Englewood, CO 80111
Attn: Daniel J. Donovan Attn: Timothy C. O'Crowley
Telephone: (203) 454-5616 Telephone: (303) 357-3000
Facsimile: (203) 459-8157 Facsimile: (303) 323-4213
PROSPERO HOLDINGS LLC
By: /s/
---------------------------
Its: _________________________
265 Post Road West, Westport, CT 06880
Attn: Daniel J. Donovan
Telephone: (203) 454-5616
Facsimile: (203) 459-8157
AGREED AND ACKNOWLEDGED:
ACORN INFORMATION SERVICES, INC.
/s/ Venkat Sharma
- ------------------------------
Venkat Sharma, Chief Executive Officer
4 Corporate Drive, Shelton, CT 06484
ACORN SHAREHOLDERS:
/s/ Venkat Sharma THE SHARMA FAMILY LLC
- ------------------------------
Venkat Sharma
/s/ Shoba Murali /s/ Venkat Sharma
- ------------------------------- --------------------------------
Shoba Murali Venkat Sharma, Manager
/s/ Raja Ramnarayan THE MURALI FAMILY LLC
- ------------------------------- --------------------------------
Raja Ramnarayan
/s/ Shoba Murali
/s/ Sunil Gupta --------------------------------
- -------------------------------- Shoba Murali, Manager
Sunil Gupta
/s/ Richard Wayne THE RAMNARAYAN FAMILY LLC
- --------------------------------
Richard Wayne
/s/ Raja Ramnarayan
--------------------------------
Raja Ramnarayan, Manager
6
<PAGE>
EXHIBIT A
Form of Registration Rights Agreement
7
<PAGE>
EXHIBIT 3.1.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ETINUUM, INC.
Etinuum, Inc., a corporation organized and existing under the laws of the State
of Delaware, hereby certifies as follows:
FIRST: The name of the corporation is Etinuum, Inc. (the
"Corporation"). The original Certificate of Incorporation of the Corporation
was filed with the Secretary of State of the State of Delaware on June 4, 1996,
an Amended and Restated Certificate of Incorporation of the Corporation was
filed with the Secretary of State of the State of Delaware on February 14, 1997,
an Amendment thereto was filed on December 18, 1997, an Amended and Restated
Certificate of Incorporation was filed on December 22, 1997, an Amended and
Restated Certificate of Incorporation was filed on May 7, 1998, an Amendment
thereto was filed on June 23, 1998, an Amended and Restated Certificate of
Incorporation was filed on April 16, 1999, an Amended and Restated Certificate
of Incorporation was filed on November 3, 1999, an Amended and Restated
Certificate of Incorporation was filed on November 22, 1999, an Amendment
thereto was filed on December 29, 1999, an amendment thereto was filed on
January 14, 2000 and an Amendment thereto was filed on February 25, 1999.
SECOND: This Amended and Restated Certificate of Incorporation has
been duly adopted by written consent pursuant to Sections 228 and 245 of the
General Corporation Law of the State of Delaware. The Corporation certifies
that amendments effected by this Amended and Restated Certificate of
Incorporation have been adopted in accordance with Section 242 of the General
Corporation Law of the State of Delaware.
THIRD: The text of the Corporation's Certificate of Incorporation as
heretofore amended or supplemented is hereby restated and further amended to
read in its entirety as follows:
ARTICLE I
The name of the Corporation is Etinuum, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of
Delaware is located at 15 E. North Street, City of Dover, County of Kent,
Delaware 19901 and the name of its registered agent at such address is
Incorporating Services, Ltd.
1
<PAGE>
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of the State of Delaware (the "GCL").
ARTICLE IV
1. Authorized Capital. The total number of shares of all classes of
capital stock which the Corporation has authority to issue is two hundred forty-
nine million (249,000,000) shares, consisting of (i) one hundred seventy million
(170,000,000) shares of Common Stock, par value $.0001 per share (the "Common
Stock") and (ii) seventy-nine million (79,000,000) shares of Preferred Stock,
par value $.001 per share (the "Preferred Stock"). Preferred Stock that is not
designated hereunder as Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred or Series F Preferred shall be
"blank check" Preferred Stock and, as such, subject to the provisions of this
Certificate and the GCL may be designated by the Corporation's Board of
Directors to have such voting powers, full or limited, or no voting powers and
such designations, preferences and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions thereof, as the
Corporation's Board of Directors shall deem appropriate.
2. Terms of the Common Stock. Subject to the powers, preferences and
rights of any Preferred Stock, including any series thereof, having any
preference or priority over, or rights superior to, the Common Stock and, except
as otherwise provided by law, the holders of the Common Stock shall have and
possess all powers and voting and other rights pertaining to the stock of this
Corporation and each share of Common Stock shall be entitled to one vote.
Except as otherwise provided herein or as required by law, the Preferred Stock
and the Common Stock shall vote together on an as-converted basis as one class.
3. Terms of the Preferred Stock.
3.1 Series A Preferred.
3.1.1. Designation; Rank. Twenty-Six Thousand (26,000) shares of
Preferred Stock shall be designated Series A Preferred Stock ("Series A
Preferred"), with the rights and preferences set forth below. As contemplated
by Sections 3.2.1, 3.3.1, 3.4.1, 3.5.1, and 3.6.1, the Series A Preferred shall
be Series B Parity Securities, Series C Parity Securities, Series D Parity
Securities, Series E Parity Securities and Series F Parity Securities, and as
such, shall be on a parity with the Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred and Series F Preferred with respect to
dividend rights and rights upon liquidation, winding-up and dissolution.
3.1.2. Voting Rights. The holder of each share of Series A
Preferred shall be entitled to the number of votes equal to the number of shares
of Common Stock into which each share of Series A Preferred could be converted
and, except as otherwise required by law or provided herein, shall have voting
rights and powers equal to the voting rights and powers of the Common Stock.
Except as provided herein, or as provided by law, the Series A Preferred
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shall vote together with the Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred and Series F Preferred and the Common Stock on all
matters.
3.1.3. Dividends.
(a) General Obligation. When, as and if, declared by the
Corporation's Board of Directors or as otherwise provided in this Section 3.1.2,
as follows, and to the extent permitted under the General Corporation Law of
Delaware, the Corporation shall pay preferential dividends to the holders of
Series A Preferred as provided in this Section 3.1.3(a). Dividends on each
share of Series A Preferred shall accrue on a daily basis as provided in Section
3.1.3(b) below, commencing on the applicable date provided in Section 3.1.3(b)
below, and continuing until the first to occur of (i) the date on which the
applicable Liquidation Value of such Series A Preferred (plus all accrued and
unpaid dividends thereon) is paid to the holder thereof in connection with the
liquidation of the Corporation or the redemption of such share by the
Corporation, (ii) the date on which such Series A Preferred is converted into
shares of Common Stock hereunder or (iii) the date on which such Series A
Preferred is otherwise acquired by the Corporation. Such dividends shall accrue
as provided in this Section 3.1.3(a) whether or not they have been declared and
whether or not there are profits, surplus or other funds of the Corporation
legally available for the payment of dividends.
(b) Dividend Rate. When and as declared by the Corporation's Board of
Directors out of funds legally available therefor, the Corporation shall pay
dividends to the holders of the Series A Preferred as follows:
(i) for all periods prior to and including October 15, 1999,
dividends shall accrue and shall be payable solely by issuance by the
Corporation to the holders of the Series A Preferred of additional shares of
Series A Preferred equal to one hundred forty-five thousandths (.145) of a share
of Series A Preferred for each one share of Series A Preferred actually issued
and outstanding on October 15, 1999 which dividend shall be cumulative (whether
or not earned or declared);
(ii) for all periods after October 15, 1999 through and
including the last day of July, 2001, dividends shall accrue and shall be
payable solely by issuance by the Corporation to the holders of the Series A
Preferred of additional shares of Series A Preferred with the number of shares
per share of Series A Preferred being equal to (i) the dollar amount of the cash
dividend which would have accrued on 1.145 shares of Series A Preferred from
October 16, 1999 to the record date for such dividend if a cash dividend had
accrued during that period at a rate of six percent (6%) [compounded annually
with the first compounding occurring on October 16, 2000] of the Series A
Original Purchase Price divided by (ii) the Series A Original Purchase Price as
of the record date for such dividend, which dividend shall be cumulative
(whether or not earned or declared), provided, however, that no dividend shall
accrue after February 29, 2000, except that if a Qualified IPO as defined in
Section 3.2.13 hereof shall not have closed before April 16, 2000, then
dividends shall again accrue hereunder effective as of March 1, 2000; and
(iii) commencing on and including August 1, 2001, the foregoing
dividends shall not further accrue (but if unpaid shall remain accrued), and in
lieu of any further
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accrual, the Corporation shall accrue and, when and as declared by the
Corporation's Board of Directors out of funds legally available therefor, the
Corporation shall pay dividends to the holders of the Series A Preferred at an
annual rate per share of Series A Preferred of (a) 8% compounded annually of (b)
(X) one plus the number of shares of Series A Preferred which would be issuable
on August 1, 2001 pursuant to clauses (i) and (ii) in respect of a share of
Series A Preferred multiplied by (Y) the Series A Original Purchase Price, and
such dividends shall accrue commencing on and including August 1, 2001 and shall
be cumulative (whether or not earned or declared). All dividends first accruing
on or after August 1, 2001 as specified in this clause (iii) shall be payable in
cash out of funds legally available therefor; provided, however, that at the
election (a "Series A PIK Election") of the holders as of the record date for
such dividend of a majority of the outstanding shares of Series A Preferred, in
lieu of payment thereof in cash, the amount of such dividends may be paid, in
whole or in part, by issuance by the Corporation to the holders of the Series A
Preferred, of additional shares of Series A Preferred, with the number of shares
being equal to (i) the dollar amount of the dividend which the holder has
elected to receive in the form of additional shares of Series A Preferred,
divided by (ii) the Series A Original Purchase Price as of the record date for
such dividend. If the Series A PIK Election is not for the entire amount of the
dividend, each holder of Series A Preferred shall receive the same proportion of
cash and additional shares of Series A Preferred for each share of Series A
Preferred held.
Dividends payable for any period less than a full dividend period
shall be computed on the basis of a 360-day year consisting of twelve 30-day
months.
For definitional purposes of the term "Series A PIK Election" the
shares of Series A Preferred received or receivable pursuant to clauses (i),
(ii) or (iii) are deemed received or receivable pursuant to a "Series A PIK
Election."
All additional shares of Series A Preferred issued upon a Series A PIK
Election shall be deemed issued as of the record date for such dividend. No
fractional shares shall be issued upon a Series A PIK Election, but rather cash
in lieu of fractional shares shall be paid, with the deemed value per whole
share of Series A Preferred being the Series A Original Purchase Price as of the
record date for such dividend. Any dividend (or portion thereof) shall be
deemed fully paid to the extent a Series A PIK Election is made with respect to
such dividend (or portion thereof). The Series A Original Purchase Price is
subject to adjustment for any Stock Adjustments as defined below. The Series A
Original Purchase Price is Seventy-Four Dollars ($74.00) per share of Series A
Preferred.
(c) Dividend Payment and Dividend Reference Dates. Accrued dividends
on each share of Series A Preferred from the date of issuance shall be due and
payable on the first Dividend Reference Date (as defined in this Section
3.1.3(c)). To the extent not paid on March 31, June 30, September 30 and
December 31 of each year (the "Dividend Reference Dates"), all dividends which
have accrued as provided in this Section 3 on each share of Series A Preferred
outstanding on each such Dividend Reference Date shall be accumulated and shall
remain accumulated dividends with respect to such share until paid in full to
the holder thereof. All accrued but unpaid dividends on the Series A Preferred
shall be paid pursuant to a liquidation, dissolution or winding up as provided
in Section 3.1.4. All accrued but unpaid dividends in respect of a particular
share of Series A Preferred shall be paid upon conversion of
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that share pursuant to Section 3.1.5.(a) or 3.1.6(a). All accrued but unpaid
dividends in respect of a particular share of Series A Preferred shall be paid
upon a redemption pursuant to Section 3.1.6(c) as a component of the Series A
Redemption Price as provided herein.
(d) Distribution of Partial Dividend Payments. Except as otherwise
provided herein, if at any time the Corporation pays less than the total amount
of dividends then accrued with respect to any of the Series A Preferred, such
payment shall be distributed pro rata among the holders of such Series A
Preferred based upon the number of shares held by each such holder.
(e) Dividends on Common. No dividend or distribution whatsoever may
be declared or paid on any shares of Common Stock or any other shares of capital
stock of the Corporation ranking junior to the Series A Preferred with respect
to dividends and distributions, unless (i) all dividends on the outstanding
shares of Series A Preferred accrued to the times of declaration and payment
shall have been paid and (ii) at the same time the same dividend or distribution
per share on an as converted to common basis is declared and paid on all
outstanding shares of Series A Preferred and any shares of Series A Preferred
issuable upon payment of any accrued but unpaid Series A PIK Election. Each
share of Series A Preferred shall be deemed converted into Common Stock as
provided in Section 3.1.5 below for purposes of determining the dividend or
distribution payable on shares of Series A Preferred under clause (ii) of the
preceding sentence of this Section 3.1.3(e). Solely for purposes of this Section
3.1.3(e), the term "distribution" means any transfer of cash, rights or property
without consideration, whether by way of dividend or otherwise (except a
dividend in shares of Common Stock of the Corporation which results in an
adjustment under Section 3.1.5(d)(i)) including, but not limited to, securities
of other persons, evidences of indebtedness issued by the Corporation or other
persons and assets, but does not include (i) any repurchase of shares from a
terminated employee of or consultant to the Corporation in accordance with the
terms of the agreement applicable to such employee or consultant providing for
such repurchase, (ii) any repurchase of shares funded solely with the proceeds
of life insurance pursuant to the provisions of the Shareholders' Agreement or
any repurchase of shares funded solely with the proceeds of life insurance
approved by the Corporation's Board of Directors, (iii) any distribution which
is part of a voluntary or involuntary liquidation, dissolution or winding up of
the Corporation, (iv) a payment of dissenter's rights or in respect of
fractional shares and (v) cashless exercises of stock options.
(f) Reservation for PIK Election. The Corporation shall at all
times reserve and keep available for issuance upon a Series A PIK Election, free
from any preemptive rights, such number of its authorized but unissued shares of
Series A Preferred as will from time to time be necessary to permit the maximum
then available Series A PIK Election, and shall take all action required to
increase the authorized number of shares of Series A Preferred if necessary to
permit the maximum then available Series A PIK Election.
3.1.4. Rights on Liquidation, Dissolution and Winding Up.
(a) Upon the dissolution, liquidation or winding up of the Corporation
(whether voluntary or involuntary) the holders of Series A Preferred shall be
entitled to receive out of the assets of the Corporation available for
distribution to stockholders before any payment
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or distribution shall be made on any Series A Junior Securities, an amount equal
to the Series A Liquidation Value with respect to each outstanding share of
Series A Preferred. "Series A Junior Securities" means all classes of Common
Stock of the Corporation, as they exist on the date hereof or as such stock may
be constituted from time to time and each other class of capital stock or series
of preferred stock issued by the Corporation or established by the Corporation's
Board of Directors to the extent the terms of such stock do not expressly
provide that it ranks senior to or on parity with, the Series A Preferred as to
dividend rights and rights on liquidation, winding-up and dissolution. "Series A
Parity Securities" means each class of capital stock or series of preferred
stock issued by the Corporation or established by the Corporation's Board of
Directors to the extent the terms of such stock expressly provide that it will
rank on a parity with the Series A Preferred as to dividend rights and rights on
liquidation, winding-up and dissolution. Without limiting the generality of the
foregoing, the Series B Preferred, the Series C Preferred, the Series D
Preferred, the Series E Preferred and the Series F Preferred shall be deemed to
be Series A Parity Securities. "Series A Liquidation Value" means the greater of
(i) $74.00 for each share of Series A Preferred, plus all accrued but unpaid
dividends on the Series A Preferred or (ii) the per share amount that the
holders of the Series A Preferred would have received upon liquidation if all
shares of Series A Preferred had been converted to Common Stock at the Series A
Conversion Price then in effect, plus all accrued but unpaid dividends on the
Series A Preferred.
(b) Unless waived by the affirmative vote of the holders of at least a
majority of the then outstanding shares of Series A Preferred, the sale, lease
or exchange (for cash, shares of stock, securities or other consideration) of
all or substantially all the property and assets of the Corporation or the
merger or consolidation of the Corporation into or with any other corporation or
the merger or consolidation of any other corporation into or with the
Corporation (other than a consolidation or merger in which the Corporation is
the continuing entity and which does not result in any change in the Common
Stock) or an exchange or sale of 90% or more of the capital stock of the
Corporation to accomplish an acquisition of the Corporation in a single or
related transaction shall be deemed to be a liquidation for the purposes of this
Section 3.1.4.
(c) After the payment to the holders of the Series A Preferred of the
full amounts provided for in this Section 3.1.4, the holders of Series A
Preferred as such shall have no right or claim to any of the remaining assets of
the Corporation.
(d) In the event the assets of the Corporation available for
distribution to the holders of Series A Preferred upon any dissolution,
liquidation or winding-up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 3.1.4(a) above, no such distribution shall be made
on account of any Series A Parity Securities unless proportionate amounts are
distributed to the holders of Series A Preferred, ratably, in proportion to the
full amounts for which holders of Series A Preferred and all such Series A
Parity Securities are respectively entitled upon such dissolution, liquidation
or winding-up.
(e) For purposes of this Section 3.1.4 and Section 3.1.6(c)(i), the
Series A Liquidation Value shall be appropriately adjusted for any Stock
Adjustment, other than a Series A PIK Election, as defined below.
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3.1.5. Conversion by Holder. The holders of Series A Preferred
shall have conversion rights as follows:
(a) Right to Convert. Each share of Series A Preferred shall be
convertible, at the option of the holder thereof, at any time after issuance, at
the office of the Corporation or any transfer agent for the Series A Preferred,
into such number of fully paid and nonassessable shares of Common Stock as is
determined by dividing the Series A Original Purchase Price, by the Series A
Conversion Price in effect at the time of conversion. The Series A Conversion
Price shall be one dollar and forty eight cents ($1.48) and shall be subject to
adjustment as hereinafter provided.
(b) Mechanics of Conversion. Before any holder of Series A
Preferred shall be entitled to convert the same into shares of Common Stock, he
shall surrender the certificate or certificates therefor, duly endorsed, at the
office of the Corporation or of any transfer agent for the Series A Preferred,
and shall give written notice to the Corporation at such office that he elects
to convert the same. The Corporation shall, as soon as practicable thereafter,
issue and deliver at such office to such holder of Series A Preferred a
certificate or certificates for the number of shares of Common Stock to which he
shall be entitled as aforesaid. Such conversion shall be deemed to have been
made immediately prior to the close of business on the date of such surrender of
the shares of Series A Preferred to be converted, and the person or persons
entitled to receive the shares of Common Stock issuable upon such conversion
shall be treated for all purposes as the record holder or holders of such shares
of Common Stock on such date.
(c) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series A Preferred. In lieu of any
fractional share to which the holder would otherwise be entitled, the
Corporation shall pay cash equal to such fraction multiplied by the then
applicable Series A Conversion Price.
(d) Adjustment of Conversion Price for Stock Splits, etc. Except
for the stock splits described in Article IX and Article X hereof, the Series A
Conversion Price, for each share of Series A Preferred, whether or not issued,
shall be subject to adjustment from time to time as follows:
(i) Splits. If the number of shares of Common Stock
outstanding at any time after the date hereof is increased by a stock dividend
payable in shares of Common Stock or by a subdivision or split-up of shares of
Common Stock, then on the date such payment is made or such change is effective,
the Series A Conversion Price shall be appropriately decreased so that the
number of shares of Common Stock issuable upon conversion of any share of Series
A Preferred shall be increased in proportion to such increase of outstanding
shares.
(ii) Combinations; Reclassifications. If (A) the number of
shares of Common Stock outstanding at any time after the date hereof is
decreased by a combination of the outstanding shares of Common Stock or (B) the
shares of Common Stock outstanding are reclassified at any time after the date
hereof, then on the effective date of such combination or reclassification, as
the case may be, the Series A Conversion Price shall be
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appropriately increased or adjusted so that the number of shares of Common Stock
issuable upon conversion of any share of Series A Preferred shall be decreased
or adjusted in proportion to such decrease or reclassification, as the case may
be, of outstanding shares.
(iii) Reorganizations and Similar Transactions. If the Corporation
shall be a party to any transaction including without limitation, a merger,
consolidation, sale of all or substantially all of the Corporation's assets or a
reorganization, reclassification or recapitalization of the capital stock of the
Corporation (each of the foregoing being referred to as a "Transaction") but
excluding (i) any Transaction for which provision for adjustment is otherwise
made in this Section 3.1.5 and (ii) any Transaction that is deemed to be a
liquidation for the purposes of Section 3.1.4, in each case, as a result of
which shares of Common Stock are converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Series A Preferred shall thereafter be convertible into the number of
shares of stock or other securities or property to which a holder of the number
of shares of Common Stock of the Corporation deliverable upon conversion of such
Series A Preferred would have been entitled upon such Transaction; and, in any
such case, appropriate adjustment (as determined by the Corporation's Board of
Directors) shall be made in the application of the provisions set forth in this
Section 3.1.5 with respect to the rights and interest thereafter of the holders
of the Series A Preferred, to the end that the provisions set forth in this
Section 3.1.5 shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Series A Preferred. Except as provided in the
Shareholders' Agreement, the Corporation shall not effect any Transaction (other
than a consolidation or merger in which the Corporation is the continuing
corporation) unless prior to or simultaneously with the consummation thereof the
Corporation, or the successor corporation or purchaser, as the case may be,
shall provide in its charter document that each share of Series A Preferred
shall be converted into such shares of stock, securities or property as, in
accordance with the foregoing provisions, each such holder is entitled to
receive. The provisions of this Section 3.1.5(d)(iii) shall similarly apply to
successive Transactions.
(iv) Stock Adjustment. The events described in Sections
3.1.5(d)(i), 3.1.5(d)(ii) and 3.1.5(d)(iii) are each referred to herein as a
"Stock Adjustment." A Series A PIK Election is not a Stock Adjustment and any
"Series F Additional Adjustment" as defined in Section 3.6.7(c)(v) hereof is not
a Stock Adjustment.
(e) If any event occurs as to which, in the opinion of the Corporation's
Board of Directors, the provisions of this Section 3.1.5 are not strictly
applicable or if strictly applicable would not fairly protect the rights of the
holders of the Series A Preferred in accordance with the essential intent and
principles of such provisions, the Corporation's Board of Directors shall make
an adjustment in the application of such provisions, in accordance with such
essential intent and principles, so as to protect such rights of the holders of
the Series A Preferred.
(f) All calculations under this Section 3.1.5 shall be made to the
nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10) of a
share, as the case may be. Upon conversion of the Series A Preferred pursuant
to this Section 3.1.5, the Corporation may pay cash based on the Series A
Conversion Price in lieu of issuing fractional shares.
3.1.6. Conversion or Redemption by the Corporation.
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(a) Series A Qualified IPO. All of the outstanding Series A Preferred
shall automatically convert into Common Stock upon the completion by the
Corporation of a Series A Qualified IPO. Any such mandatory conversion shall
only be effected at the time of and subject to the closing of the sale of such
shares pursuant to such Series A Qualified IPO and following written notice of
such mandatory conversion delivered to all holders of the Series A Preferred at
least seven days prior to such closing, and such notice may be waived with
respect to all of the outstanding Series A Preferred by the holders of a
majority of the outstanding Series A Preferred.
"Series A Qualified IPO" means any firmly underwritten public offering
by the Corporation of the Common Stock pursuant to an effective registration
statement under the Securities Act of 1933, as amended as then in effect, or any
comparable statement under any similar federal statute then in force, in which
(i) the aggregate price paid by the public for the shares shall be at least
$20,000,000 and (ii) the price per share paid by the public for such shares
shall be at least three (3) times the Series A Conversion Price (as adjusted for
Stock Adjustments other than a Series A PIK Election).
(b) Election of a Majority of Series A Preferred. Upon the election
of holders of at least 51% of the Series A Preferred outstanding, either by vote
at a duly called shareholders meeting or by written consent, all of the
outstanding Series A Preferred shall automatically convert into Common Stock.
(c) Redemption of Series A Preferred at Holder's Option.
(i) The Corporation may not require the redemption of any shares of
Series A Preferred. The holder or holders of at least 66-2/3% of the
outstanding shares of Series A Preferred may, at their option, at any time, or
from time to time, from and after February 20, 2003, upon notice given to the
Corporation by the holder or holders of at least 66-2/3% of the outstanding
shares of Series A Preferred (a "Series A Redemption Notice") require the
Corporation to redeem, out of funds legally available therefor, any or all
outstanding shares of Series A Preferred (including shares not held by such
holder or holders). The redemption price per share of Series A Preferred (the
"Series A Redemption Price") payable pursuant to this Section 3.1.6(c) shall be
the Series A Liquidation Value of such share as of the Series A Redemption Date
(hereinafter defined). Unless waived by the Corporation, a Series A Redemption
Notice is irrevocable with respect to the holders giving such notice.
(ii) Promptly upon the determination of the Series A Redemption Price,
the Corporation shall (A) give notice of the Series A Redemption Price to the
holders requesting redemption and to holders of Series A Preferred required to
accept redemption pursuant to Section 3.1.6(c)(i), if any, stating the
redemption date (the "Series A Redemption Date"), which Series A Redemption Date
shall be no less than twenty (20) days and no more than forty (40) days
following the date of the Series A Redemption Notice and (B) give notice to each
holder of Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred and Series F Preferred stating the Series A Redemption Date. On the
Series A Redemption Date, the Corporation shall, unless such shares of Series A
Preferred have been previously surrendered for conversion pursuant to Section
3.1.5, redeem the shares of Series A Preferred set forth in the Series A
Redemption Notice at a price per share equal to the Series A
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Redemption Price, upon submission of certificates of the Series A Preferred in
accordance with Section 3.1.6(c)(iii) hereof.
(iii) Except as provided in Section 3.1.6(c)(iv), on or after the Series
A Redemption Date, a holder of Series A Preferred requesting redemption of or
otherwise required to redeem Series A Preferred set forth in the Series A
Redemption Notice shall surrender to the Corporation the certificate or
certificates representing such shares, in the manner and at the place designated
by the Corporation, and thereupon the Series A Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. If all the shares of Series A Preferred evidenced
by a certificate are not redeemed, the Corporation shall on the Series A
Redemption Date deliver to the owner a new certificate in the name of the owner
for the unredeemed shares.
(iv) From and after the Series A Redemption Date, unless there shall
have been a default in payment of the Series A Redemption Price, all rights of
the holder requesting or required to accept redemption of the shares of Series A
Preferred for which redemption has been requested (except the right to receive
the Series A Redemption Price without interest upon surrender of their
certificate or certificates) shall cease, and such shares shall not thereafter
be transferred on the books of the Corporation or be deemed to be outstanding
for any purpose whatsoever. Subject to clauses (v) and (vi) of paragraph
3.1.6(c), if the funds of the Corporation legally available for redemption of
shares of Series A Preferred on the Series A Redemption Date are insufficient to
redeem the total number of shares of Series A Preferred to be redeemed on such
date, (A) those funds that are legally available shall be used to redeem the
maximum possible number of shares ratably among the holders of such shares, (B)
the shares of Series A Preferred not redeemed shall remain outstanding and
entitled to all the rights and preferences provided herein, until any subsequent
redemption, and (C) at any time thereafter when additional funds of the
Corporation are legally available for redemption of shares of Series A Preferred
such funds will immediately be used to redeem the balance of the shares which
the Corporation has become obliged to redeem but which it has not redeemed.
(v) If and to the extent, not later than five (5) days prior to the
Series A Redemption Date, the Corporation receives a Series B Redemption Notice
pursuant to Section 3.2.6, a Series C Redemption Notice pursuant to Section
3.3.6, a Series D Redemption Notice pursuant to Section 3.4.6, or a Series E
Redemption Notice pursuant to Section 3.5.6, or a Series F Redemption Notice
pursuant to Section 3.6.6, the Series B Redemption Date (as defined in Section
3.2.6), the Series C Redemption Date (as defined in Section 3.3.6), the Series D
Redemption Date (as defined in Section 3.4.6), the Series E Redemption Date (as
defined in Section 3.5.6), or the Series F Redemption Date (as defined in
Section 3.6.6) as the case may be, notwithstanding any contrary provision in
Section 3.2.6, Section 3.3.6, 3.4.6, 3.5.6 or 3.6.6, shall be the same as the
Series A Redemption Date (such date being the "Redemption Date") with respect to
the shares of Series B Preferred designated for redemption in such Series B
Redemption Notice, shares of Series C Preferred designated for redemption in
such Series C Redemption Notice, shares of Series D Preferred designated for
redemption in such Series D Redemption Notice, shares of Series E Preferred
designated for redemption in such Series E Redemption Notice and shares of
Series F Preferred designated for redemption in such Series F Redemption Notice.
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(vi) Redemptions of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Series F Preferred that
occur, or would occur but for the absence of funds legally available therefor,
on the same date shall be made, ratably in proportion to the amounts that the
holders of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred and Series F Preferred to be redeemed on
such Redemption Date are entitled to receive in respect of such redemption.
3.1.7. No Impairment. The Corporation shall not by amendment to
this Certificate of Incorporation or through any reorganization, transfer of
assets, consolidation, merger, dissolution, issue or sale of securities, or any
other voluntary action, except as has been approved by the holders of at least
51% of the then outstanding Series A Preferred voting as a class on an as-
converted basis either at a duly called shareholders meeting or by written
consent, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but shall at all
times in good faith assist in the carrying out of all of the provisions of
Sections 3.1.5 and 3.1.6 and in the taking of all such action as may be
necessary or appropriate in order to protect the conversion rights of the
holders of Series A Preferred against impairment.
3.1.8. Certificate as to Adjustments. Upon the occurrence of each adjustment
or readjustment of the Series A Liquidation Value, Series A Conversion Price or
Series A Redemption Price pursuant to Section 3.1.4, Section 3.1.5 or Section
3.1.6, the Corporation at its expense shall promptly compute such adjustment or
readjustment in accordance with the terms hereof and prepare and furnish to each
holder of affected Series A Preferred a certificate, which shall be certified by
the Corporation's accountants if required by such holder, setting forth such
adjustment or readjustment and showing in detail the facts upon which such
adjustment or readjustment is based. The Corporation shall, upon written request
at any time of any holder of Series A Preferred, furnish or cause to be
furnished to such holder a like certificate setting forth (a) such adjustments
or readjustments, (b) the Series A Liquidation Value, Series A Conversion Price
or Series A Redemption Price in effect, and (c) the number of shares of Common
Stock and the amount, if any, of other property that at the time would be
received upon the conversion of the Series A Preferred.
3.1.9. Notice of Record Date. In the event of any taking by the Corporation
of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, the Corporation shall mail to each holder of Series A
Preferred, at least ten (10) days prior to the record date, a notice specifying
the date on which any such record is to be taken for the purpose of such
dividend or distribution and such notice may be waived with respect to all of
the outstanding Series A Preferred by holders of the majority of the outstanding
Series A Preferred.
3.1.10. Reservation of Stock Issuable Upon Conversion. The Corporation shall
at all times reserve and keep available out of its authorized but unissued
shares of Common Stock, free from any preemptive rights, solely for the purpose
of effecting the conversion of the shares of Series A Preferred such number of
its shares of Common Stock as shall from time to time be sufficient to effect
the conversion of all outstanding shares of Series A Preferred; and if at any
time the number of authorized but unissued shares of Common Stock shall not be
sufficient to effect the conversion of the then outstanding shares of Series A
Preferred, the
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Corporation shall take 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.
3.1.11. Notice of Certain Events. In case, at any time while any
shares of Series A Preferred are outstanding:
(a) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock;
(b) the Corporation shall authorize the issuance to the holders
of its Common Stock as a class, of Common Stock Equivalents, or rights or
warrants to subscribe for or purchase shares of its Common Stock or of any other
subscription rights or warrants;
(c) the Corporation shall authorize any reorganization,
reclassification or recapitalization of its Common Stock;
(d) the Corporation shall authorize the consolidation or merger
of the Corporation into or with any other person, the sale or transfer of a
substantial portion of its capital stock, business or assets to another person,
or any other similar business combination or transaction; or
(e) the Corporation shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then the Corporation shall promptly deliver to the transfer agent
of the Series A Preferred and to each of the holders of shares of Series A
Preferred at their last addresses as shown on the books of the Corporation, at
least 15 days before the date hereinafter specified (or the earlier of the dates
hereinafter specified, in the event that more than one date is specified), a
notice describing such event and stating (i) the date on which a record is to be
taken for the purpose of such dividend, distribution, rights or warrants, or, if
a record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights or warrants are to
be determined, or (ii) the date on which any such reclassification,
reorganization, recapitalization, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property
(including cash), if any, deliverable upon such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up. Any notice
required to be given hereunder to the holders of shares of Series A Preferred
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
the Corporation, and such notice may be waived with respect to all of the
outstanding Series A Preferred by the holders of a majority of the outstanding
Series A Preferred.
3.1.12 Amendments and Changes. As long as any of the Series A Preferred
shall be issued and outstanding, the Corporation shall not, without first
obtaining the approval (by vote or written consent, as provided by law) of the
holders of at least a majority of the total number of shares of Series A
Preferred then outstanding:
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(a) increase or decrease (except as set forth in Section 3.1.3)
the number of authorized shares of Series A Preferred;
(b) create any new class or series of shares having rights senior
to the rights of the Series A Preferred;
(c) materially or adversely alter or change the preferences,
rights, privileges, powers, or the restrictions provided herein for the benefit
of the Series A Preferred;
(d) amend this Section 3.1.12.
3.1.13. No Reissuance of Series A Preferred. No share or shares of Series
A Preferred acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and with no further corporate or
stockholder action all such shares shall be canceled, retired and eliminated
from the shares that the Corporation shall be authorized to issue.
3.2. Series B Preferred.
3.2.1. Designation; Rank. This series of Preferred Stock shall be
designated the "Series B Convertible Preferred Stock" with a par value of $.001
per share (the "Series B Preferred"). The Series B Preferred shall rank, with
respect to dividend rights and rights on liquidation, winding-up and
dissolution, (i) senior to all classes of Common Stock of the Corporation, as
they exist on the date hereof or as such stock may be constituted from time to
time and to each other class of capital stock or series of preferred stock
issued by the Corporation or established by the Corporation's Board of Directors
to the extent the terms of such stock do not expressly provide that it ranks
senior to or on parity with, the Series B Preferred as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively, together with
the Common Stock, the "Series B Junior Securities"), (ii) on a parity with each
other class of capital stock or series of preferred stock issued by the
Corporation or established by the Corporation's Board of Directors to the extent
the terms of such stock expressly provide that it will rank on a parity with the
Series B Preferred as to dividend rights and rights on liquidation, winding-up
and dissolution (collectively, the "Series B Parity Securities"), and (iii)
junior to each other class of capital stock or series of preferred stock issued
by the Corporation or established by the Corporation's Board of Directors to the
extent the terms of such stock expressly provide that it will rank senior to the
Series B Preferred as to dividend rights and rights on liquidation, winding-up
and dissolution (collectively, the "Series B Senior Securities"). Without
limiting the generality of the foregoing, the Series A Preferred, the Series C
Preferred, the Series D Preferred, the Series E Preferred and the Series F
Preferred shall be deemed to be Series B Parity Securities. For all purposes of
this Certificate of Incorporation (other than Section 3.2.7) including, without
limitation, for purposes of determining the rights of such holder to participate
in dividends and other distributions by the Corporation or to vote on all
matters presented generally to the shareholders of the Corporation, the shares
of Common Stock into which shares of Series B Preferred held by a holder of the
Series NB Warrant are convertible shall include all of the shares of Common
Stock for which the Series NB Warrant is then exercisable.
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3.2.2. Authorized Number. The authorized number of shares
constituting the Series B Preferred shall be twenty two million (22,000,000).
3.2.3. Dividends.
(a) Dividends shall accrue from day to day and shall be payable
when and as declared by the Corporation's Board of Directors or as otherwise
provided in this Section 3.2.3. as follows, out of funds legally available
therefor:
(i) for all periods prior to and including October 15,
1999, dividends shall accrue and shall be payable solely by issuance by the
Corporation to the holders of the Series B Preferred of additional shares of
Series B Preferred equal to one hundred forty-five thousandths (.145) of a share
of Series B Preferred for each one share of Series B Preferred actually issued
and outstanding on October 15, 1999 which dividend shall be cumulative (whether
or not earned or declared);
(ii) for all periods after October 15, 1999 through and
including the last day of July, 2001, dividends shall accrue and shall be
payable solely by issuance by the Corporation to the holders of the Series B
Preferred of additional shares per share of Series B Preferred with the number
of shares per share of Series B Preferred being equal to (i) the dollar amount
of the cash dividend which would have accrued on 1.145 shares of Series B
Preferred from October 16, 1999 to the record date for such dividend if a cash
dividend had accrued during that period at a rate of eight percent (8%)
compounded annually with the first compounding occurring on October 16, 2000 of
the Series B Stated Value divided by (ii) the Series B Stated Value as of the
record date for such dividend which dividend shall be cumulative (whether or not
earned or declared), provided, however, that no dividend shall accrue after
February 29, 2000, except that if a Qualified IPO as defined in Section 3.2.13
hereof shall not have closed before April 16, 2000, then dividends shall again
accrue hereunder effective as of March 1, 2000; and
(iii) commencing on and including August 1, 2001, the
foregoing dividends shall not further accrue (but if unpaid shall remain
accrued), and in lieu of any further accrual, the Corporation shall accrue and,
when and as declared by the Corporation's Board of Directors out of funds
legally available therefor, the Corporation shall pay dividends to the holders
of the Series B Preferred at an annual rate per share of Series B Preferred of
(a) 8% compounded annually of (b) (X) one plus the number of shares of Series B
Preferred which would be issuable on August 1, 2001 pursuant to clauses (i) and
(ii) in respect of a share of Series B Preferred multiplied by (Y) the Series B
Stated Value, and such dividends shall accrue commencing on and including August
1, 2001 and shall be cumulative (whether or not earned or declared). All
dividends first accruing on or after August 1, 2001 as specified in clause (iii)
shall be payable in cash out of funds legally available therefor; provided,
however, that at the election (a "Series B PIK Election") of the holders as of
the record date for such dividend of a majority of the outstanding shares of
Series B Preferred, in lieu of payment thereof in cash, the amount of such
dividends may be paid, in whole or in part, by issuance by the Corporation to
the holders of the Series B Preferred, of additional shares of Series B
Preferred, with the number of shares being equal to (i) the dollar amount of the
dividend which the holder has elected to receive in the form of additional
shares of Series B Preferred, divided by (ii) the Series B Stated Value as of
the record date for such dividend. If the Series B PIK Election is not for the
entire amount of the
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dividend, each holder of Series B Preferred shall receive
the same proportion of cash and additional shares of Series B Preferred for each
share of Series B Preferred held.
Dividends payable for any period less than a full dividend period
shall be computed on the basis of a 360-day year consisting of twelve 30-day
months.
For definitional purposes of the term "Series B PIK Election" the
shares of Series B Preferred received or receivable pursuant to clauses (i),
(ii) or (iii) are deemed received or receivable pursuant to a "Series B PIK
Election."
All additional shares of Series B Preferred issued upon a Series B PIK
Election shall be deemed issued as of the record date for such dividend. No
fractional shares shall be issued upon a Series B PIK Election, but rather cash
in lieu of fractional shares shall be paid, with the deemed value per whole
share of Series B Preferred being the Series B Stated Value as of the record
date for such dividend. Any dividend (or portion thereof) shall be deemed fully
paid to the extent a Series B PIK Election is made with respect to such dividend
(or portion thereof).
(b) No full dividends may be declared or paid or funds set apart for
the payment of dividends on any Series B Parity Securities (except dividends on
Series B Parity Securities paid in shares of Series B Junior Securities) for any
period unless full cumulative dividends to be paid hereunder prior to the date
thereof shall have been paid on the Series B Preferred. If dividends are not so
paid, the Series B Preferred, if and to the extent a Series B PIK Election has
not been made with respect to such dividends, shall share dividends pro rata
with the Series B Parity Securities according to the amount of dividends due and
payable with respect to each. No dividends may be paid or set aside for such
payment on Series B Junior Securities (except dividends on Series B Junior
Securities paid in additional shares of Series B Junior Securities), and no
Series B Parity Securities or Series B Junior Securities may be repurchased,
redeemed or otherwise retired nor may funds be set aside for payment with
respect thereto, nor shall the Corporation permit any corporation or entity
directly or indirectly controlled by the Corporation to purchase any shares of
Series B Parity Securities or Series B Junior Securities, (except in each case
for (a) cashless exercises of stock options (whether effected by surrendering
stock options or outstanding shares of Stock), (b) repurchases by the
Corporation of Series B Parity Securities or Series B Junior Securities wholly
funded by life insurance proceeds, or (c) a payment in respect of fractional
shares) if full cumulative dividends to be paid hereunder prior to the date
thereof have not been paid on the Series B Preferred.
(c) If, in any year, any cash or other distributions are declared by
the Corporation's Board of Directors to be paid on Common Stock (including,
without limitation, any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the Corporation or any of its
Subsidiaries by way of dividend or spinoff), other than dividends or
distributions of shares of Common Stock that are referred to in clause (i) of
Section 3.2.7(c), then an additional dividend shall be paid at the same time to
the holders of the Series B Preferred at the rate per share equal to the product
of (x) such per share dividend on the Common Stock multiplied by (y) the number
of shares of Common Stock into which each share of Series B Preferred (including
any issuable upon the payment of any accrued but unpaid Series B PIK Election)
is then convertible. Dividends payable to the holders of the Series B Preferred
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pursuant to this Section 3.2.3(c) shall be paid in the same form as paid to
holders of Common Stock. Solely for purposes of this Section 3.2.3(c), the term
"distribution" means any transfer of cash or property without consideration,
whether by way of dividend or otherwise (except a dividend in shares of Common
Stock of the Corporation) including, but not limited to, securities of other
persons, evidences of indebtedness issued by the Corporation or other persons
and assets, but does not include (i) any repurchase of shares from a terminated
employee of or consultant to the Corporation in accordance with the terms of the
agreement applicable to such employee or consultant providing for such
repurchase, (ii) any repurchase of shares wholly funded with the proceeds of
life insurance covering certain executives of the Corporation as provided in the
Shareholders' Agreement or approved by the Corporation's Board of Directors,
(iii) any distribution that is part of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and (iv) a payment of dissenter's
rights or in respect of fractional shares.
(d) The Corporation shall at all times reserve and keep available for
issuance upon a Series B PIK Election, free from any preemptive rights, such
number of its authorized but unissued shares of Series B Preferred as will from
time to time be necessary to permit the maximum then available Series B PIK
Election, and shall take all action required to increase the authorized number
of shares of Series B Preferred if necessary to permit the maximum then
available Series B PIK Election.
(e) All accrued but unpaid dividends on Series B Preferred shall be
paid pursuant to a liquidation, dissolution or winding up as provided in Section
3.2.4 as a component of the Series B Liquidation Value. All accrued but unpaid
dividends in respect of a particular share of Series B Preferred shall be paid
upon conversion of that share pursuant to Section 3.2.7. All accrued but unpaid
dividends in respect of a particular share of Series B Preferred shall be paid
upon a redemption pursuant to Section 3.2.6 as a component of the Series B
Redemption Price.
3.2.4. Liquidation.
(a) Upon the dissolution, liquidation or winding up of the
Corporation (whether voluntary or involuntary) the holders of Series B Preferred
shall be entitled to receive out of the assets of the Corporation available for
distribution to stockholders before any payment or distribution shall be made on
any Series B Junior Securities, an amount equal to the Series B Liquidation
Value with respect to each outstanding share of Series B Preferred.
(b) Unless waived by the affirmative vote of the holders of at least
a majority of the then outstanding shares of Series B Preferred, the sale, lease
or exchange (for cash, shares of stock, securities or other consideration) of
all or substantially all the property and assets of the Corporation or the
merger or consolidation of the Corporation into or with any other corporation or
the merger or consolidation of any other corporation into or with the
Corporation (other than a consolidation or merger in which the Corporation is
the continuing entity and which does not result in any change in the Common
Stock) or an exchange or sale of 90% or more of the capital stock of the
Corporation to accomplish an acquisition of the Corporation in a single or
related transaction shall be deemed to be a liquidation for the purposes of this
Section 3.2.4.
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(c) After the payment to the holders of the Series B Preferred of the
full amounts provided for in this Section 3.2.4, the holders of Series B
Preferred as such shall have no right or claim to any of the remaining assets of
the Corporation.
(d) In the event the assets of the Corporation available for
distribution to the holders of Series B Preferred upon any dissolution,
liquidation or winding-up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 3.2.4(a) above, no such distribution shall be made
on account of any Series B Parity Securities unless proportionate amounts are
distributed to the holders of Series B Preferred, ratably, in proportion to the
full amounts for which holders of Series B Preferred and all such Series B
Parity Securities are respectively entitled upon such dissolution, liquidation
or winding-up.
3.2.5. Voting Rights. The holder of each share of Series B Preferred shall be
entitled to vote on all matters and shall be entitled to the number of votes
equal to the largest number of full shares of Common Stock into which such
shares of Series B Preferred could be converted and for which any Series NB
Warrant held by a holder of such Series B Preferred may be exercised, pursuant
to the provisions of Section 3.2.7 hereof, at the record date for the
determination of shareholders entitled to vote on such matters or, if no such
record date is established, at the date such vote is taken or any written
consent of shareholders is solicited. Except as otherwise expressly provided
herein or the Shareholders' Agreement or as required by law, the holders of
shares of Series B Preferred, Series A Preferred, Series C Preferred, Series D
Preferred, Series E Preferred, Series F Preferred and Common Stock shall vote
together as a single class on all matters and not as separate classes.
Notwithstanding any provision of this Certificate of Incorporation to the
contrary, references to shares of Series B Preferred on an "as-converted basis"
shall, in each instance, take into account shares of Common Stock that would be
issued upon the exercise of Series NB Warrants held by holders of shares of
Series B Preferred.
3.2.6. Redemption.
(a) The Corporation may not require the redemption of any shares of
Series B Preferred. The holder or holders of at least 66-2/3% of the
outstanding shares of Series B Preferred may, at their option, at any time, or
from time to time, from and after February 20, 2003, upon notice given to the
Corporation by the holder or holders of at least 66-2/3% of the outstanding
shares of Series B Preferred (a "Series B Redemption Notice") require the
Corporation to redeem, out of funds legally available therefor, any or all
outstanding shares of Series B Preferred (including shares not held by such
holder or holders) and the Series NB Warrant. The redemption price per share of
Series B Preferred (the "Series B Redemption Price") payable pursuant to this
Section 3.2.6 shall be the Series B Liquidation Value of such share as of the
Series B Redemption Date (hereinafter defined). For the purpose of determining
the "per share amount" in the definition of Series B Liquidation Value, the
value of each share of Common Stock shall equal the Fair Market Value. Unless
waived by the Corporation, a Series B Redemption Notice is irrevocable with
respect to the holders giving such notice.
(b) Promptly upon the determination of the Series B Redemption Price,
the Corporation shall (i) give notice of the Series B Redemption Price to the
holders
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requesting redemption and to holders of Series B Preferred required to accept
redemption pursuant to Section 3.2.6(a), if any, stating the redemption date
(the "Series B Redemption Date"), which Series B Redemption Date shall be no
less than twenty (20) days and no more than forty (40) days following the date
of the Series B Redemption Notice, and (ii) give notice to each holder of Series
A Preferred, Series C Preferred, Series D Preferred, Series E Preferred and
Series F Preferred stating the Series B Redemption Date. On the Series B
Redemption Date, the Corporation shall, unless such shares of Series B Preferred
have been previously surrendered for conversion pursuant to Section 3.2.7,
redeem the shares of Series B Preferred and the Series NB Warrant as set forth
in the Series B Redemption Notice at a price per share equal to the Series B
Redemption Price, upon submission of certificates of the Series B Preferred in
accordance with Section 3.2.6(c) hereof.
(c) Except as provided in Section 3.2.6(d), on or after the Series B
Redemption Date, a holder of Series B Preferred requesting redemption of or
otherwise required to redeem Series B Preferred set forth in the Series B
Redemption Notice shall surrender to the Corporation the certificate or
certificates representing such shares and the related Series NB Warrant, in the
manner and at the place designated by the Corporation, and thereupon the Series
B Redemption Price of such securities shall be payable to the order of the
person whose name appears on such certificate or certificates as the owner
thereof and each surrendered certificate shall be canceled. If all the shares
of Series B Preferred evidenced by a certificate or all of the Series NB Warrant
are not redeemed, the Corporation shall on the Series B Redemption Date deliver
to the owner a new certificate and/or warrant in the name of the owner for the
unredeemed shares.
(d) From and after the Series B Redemption Date, unless there shall
have been a default in payment of the Series B Redemption Price, all rights of
the holder requesting or required to accept redemption of the shares of Series B
Preferred for which redemption has been requested (except the right to receive
the Series B Redemption Price without interest upon surrender of their
certificate or certificates) shall cease, and such shares shall not thereafter
be transferred on the books of the Corporation or be deemed to be outstanding
for any purpose whatsoever. Subject to paragraphs 3.2.6(e) and 3.2.6(f), if the
funds of the Corporation legally available for redemption of shares of Series B
Preferred on the Series B Redemption Date are insufficient to redeem the total
number of shares of Series B Preferred to be redeemed on such date, (i) those
funds that are legally available shall be used to redeem the maximum possible
number of shares ratably among the holders of such shares, (ii) the shares of
Series B Preferred not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein, until any subsequent redemption, and
(iii) at any time thereafter when additional funds of the Corporation are
legally available for redemption of shares of Series B Preferred such funds will
immediately be used to redeem the balance of the shares which the Corporation
has become obliged to redeem but which it has not redeemed.
(e) If and to the extent, not later than five (5) days prior to the
Series B Redemption Date, the Corporation receives a Series A Redemption
Notice pursuant to Section 3.1.6(c), a Series C Redemption Notice pursuant
to Section 3.3.6(a), a Series D Redemption Notice pursuant to Section
3.4.6(a), a Series E Redemption Notice pursuant to Section 3.5.6(a), or a
Series F Redemption Notice pursuant to Section 3.6.6(a), the Series A
Redemption Date (as defined in Section 3.1.6(c)), the Series C Redemption
Date (as defined in
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Section 3.3.6(b)), the Series D Redemption Date (as defined in Section
3.4.6(b)), the Series E Redemption Date (as defined in Section 3.5.6(b)), or the
Series F Redemption Date (as defined in Section 3.6.6(b)), notwithstanding any
contrary provision in Section 3.1.6(c), Section 3.3.6(b), Section 3.4.6(b),
Section 3.5.6(b) or Section 3.6.6(b), shall be the same as the Series B
Redemption Date (such date being the "Redemption Date") with respect to the
shares of Series A Preferred designated for redemption in such Series A
Redemption Notice, shares of Series C Preferred designated for redemption in
such Series C Redemption Notice, shares of Series D Preferred designated for
redemption in said Series D Redemption Notice, shares of Series E Preferred
designated for redemption in said Series E Redemption Notice and shares of
Series F Preferred designated for redemption in said Series F Redemption Notice.
(f) Redemptions of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Series F Preferred that
occur, or would occur but for the absence of funds legally available therefor,
on the same date shall be made, ratably in proportion to the amounts that the
holders of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred and Series F Preferred to be redeemed on
such Redemption Date are entitled to receive in respect of such redemption.
3.2.7. Conversion.
(a) Upon the earlier of (i) the consummation of a Qualified IPO or
(ii) for each of at least 20 consecutive trading days after an initial public
offering of the Common Stock the aggregate market capitalization of the Free
Common Stock is at least $25 million and the Common Stock has a Current Market
Price of at least $12.00 per share (subject to adjustment for stock splits and
combinations, recapitalizations and stock dividends of the Common Stock except
for the stock splits described in Article IX and Article X hereof), each share
of Series B Preferred shall automatically be converted into a number of shares
of Common Stock at the then effective Series B Conversion Ratio. In addition,
(x) at the option of the holder of any Series B Preferred, such holder shall
have the right, at any time and from time to time prior to or after the
consummation of an initial public offering of the Common Stock, by written
notice to the Corporation, to convert any and all shares of Series B Preferred
owned by such holder at such time into a number of shares of Common Stock, at
the then effective Series B Conversion Ratio, and (y) upon the election of
holders of at least 51% of the then outstanding Series B Preferred and Series C
Preferred voting as a class on an as-converted basis either at a duly called
shareholders meeting or by written consent, all of the outstanding Series B
Preferred and Series C Preferred shall automatically convert into Common Stock
at the then applicable conversion ratio for such stock.
(b) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of the Series B Preferred, free from any preemptive
rights, such number of its authorized but unissued shares of Common Stock as
will from time to time be necessary to permit the conversion of all outstanding
shares of Series B Preferred into shares of Common Stock, and shall take all
action required to increase the authorized number of shares of Common Stock if
necessary to permit the conversion of all outstanding shares of Series B
Preferred.
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(c) Except for the stock splits described in Article IX and Article X
hereof, the Series B Conversion Ratio shall be subject to adjustment from time
to time as follows:
(i) In case the Corporation shall at any time or from time to
time after the Series B Issue Date (A) pay a dividend, or make a distribution,
on the outstanding shares of Common Stock in shares of Common Stock, (B)
subdivide the outstanding shares of Common Stock, (C) combine the outstanding
shares of Common Stock into a smaller number of shares or (D) issue by
reclassification of the shares of Common Stock any shares of capital stock of
the Corporation, then, and in each such case, the Series B Conversion Ratio in
effect immediately prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of Series B
Preferred thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock or other securities of the Corporation that
such holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such shares of Series B
Preferred been surrendered for conversion immediately prior to the happening of
such event or the record date therefor, whichever is earlier. An adjustment made
pursuant to this clause (i) shall become effective (x) in the case of any such
dividend or distribution, immediately after the close of business on the record
date for the determination of holders of shares of Common Stock entitled to
receive such dividend or distribution, or (y) in the case of such subdivision,
reclassification or combination, at the close of business on the day upon which
such corporate action becomes effective. No adjustment shall be made pursuant to
this clause (i) in connection with any transaction to which Section 3.2.7(g)
applies.
(ii) The Series B Conversion Ratio shall not be adjusted for any
"Series F Additional Adjustment" as defined in Section 3.6.7(c)(v) hereof.
(d) The issuance of certificates for shares of Common Stock upon
conversion of the Series B Preferred shall be made without charge to the holders
thereof for any issuance tax in respect thereof, provided that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the holder of the Series B Preferred which is being
converted.
(e) The Corporation will at no time close its transfer books against
the transfer of any Series B Preferred, or of any shares of Common Stock issued
or issuable upon the conversion of any shares of Series B Preferred, in any
manner which interferes with the timely conversion of such Series B Preferred,
except as may otherwise be required to comply with applicable securities laws.
(f) If any event occurs as to which, in the opinion of the
Corporation's Board of Directors, the provisions of this Section 3.2.7 are not
strictly applicable or if strictly applicable would not fairly protect the
rights of the holders of the Series B Preferred in accordance with the essential
intent and principles of such provisions, the Corporation's Board of Directors
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect such rights of the
holders of the Series B Preferred.
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(g) If the Corporation shall be a party to any Transaction (but
excluding (i) any Transaction for which provision for adjustment is otherwise
made in this Section 3.2.7 and (ii) any Transaction that is deemed to be a
liquidation for the purposes of Section 3.2.4), in each case, as a result of
which shares of Common Stock are converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Series B Preferred shall thereafter be convertible into the number of
shares of stock or other securities or property to which a holder of the number
of shares of Common Stock of the Corporation deliverable upon conversion of such
Series B Preferred would have been entitled upon such Transaction; and, in any
such case, appropriate adjustment (as determined by the Corporation's Board of
Directors) shall be made in the application of the provisions set forth in this
Section 3.2.7 with respect to the rights and interest thereafter of the holders
of the Series B Preferred, to the end that the provisions set forth in this
Section 3.2.7 shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Series B Preferred. Except as provided in the
Shareholders' Agreement, the Corporation shall not effect any Transaction (other
than a consolidation or merger in which the Corporation is the continuing
corporation) unless prior to or simultaneously with the consummation thereof the
Corporation, or the successor corporation or purchaser, as the case may be,
shall provide in its charter document that each share of Series B Preferred
shall be converted into such shares of stock, securities or property as, in
accordance with the foregoing provisions, each such holder is entitled to
receive. The provisions of this Section 3.2.7(g) shall similarly apply to
successive Transactions.
(h) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
except as has been approved by the holders of at least 51% of the then
outstanding Series B Preferred and Series C preferred voting as a class on an
as-converted basis either at a duly called shareholders meeting or by written
consent, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 3.2.7 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series B Preferred against impairment.
(i) All calculations under this Section 3.2.7 shall be made to
the nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10) of a
share, as the case may be. Upon conversion of the Series B Preferred pursuant to
this Section 3.2.7, the Corporation may pay cash based on the Series B
Conversion Price in lieu of issuing fractional shares.
3.2.8. Notice of Certain Events. In case, at any time while any shares of
Series B Preferred are outstanding:
(a) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock;
(b) the Corporation shall authorize the issuance to the holders of
its Common Stock as a class, of Common Stock Equivalents, or rights or warrants
to subscribe for or purchase shares of its Common Stock or of any other
subscription rights or warrants;
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(c) the Corporation shall authorize any reorganization,
reclassification or recapitalization of its Common Stock;
(d) the Corporation shall authorize the consolidation or merger of
the Corporation into or with any other person, the sale or transfer of a
substantial portion of its capital stock, business or assets to another person,
or any other similar business combination or transaction; or
(e) the Corporation shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; then the Corporation
shall promptly deliver to the transfer agent of the Series B Preferred and to
each of the holders of shares of Series B Preferred at their last addresses as
shown on the books of the Corporation, at least 15 days before the date
hereinafter specified (or the earlier of the dates hereinafter specified, in the
event that more than one date is specified), a notice describing such event and
stating (A) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants, or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distribution, rights or warrants are to be determined, or (B) the
date on which any such reclassification, reorganization, recapitalization,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their Common
Stock for securities or other property (including cash), if any, deliverable
upon such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up. Any notice required to be given hereunder to the
holders of shares of Series B Preferred shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each holder of record
at his address appearing on the books of the Corporation, and such notice may be
waived with respect to all of the outstanding Series B Preferred by the holders
of a majority of the outstanding Series B Preferred.
3.2.9. Certain Remedies. Any registered holder of Series B
Preferred may proceed to protect and enforce its rights and the rights of any
other holders of Series B Preferred with any and all remedies available at law
or in equity.
3.2.10. Protective Provisions. So long as any shares of Series B
Preferred are outstanding, the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holder or
holders of at least 50.1% of the then outstanding shares of Series B Preferred:
(a) alter or change the rights, preference or privileges of the
shares of Series B Preferred or otherwise amend the Certificate of
Incorporation, in either case, whether by merger, consolidation or otherwise, so
as to affect adversely the shares of Series B Preferred;
(b) increase the authorized number of shares of Series B Preferred
except solely to pay, or reserve for payment, upon a Series B PIK Election;
(c) except as provided by the Shareholders' Agreement or upon a
Series B PIK Election, authorize the issuance of, issue, or sell any additional
shares of Series B Preferred; or
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(d) except for Excluded Securities defined in clauses (iii), (iv),
(vi) or (vii) of the definition of Excluded Securities, create or designate, or
authorize the issuance of, any new class or series of stock (i) which are Series
B Senior Securities or Series B Parity Securities, (ii) having rights similar to
any rights of the Series B Preferred under Section 3.2.5 hereof or (iii)
convertible into any class or series of stock described in clause (i) of this
paragraph (d).
3.2.11. Reports as to Adjustments. Upon any adjustment of the
Series B Conversion Ratio then in effect and any increase or decrease in the
number of shares of Common Stock issuable upon the operation of the conversion
provisions set forth in Section 3.2.7, then, and in each such case, the
Corporation shall promptly deliver to the registered holders of the Series B
Preferred as shown on the books of the Corporation a copy of a certificate
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Corporation, with
the original being delivered to the transfer agent for the Series B Preferred,
setting forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated and specifying the Series B
Conversion Ratio then in effect following such adjustment and the increased or
decreased number of shares issuable upon the conversion granted pursuant to
Section 3.2.7, and shall set forth in reasonable detail the method of
calculation of each and a brief statement of the facts requiring such
adjustment.
3.2.12. No Reissuance of Series B Preferred. No share or shares of Series B
Preferred acquired by the Corporation by reason of redemption, purchase,
conversion or otherwise shall be reissued, and without further corporate or
stockholder action all such shares shall be canceled, retired and eliminated
from the shares that the Corporation shall be authorized to issue.
3.2.13. Definitions. In addition to any other terms defined herein, the
following terms shall have the meanings indicated for purposes of this Section
3.2, Section 3.3, Section 3.4, Section 3.5 and Section 3.6:
"Business Day" means any day that is not a Saturday, Sunday or a day
on which banking institutions in New York, New York are required to be closed
for business.
"Common Stock Equivalent" means securities convertible into, or
exchangeable or exercisable for, shares of Common Stock.
"Current Market Price" means, in respect of any share of Common Stock
on any date herein specified, (i) if the shares of Common Stock are publicly
traded, the average of the daily closing prices of the Common Stock for the
twenty consecutive trading days ending on such date or (ii) if the shares of
Common Stock are not publicly traded, the Fair Market Value per share of Common
Stock as of such date.
"Exchange Agreement" means the Exchange Agreement dated May 7, 1998
between the Company and Beacon, without amendment.
"Excluded Securities" means (i) options issued by the Corporation
pursuant to any stock option, employee stock purchase or similar plan (and any
shares of Common Stock
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issuable thereunder) approved by the Corporation's Board of Directors, (ii)
shares of Common Stock issuable upon conversion, exchange or exercise of any
Common Stock Equivalent outstanding as of the Series B Issue Date and the
warrants listed in the following clause (iv), (iii) securities issued pursuant
to a Series A PIK Election, Series B PIK Election, Series C PIK Election, Series
D PIK Election, Series E PIK Election or Series F PIK Election and upon
conversion of such securities, (iv) Series NB Warrants and upon exercise of such
securities, (v) any shares of Common Stock issuable upon conversion, exchange or
exercise of any Common Stock Equivalents that are Series B Preferred outstanding
on the date hereof, Series C Preferred outstanding on the date hereof, Series D
Preferred outstanding on the date hereof, Series E Preferred outstanding on the
date hereof (the Series E Preferred Stock Purchase Agreement by and among the
Corporation, Trans Cosmos USA, Inc. and certain other parties dated as of April
16, 1999 is referred to as the "TCI Purchase Agreement"), (vi) any Series B
Preferred and Series C Preferred issued pursuant to the Exchange Agreement, and
securities issued upon conversion of such securities issued pursuant to the
Exchange Agreement and (vii) up to 6,103,287 shares of Series F Preferred issued
pursuant to the Series F Preferred Stock Purchase Agreement between the
Corporation and BVCF IV, L.P. dated as of November 19, 1999 (the "Brinson
Purchase Agreement") including issuances of such stock by the addition or
substitution of parties thereto, and any securities issued or deemed issued and
any adjustments made or deemed made as a results of any of the Series F
Additional Adjustments, and any shares of Common Stock issuable upon conversion,
exchange or exercise of any Common Stock Equivalents that are such Series F
Preferred.
"Fair Market Value" of the Common Stock or any other property means
the fair market value of such Common Stock or other property as determined
(unless expressly otherwise provided herein) by mutual agreement between the
Corporation and the holders of not less than 50% of the Series B Preferred,
Series C Preferred and Series D Preferred, each treated as a separate class on
an as-converted basis, or, if the parties are unable to agree, as determined
based upon what a seller under no compulsion to sell would receive from a
willing buyer and without discount for illiquidity, minority interest or the
non-public status of the Corporation and without a control premium, by a
nationally recognized independent investment banking firm selected by mutual
agreement between the Corporation and the holders of not less than 50% of the
Series B Preferred (including in such as converted amount Common Stock issuable
on the exercise of the Series NB Warrant), Series C Preferred and Series D
Preferred, each treated as a separate class on an as-converted basis.
"Free Common Stock" means Common Stock beneficially owned by Persons
other than officers, directors, employees or affiliates of the Corporation.
"Person" means any individual, corporation, limited liability company,
limited or general partnership, joint venture, association, joint-stock company
or other business entity, trust, unincorporated organization or government or
any agency or political subdivisions thereof.
"Qualified IPO" means a bona fide, firm commitment, underwritten
public offering of Common Stock pursuant to an effective registration statement
under the Securities Act of 1933, as amended, (i) resulting in at least
$25,000,000 of net proceeds to the Corporation after deducting underwriting
discounts and commissions and offering expenses, and (ii) reflecting a per share
offering price for each share of Common Stock sold in such offering of at
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least $10.00 per share (subject to adjustment, for stock splits and
combinations, recapitalizations and stock dividends of the Common Stock except
for the stock splits described in Article IX and Article X hereof) if the
closing of the public offering occurs during the period from January 13, 2000
through July 31, 2000, and thereafter of at least $12.00; (subject to adjustment
for stock splits and combinations, recapitalizations and stock dividends of the
Common Stock, except for the stock splits described in Article IX and Article X
hereof).
"Series B Conversion Ratio," determined as of any date, shall equal
the number of shares of Common Stock into which one share of Series B Preferred
is convertible pursuant to Section 3.2.7. The Series B Conversion Ratio shall
equal twenty-five one hundredths (.25) as of January 15, 2000 and shall be
subject to adjustment as provided in paragraph (c) of Section 3.2.7.
"Series B Conversion Price" means, at any date, the Series B Stated
Value multiplied by the inverse of the Series B Conversion Ratio then in effect.
"Series B Issue Date" means the first date on which shares of Series B
Preferred are issued.
"Series B Liquidation Value" means the greater of (i) $1.611 (as
adjusted for stock splits, reverse splits, stock dividends other than a Series B
PIK Election) and stock combinations, in each case of the Series B Preferred),
for each share of Series B Preferred, plus all accrued but unpaid dividends on
the Series B Preferred or (ii) the per share amount that the holders of the
Series B Preferred would have received upon liquidation if all shares of Series
B Preferred had been converted to Common Stock at the Series B Conversion Ratio
then in effect and all Series NB Warrants related thereto had been exercised for
Common Stock immediately prior to such liquidation, plus all accrued but unpaid
dividends on the Series B Preferred.
"Series B Stated Value" means $1.611 per share (as adjusted for stock
splits, reverse splits, stock dividends (other than Series B PIK Election) and
stock combinations of the Series B Preferred and Sections 3.2.3(a) (other than
in respect of a Series B PIK Election) and 3.2.7(g)).
"Series NB Warrant" means a Series NB Warrant (including Warrant NB-1)
of the Corporation, as amended and restated as of November 19, 1999, to purchase
shares of Common Stock.
"Subsidiary" of any Person means any corporation or other entity of
which a majority of the voting power of the voting equity securities or equity
interest is owned, directly or indirectly, by such Person.
3.3. Series C Preferred.
3.3.1. Designation; Rank. This series of Preferred Stock shall be
designated the "Series C Convertible Preferred Stock" with a par value of $.001
per share (the "Series C Preferred"). The Series C Preferred shall rank, with
respect to dividend rights and rights on liquidation, winding-up and
dissolution, (i) senior to all classes of Common Stock of the Corporation, as
they exist on the date hereof or as such stock may be constituted from time to
time and to each other class of capital stock or series of preferred stock
issued by the Corporation
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or established by the Corporation's Board of Directors to the extent the terms
of such stock do not expressly provide that it ranks senior to or on parity
with, the Series C Preferred as to dividend rights and rights on liquidation,
winding-up and dissolution (collectively, together with the Common Stock, the
"Series C Junior Securities"), (ii) on a parity with each other class of capital
stock or series of preferred stock issued by the Corporation or established by
the Corporation's Board of Directors to the extent the terms of such stock
expressly provide that it will rank on a parity with the Series C Preferred as
to dividend rights and rights on liquidation, winding-up and dissolution
(collectively, the "Series C Parity Securities"), and (iii) junior to each other
class of capital stock or series of preferred stock issued by the Corporation or
established by the Corporation's Board of Directors to the extent the terms of
such stock expressly provide that it will rank senior to the Series C Preferred
as to dividend rights and rights on liquidation, winding-up and dissolution
(collectively, the "Series C Senior Securities"). Without limiting the
generality of the foregoing, the Series A Preferred, Series B Preferred, Series
D Preferred, Series E Preferred and Series F Preferred shall be deemed to be
Series C Parity Securities.
3.3.2. Authorized Number. The authorized number of shares
constituting the Series C Preferred shall be eleven million five hundred
thousand (11,500,000) shares.
3.3.3. Dividends.
(a) Dividends shall accrue from day to day and shall be payable when
and as declared by the Corporation's Board of Directors or as otherwise provided
in this Section 3.3.3. as follows, out of funds legally available therefor:
(i) for all periods prior to and including October 15, 1999,
dividends shall accrue and shall be payable solely by issuance by the
Corporation to the holders of the Series C Preferred of additional shares of
Series C Preferred equal to one hundred forty-five thousandths (.145) of a share
of Series C Preferred for each one share of Series C Preferred actually issued
and outstanding on October 15, 1999 which dividend shall be cumulative (whether
or not earned or declared);
(ii) for all periods after October 15, 1999 through and
including the last day of July, 2001, dividends shall accrue and shall be
payable solely by issuance by the Corporation to the holders of the Series C
Preferred of additional shares of Series C Preferred with the number of shares
per share of Series C Preferred being equal to (i) the dollar amount of the cash
dividend which would have accrued on 1.145 shares of Series C Preferred from
October 16, 1999 to the record date for such dividend if a cash dividend had
accrued during that period at a rate of eight percent (8%) compounded annually
with the first compounding occurring on October 16, 2000 of the Series C Stated
Value divided by (ii) the Series C Stated Value as of the record date for such
dividend which dividend shall be cumulative (whether or not earned or declared),
provided, however, that no dividend shall accrue after February 29, 2000, except
that if a Qualified IPO as defined in Section 3.2.13 hereof shall not have
closed before April 16, 2000, then dividends shall again accrue hereunder
effective as of March 1, 2000; and
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(iii) commencing on and including August 1, 2001, the
foregoing dividends shall not further accrue (but if unpaid shall remain
accrued), and in lieu of any further accrual, the Corporation shall accrue and,
when and as declared by the Corporation's Board of Directors out of funds
legally available therefor, the Corporation shall pay dividends to the holders
of the Series C Preferred at an annual rate per share of Series C Preferred of
(a) 8% compounded annually of (b) (X) one plus the number of shares of Series C
Preferred which would be issuable on August 1, 2001, pursuant to clauses (i) and
(ii) in respect of a share of Series C Preferred multiplied by (Y) the Series C
Stated Value, and such dividends shall accrue commencing on and including August
1, 2001 and shall be cumulative (whether or not earned or declared). All
dividends first accruing on or after August 1, 2001 as specified in clause (iii)
shall be payable in cash out of funds legally available therefor; provided,
however, that at the election (a "Series C PIK Election") of the holders as of
the record date for such dividend of a majority of the outstanding shares of
Series C Preferred, in lieu of payment thereof in cash, the amount of such
dividends may be paid, in whole or in part, by issuance by the Corporation to
the holders of the Series C Preferred, of additional shares of Series C
Preferred, with the number of shares being equal to (i) the dollar amount of the
dividend which the holder has elected to receive in the form of additional
shares of Series C Preferred, divided by (ii) the Series C Stated Value as of
the record date for such dividend. If the Series C PIK Election is not for the
entire amount of the dividend, each holder of Series C Preferred shall receive
the same proportion of cash and additional shares of Series C Preferred for each
share of Series C Preferred held.
Dividends payable for any period less than a full dividend period
shall be computed on the basis of a 360-day year consisting of twelve 30-day
months.
For definitional purposes of the term "Series C PIK Election" the
Shares of Series C Preferred received or receivable pursuant to clauses (i),
(ii) or (iii) are deemed received or receivable pursuant to a "Series C PIK
Election."
All additional shares of Series C Preferred issued upon a Series C PIK
Election shall be deemed issued as of the record date for such dividend. No
fractional shares shall be issued upon a Series C PIK Election, but rather cash
in lieu of fractional shares shall be paid, with the deemed value per whole
share of Series C Preferred being the Series C Stated Value as of the record
date for such dividend. Any dividend (or portion thereof) shall be deemed fully
paid to the extent a Series C PIK Election is made with respect to such dividend
(or portion thereof).
(b) No full dividends may be declared or paid or funds set apart for
the payment of dividends on any Series C Parity Securities (except dividends on
Series C Parity Securities paid in shares of Series C Junior Securities) for any
period unless full cumulative dividends to be paid hereunder prior to the date
thereof shall have been paid on the Series C Preferred. If dividends are not so
paid, the Series C Preferred, if and to the extent a Series C PIK Election has
not been made with respect to such dividends, shall share dividends pro rata
with the Series C Parity Securities according to the amount of dividends due and
payable with respect to each. No dividends may be paid or set aside for such
payment on Series C Junior Securities (except dividends on Series C Junior
Securities paid in additional shares of Series C Junior Securities), and no
Series C Parity Securities or Series C Junior Securities may be repurchased,
redeemed or otherwise retired nor may funds be set aside for payment with
respect thereto, nor
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shall the Corporation permit any corporation or entity directly or indirectly
controlled by the Corporation to purchase any shares of Series C Parity
Securities or Series C Junior Securities, (except in each case for (a) cashless
exercises of stock options (whether effected by surrendering stock options or
outstanding shares of Stock), (b) repurchases by the Corporation of Series C
Parity Securities or Series C Junior Securities funded solely by life insurance
proceeds, or (c) a payment in respect of fractional shares) if full cumulative
dividends to be paid hereunder prior to the date thereof have not been paid on
the Series C Preferred.
(c) If, in any year, any cash or other distributions are declared by
the Corporation's Board of Directors to be paid on Common Stock (including,
without limitation, any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the Corporation or any of its
Subsidiaries by way of dividend or spinoff), other than dividends or
distributions of shares of Common Stock that are referred to in clause (i) of
Section 3.3.7(c), then an additional dividend shall be paid at the same time to
the holders of the Series C Preferred at the rate per share equal to the product
of (x) such per share dividend on the Common Stock multiplied by (y) the number
of shares of Common Stock into which each share of Series C Preferred (including
any issuable upon the payment of any accrued but unpaid Series C PIK Election)
is then convertible. Dividends payable to the holders of the Series C Preferred
pursuant to this Section 3.3.3(c) shall be paid in the same form as paid to
holders of Common Stock. Solely for purposes of this Section 3.3.3(c), the term
"distribution" means any transfer of cash or property without consideration,
whether by way of dividend or otherwise (except a dividend in shares of Common
Stock of the Corporation) including, but not limited to, securities of other
persons, evidences of indebtedness issued by the Corporation or other persons
and assets, but does not include (i) any repurchase of shares from a terminated
employee of or consultant to the Corporation in accordance with the terms of the
agreement applicable to such employee or consultant providing for such
repurchase, (ii) any repurchase of shares funded solely with the proceeds of
life insurance covering certain executives of the Corporation as provided in the
Shareholders' Agreement or approved by the Corporation's Board of Directors,
(iii) any distribution that is part of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and (iv) a payment of dissenter's
rights or in respect of fractional shares.
(d) The Corporation shall at all times reserve and keep available for
issuance upon a Series C PIK Election, free from any preemptive rights, such
number of its authorized but unissued shares of Series C Preferred as will from
time to time be necessary to permit the maximum then available Series C PIK
Election, and shall take all action required to increase the authorized number
of shares of Series C Preferred if necessary to permit the maximum then
available Series C PIK Election.
(e) All accrued but unpaid dividends on Series C Preferred shall be
paid pursuant to a liquidation, dissolution or winding up as provided in Section
3.3.4 as a component of the Series C Liquidation Value. All accrued but unpaid
dividends in respect of a particular share of Series C Preferred shall be paid
upon conversion of that share pursuant to Section 3.3.7. All accrued but unpaid
dividends in respect of a particular share of Series C Preferred shall be paid
upon a redemption pursuant to Section 3.3.6 as a component of the Series C
Redemption Price.
3.3.4. Liquidation.
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(a) Upon the dissolution, liquidation or winding up of the
Corporation (whether voluntary or involuntary) the holders of Series C Preferred
shall be entitled to receive out of the assets of the Corporation available for
distribution to stockholders before any payment or distribution shall be made on
any Series C Junior Securities, an amount equal to the Series C Liquidation
Value with respect to each outstanding share of Series C Preferred.
(b) Unless waived by the affirmative vote of the holders of at least
a majority of the then outstanding shares of Series C Preferred, the sale, lease
or exchange (for cash, shares of stock, securities or other consideration) of
all or substantially all the property and assets of the Corporation or the
merger or consolidation of the Corporation into or with any other corporation or
the merger or consolidation of any other corporation into or with the
Corporation (other than a consolidation or merger in which the Corporation is
the continuing entity and which does not result in any change in the Common
Stock) or an exchange or sale of 90% or more of the capital stock of the
Corporation to accomplish an acquisition of the Corporation in a single or
related transaction shall be deemed to be a liquidation for the purposes of this
Section 3.3.4.
(c) After the payment to the holders of the Series C Preferred of the
full amounts provided for in this Section 3.3.4, the holders of Series C
Preferred as such shall have no right or claim to any of the remaining assets of
the Corporation.
(d) In the event the assets of the Corporation available for
distribution to the holders of Series C Preferred upon any dissolution,
liquidation or winding-up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 3.3.4(a) above, no such distribution shall be made
on account of any Series C Parity Securities unless proportionate amounts are
distributed to the holders of Series C Preferred, ratably, in proportion to the
full amounts for which holders of Series C Preferred and all such Series C
Parity Securities are respectively entitled upon such dissolution, liquidation
or winding-up.
3.3.5. Voting Rights. The holder of each share of Series C
Preferred shall be entitled to vote on all matters and shall be entitled to the
number of votes equal to the largest number of full shares of Common Stock into
which such shares of Series C Preferred could be converted, pursuant to the
provisions of Section 3.3.7 hereof, at the record date for the determination of
shareholders entitled to vote on such matters or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited. Except as otherwise expressly provided herein or the
Shareholders' Agreement or as required by law, the holders of shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred and Series F Preferred and Common Stock shall vote together as a
single class on all matters and not as separate classes.
3.3.6. Redemption.
(a) The Corporation may not require the redemption of any shares of
Series C Preferred. The holder or holders of at least 66-2/3% of the
outstanding shares of Series C Preferred may, at their option, at any time, or
from time to time, from and after February 20, 2003, upon notice given to the
Corporation by the holder or holders of at least 66-2/3% of the outstanding
shares of Series C Preferred (a "Series C Redemption Notice") require the
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Corporation to redeem, out of funds legally available therefor, any or all
outstanding shares of Series C Preferred (including shares not held by such
holder or holders). The redemption price per share of Series C Preferred (the
"Series C Redemption Price") payable pursuant to this Section 3.3.6 shall be the
Series C Liquidation Value of such share as of the Series C Redemption Date
(hereinafter defined). For the purposes of determining the "per share amount"
in the definition of the Series C Liquidation Value, the value of each share of
Common Stock shall equal the Fair Market Value. Unless waived by the
Corporation, a Series C Redemption Notice is irrevocable with respect to the
holders giving such notice.
(b) Promptly upon the determination of the Series C Redemption Price,
the Corporation shall (i) give notice of the Series C Redemption Price to the
holders requesting redemption and to holders of Series C Preferred required to
accept redemption pursuant to Section 3.3.6(a), if any, stating the redemption
date (the "Series C Redemption Date"), which Series C Redemption Date shall be
no less than twenty (20) days and no more than forty (40) days following the
date of the Series C Redemption Notice, and (ii) give notice to each holder of
Series A Preferred, Series B Preferred, Series D Preferred, Series E Preferred
and Series F Preferred stating the Series C Redemption Date. On the Series C
Redemption Date, the Corporation shall, unless such shares of Series C Preferred
have been previously surrendered for conversion pursuant to Section 3.3.7,
redeem the shares of Series C Preferred set forth in the Series C Redemption
Notice at a price per share equal to the Series C Redemption Price, upon
submission of certificates of the Series C Preferred in accordance with Section
3.3.6(c) hereof.
(c) Except as provided in Section 3.3.6(d), on or after the Series C
Redemption Date, a holder of Series C Preferred requesting redemption of or
otherwise required to redeem Series C Preferred set forth in the Series C
Redemption Notice shall surrender to the Corporation the certificate or
certificates representing such shares, in the manner and at the place designated
by the Corporation, and thereupon the Series C Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. If all the shares of Series C Preferred
evidenced by a certificate are not redeemed, the Corporation shall on the Series
C Redemption Date deliver to the owner a new certificate in the name of the
owner for the unredeemed shares.
(d) From and after the Series C Redemption Date, unless there shall
have been a default in payment of the Series C Redemption Price, all rights of
the holder requesting or required to accept redemption of the shares of Series C
Preferred for which redemption has been requested (except the right to receive
the Series C Redemption Price without interest upon surrender of their
certificate or certificates) shall cease, and such shares shall not thereafter
be transferred on the books of the Corporation or be deemed to be outstanding
for any purpose whatsoever. Subject to paragraphs 3.3.6(e) and 3.3.6(f), if the
funds of the Corporation legally available for redemption of shares of Series C
Preferred on the Series C Redemption Date are insufficient to redeem the total
number of shares of Series C Preferred to be redeemed on such date, (i) those
funds that are legally available shall be used to redeem the maximum possible
number of shares ratably among the holders of such shares, (ii) the shares of
Series C Preferred not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein, until any subsequent redemption, and
(iii) at any time thereafter when additional funds of the Corporation are
legally available for redemption of shares of Series
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C Preferred such funds will immediately be used to redeem the balance of the
shares which the Corporation has become obliged to redeem but which it has not
redeemed.
(e) If and to the extent, not later than five (5) days prior to the
Series C Redemption Date, the Corporation receives a Series A Redemption Notice
pursuant to Section 3.1.6(c), a Series B Redemption Notice pursuant to Section
3.2.6(a), a Series D Redemption Notice pursuant to Section 3.4.6(a), a Series E
Redemption Notice pursuant to Section 3.5.6(a), or a Series F Redemption Notice
pursuant to Section 3.6.6(a), the Series A Redemption Date (as defined in
Section 3.1.6(c)), the Series B Redemption Date (as defined in Section
3.2.6(b)), the Series D Redemption Date (as defined in Section 3.4.6(b)), the
Series E Redemption Date (as defined in Section 3.5.6(b)) or the Series F
Redemption Date (as defined in Section 3.6.6(b), notwithstanding any contrary
provision in Section 3.1.6(c), Section 3.2.6(b), Section 3.4.6(b), Section
3.5.6(b) or Section 3.6.6(b), shall be the same as the Series C Redemption Date
(such date being the "Redemption Date") with respect to the shares of Series A
Preferred designated for redemption in such Series A Redemption Notice and
shares of Series B Preferred designated for redemption in such Series B
Redemption Notice and shares of Series D Preferred designated for redemption in
such Series D Redemption Notice and shares of Series E Preferred designated for
redemption in such Series E Redemption Notice and shares of Series F Preferred
designated for redemption in such Series F Redemption Notice.
(f) Redemptions of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Series F Preferred that
occur, or would occur but for the absence of funds legally available therefor,
on the same date shall be made, ratably in proportion to the amounts that the
holders of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred and Series F Preferred to be redeemed on
such Redemption Date are entitled to receive in respect of such redemption.
3.3.7. Conversion.
(a) Upon the earlier of (i) the consummation of a Qualified IPO or
(ii) for each of at least 20 consecutive trading days after an initial public
offering of the Common Stock the aggregate market capitalization of the Free
Common Stock is at least $25 million and the Common Stock has a Current Market
Price of at least $12.00 per share (subject to adjustment for stock splits and
combinations, recapitalizations and stock dividends of the Common Stock except
for the stock splits described in Article IX and Article X hereof), each share
of Series C Preferred shall automatically be converted into a number of shares
of Common Stock at the then effective Series C Conversion Ratio. In addition,
(x) at the option of the holder of any Series C Preferred, such holder shall
have the right, at any time and from time to time prior to or after the
consummation of an initial public offering of the Common Stock, by written
notice to the Corporation, to convert any and all shares of Series C Preferred
owned by such holder at such time into a number of shares of Common Stock, at
the then effective Series C Conversion Ratio, and (y) upon the election of
holders of at least 51% of the then outstanding Series B Preferred and Series C
Preferred voting as a class on an as-converted basis either at a duly called
shareholders meeting or by written consent, all of the outstanding Series B
Preferred and Series C Preferred shall automatically convert into Common Stock
at the then applicable conversion ratio for such stock.
(b) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of the Series C Preferred, free from any preemptive
rights, such
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number of its authorized but unissued shares of Common Stock as will from time
to time be necessary to permit the conversion of all outstanding shares of
Series C Preferred into shares of Common Stock, and shall take all action
required to increase the authorized number of shares of Common Stock if
necessary to permit the conversion of all outstanding shares of Series C
Preferred.
(c) Except for the stock splits described in Article IX and Article X
hereof, the Series C Conversion Ratio shall be subject to adjustment from time
to time as follows:
(i) In case the Corporation shall at any time or from time to
time after the Series C Issue Date (A) pay a dividend, or make a distribution,
on the outstanding shares of Common Stock in shares of Common Stock, (B)
subdivide the outstanding shares of Common Stock, (C) combine the outstanding
shares of Common Stock into a smaller number of shares or (D) issue by
reclassification of the shares of Common Stock any shares of capital stock of
the Corporation, then, and in each such case, the Series C Conversion Ratio in
effect immediately prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of Series C
Preferred thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock or other securities of the Corporation that
such holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such shares of Series C
Preferred been surrendered for conversion immediately prior to the happening of
such event or the record date therefor, whichever is earlier. An adjustment made
pursuant to this clause (i) shall become effective (x) in the case of any such
dividend or distribution, immediately after the close of business on the record
date for the determination of holders of shares of Common Stock entitled to
receive such dividend or distribution, or (y) in the case of such subdivision,
reclassification or combination, at the close of business on the day upon which
such corporate action becomes effective. No adjustment shall be made pursuant to
this clause (i) in connection with any transaction to which Section 3.3.7(g)
applies.
(ii) Except with respect to Excluded Securities, if the
Corporation shall, while there are any shares of Series C Preferred outstanding,
issue or sell shares of its Common Stock or Common Stock Equivalents without
consideration or at a Purchase Price (as defined below) less than the applicable
Series C Conversion Price in effect immediately prior to such issuance or sale,
then in each such case such applicable Series C Conversion Price, except as
hereinafter provided, shall be lowered so as to be equal to an amount determined
by multiplying such applicable Series C Conversion Price by a fraction:
(1) the numerator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock or Common Stock Equivalents (calculated on a fully-
diluted basis assuming the conversion of all then presently exercisable options,
warrants, purchase rights or convertible securities whose exercise or conversion
price is less than the applicable Series C Conversion Price then in effect) plus
(b) the number of shares of Common Stock or Common Stock Equivalents which the
aggregate consideration, if any, received by the Corporation for the total
number of such additional shares of Common Stock or Common Stock Equivalents so
issued would
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purchase at the applicable Series C Conversion Price in effect immediately prior
to such issuance, and
(2) the denominator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock or Common Stock Equivalents (calculated on a fully-
diluted basis assuming the exercise or conversion of all then presently
exercisable options, warrants, purchase rights or convertible securities whose
exercise or conversion price is less than the applicable Series C Conversion
Price then in effect), plus (b) the number of such additional shares of Common
Stock or Common Stock Equivalents so issued.
The provisions of the foregoing paragraph as they may apply to the
Series C Preferred may be waived in any instance (without the necessity of
convening any meeting of stockholders of the Corporation) upon the written
agreement of holders of at least 66 2/3% of the then outstanding shares of
Series C Preferred (voting as a separate class).
(iii) (A) For the purposes of Section 3.3.7(c)(ii), the issuance
of any Common Stock Equivalent shall be deemed an issuance of Common Stock with
respect to adjustments in the applicable Series C Conversion Price if the
Purchase Price which may be received by the Corporation for such Common Stock
shall be less than the applicable Series C Conversion Price in effect at the
time of such issuance. Any obligation, agreement or undertaking to issue Common
Stock Equivalents at any time in the future shall be deemed to be an issuance at
the time such obligation, agreement or undertaking is made or arises. Except as
provided in subparagraph (B) below, no adjustment of the applicable Series C
Conversion Price shall be made under 3.3.7(c)(ii) upon the issuance of any
shares of Common Stock which are issued pursuant to the exercise, conversion or
exchange of any Common Stock Equivalents if any adjustment shall previously have
been made upon the issuance of any such Common Stock Equivalents as above
provided.
(B) Should the Purchase Price of any such Common Stock
Equivalents be decreased from time to time, then, upon the effectiveness of each
such change, the applicable Series C Conversion Price will be that which would
have been obtained (x) had the adjustments made upon the issuance of such Common
Stock Equivalents been made upon the basis of the actual Purchase Price of such
securities, and (y) had the adjustments made to the applicable Series C
Conversion Price since the date of issuance of such Common Stock Equivalents
been made to such applicable Series C Conversion Price as adjusted pursuant to
clause (A) immediately above. Any adjustment of the applicable Series C
Conversion Price with respect to 3.3.7(c)(ii) which relates to any Common Stock
Equivalent shall be disregarded if, as, and when such Common Stock Equivalent
expires or is canceled without being exercised, or is repurchased by the
Corporation at a price per share at or less than the original purchase price, so
that the applicable Series C Conversion Price effective immediately upon such
cancellation or expiration shall be equal to the applicable Series C Conversion
Price that would have been in effect had the expired or canceled Common Stock
Equivalent not been issued.
(C) The Purchase Price which may be received by the
Corporation shall be determined in each instance as of the date of issuance of
Common Stock
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Equivalents without giving effect to any possible future upward price
adjustments or rate adjustments which may be applicable with respect to such
Common Stock Equivalents.
(iv) For purposes of this Section 3.3.7(c), the aggregate
consideration receivable by the Corporation in connection with the issuance of
shares of Common Stock and/or Common Stock Equivalents shall be deemed to be
equal to the sum of the aggregate offering price (before deduction of
underwriting discounts or commissions and expenses payable to third parties, if
any) of all such Common Stock and/or Common Stock Equivalents plus the minimum
aggregate amount, if any, payable upon conversion, exchange or exercise of any
such Common Stock Equivalents. If the consideration received by the Corporation
in connection with the sale or issuance of shares of Common Stock (or Common
Stock Equivalents) consists, in whole or in part, of property other than cash or
its equivalent, the value of such property shall be the Fair Market Value.
(v) The Series C Conversion Ratio shall not be adjusted because
of any "Series F Additional Adjustment" pursuant to Section 3.6.7(c)(v) hereof.
(d) The issuance of certificates for shares of Common Stock upon
conversion of the Series C Preferred shall be made without charge to the holders
thereof for any issuance tax in respect thereof, provided that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the holder of the Series C Preferred which is being
converted.
(e) The Corporation will at no time close its transfer books against
the transfer of any Series C Preferred, or of any shares of Common Stock issued
or issuable upon the conversion of any shares of Series C Preferred, in any
manner which interferes with the timely conversion of such Series C Preferred,
except as may otherwise be required to comply with applicable securities laws.
(f) If any event occurs as to which, in the opinion of the
Corporation's Board of Directors, the provisions of this Section 3.3.7 are not
strictly applicable or if strictly applicable would not fairly protect the
rights of the holders of the Series C Preferred in accordance with the essential
intent and principles of such provisions, the Corporation's Board of Directors
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect such rights of the
holders of the Series C Preferred.
(g) If the Corporation shall be a party to any Transaction (but
excluding (i) any Transaction for which provision for adjustment is otherwise
made in this Section 3.3.7 and (ii) any Transaction that is deemed to be a
liquidation for the purposes of Section 3.3.4), in each case, as a result of
which shares of Common Stock are converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Series C Preferred shall thereafter be convertible into the number of
shares of stock or other securities or property to which a holder of the number
of shares of Common Stock of the Corporation deliverable upon conversion of such
Series C Preferred would have been entitled upon such Transaction; and, in any
such case, appropriate adjustment (as determined by the
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Corporation's Board of Directors) shall be made in the application of the
provisions set forth in this Section 3.3.7 with respect to the rights and
interest thereafter of the holders of the Series C Preferred, to the end that
the provisions set forth in this Section 3.3.7 shall thereafter be applicable,
as nearly as reasonably may be, in relation to any shares of stock or other
property thereafter deliverable upon the conversion of the Series C Preferred.
Except as provided in the Shareholders' Agreement, the Corporation shall not
effect any Transaction (other than a consolidation or merger in which the
Corporation is the continuing corporation) unless prior to or simultaneously
with the consummation thereof the Corporation, or the successor corporation or
purchaser, as the case may be, shall provide in its charter document that each
share of Series C Preferred shall be converted into such shares of stock,
securities or property as, in accordance with the foregoing provisions, each
such holder is entitled to receive. The provisions of this Section 3.3.7(g)
shall similarly apply to successive Transactions.
(h) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
except as has been approved by the holders of at least 51% of the then
outstanding Series B Preferred and Series C Preferred voting as a class on an
as-converted basis either at a duly called shareholders meeting or by written
consent, avoid or seek to avoid the observance or performance of any of the
terms to be observed or performed hereunder by the Corporation, but will at all
times in good faith assist in the carrying out of all the provisions of this
Section 3.3.7 and in the taking of all such action as may be necessary or
appropriate in order to protect the conversion rights of the holders of the
Series C Preferred against impairment.
(i) All calculations under this Section 3.3.7 shall be made to the
nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10) of a
share, as the case may be. Upon conversion of the Series C Preferred pursuant
to this Section 3.3.7, the Corporation may pay cash based on the Series C
Conversion Price in lieu of issuing fractional shares.
3.3.8. Notice of Certain Events. In case, at any time while any shares of
Series C Preferred are outstanding:
(a) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock;
(b) the Corporation shall authorize the issuance to the holders of
its Common Stock as a class, of Common Stock Equivalents, or rights or warrants
to subscribe for or purchase shares of its Common Stock or of any other
subscription rights or warrants;
(c) the Corporation shall authorize any reorganization,
reclassification or recapitalization of its Common Stock;
(d) the Corporation shall authorize the consolidation or merger of
the Corporation into or with any other person, the sale or transfer of a
substantial portion of its capital stock, business or assets to another person,
or any other similar business combination or transaction; or
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(e) the Corporation shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; then the Corporation
shall promptly deliver to the transfer agent of the Series C Preferred and to
each of the holders of shares of Series C Preferred at their last addresses as
shown on the books of the Corporation, at least 15 days before the date
hereinafter specified (or the earlier of the dates hereinafter specified, in the
event that more than one date is specified), a notice describing such event and
stating (A) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants, or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distribution, rights or warrants are to be determined, or (B) the
date on which any such reclassification, reorganization, recapitalization,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their Common
Stock for securities or other property (including cash), if any, deliverable
upon such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up. Any notice required to be given hereunder to the
holders of shares of Series C Preferred shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each holder of record
at his address appearing on the books of the Corporation, and such notice may be
waived with respect to all of the outstanding Series C Preferred by the holders
of a majority of the outstanding Series C Preferred.
3.3.9. Certain Remedies. Any registered holder of Series C Preferred may
proceed to protect and enforce its rights and the rights of any other holders of
Series C Preferred with any and all remedies available at law or in equity.
3.3.10. Protective Provisions. So long as any shares of Series C
Preferred are outstanding, the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holder or
holders of at least 50.1% of the then outstanding shares of Series C Preferred:
(a) alter or change the rights, preference or privileges of the
shares of Series C Preferred or otherwise amend the Certificate of
Incorporation, in either case, whether by merger, consolidation or otherwise, so
as to affect adversely the shares of Series C Preferred;
(b) increase the authorized number of shares of Series C Preferred
except to pay, or reserve for payment, upon a Series C PIK Election;
(c) except as provided by the Shareholders' Agreement or upon a
Series C PIK Election, authorize the issuance of, issue, or sell any additional
shares of Series C Preferred; or
(d) except for Excluded Securities defined in clauses (iii), (iv),
(vi) or (vii) of the definition of Excluded Securities, create or designate, or
authorize the issuance of, any new class or series of stock (i) which are Series
C Senior Securities or Series C Parity Securities, (ii) having rights similar to
any rights of the Series C Preferred under Section 3.3.5 hereof or (iii)
convertible into any class or series of stock described in clause (i) of this
paragraph (d).
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3.3.11. Major Transactions. For so long as the outstanding shares of Series B
Preferred held by holders of Series NB Warrants and Series C Preferred
represent, collectively on an as-converted basis, 5% of the aggregate voting
power of all of the outstanding voting stock of the Corporation, the Corporation
shall not, and shall not permit any of its Subsidiaries to, directly or
indirectly, take any of the following actions without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least 50.1% of the then outstanding shares of Series B Preferred held by holders
of Series NB Warrants and shares of Series C Preferred voting as a single class
on an as-converted basis:
(a) consolidate or merge with or into any Person or enter into any
similar business combination transaction (including a sale of substantially all
of its assets) or effect any transaction or series of transactions in which more
than 33-1/3% of its voting securities are transferred to another Person, except
(i) pursuant to a Qualified IPO or (ii) any such transaction or series of
transactions, as the case may be, involving only wholly-owned Subsidiaries of
the Corporation;
(b) amend or repeal any provision of, or add any provision to, this
Certificate of Incorporation or the Corporation's By-laws;
(c) alter or change through any means the preferences, rights,
privileges or powers of the Series C Preferred so as to adversely affect the
Series C Preferred;
(d) create or designate, authorize the issuance of, or issue or sell
any new series or class of securities (or warrants, options or convertible or
exchangeable securities), or increase the authorized number of, authorize the
issuance of, or issue, any additional shares of Common Stock or Preferred Stock
(or warrants, options, or rights to acquire, or securities convertible into or
exchangeable for, Common Stock or Preferred Stock), except (i) pursuant to a
Qualified IPO, (ii) as consideration for an acquisition approved by the
Corporation's Board of Directors and which securities are valued in the
acquisition of less than $1,000,000, (iii) pursuant to any stock option plan or
employee stock purchase plan duly adopted by the Corporation's Board of
Directors or (iv) Excluded Securities;
(e) increase the number of authorized directors of the Corporation's
Board of Directors above ten, except for an increase to eleven if holders of the
Series F Preferred Stock appoints a director as provided in the Shareholders
Agreement;
(f) voluntarily liquidate, dissolve or wind up;
(g) pay, declare or set aside any sums for the payment of, any
dividends, or make any distributions on, any shares of its capital stock or
other equity securities except as required by the terms of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred and Series F Preferred;
(h) redeem, purchase or otherwise acquire, any of its capital stock
or other equity securities (including, without limitation, warrants, options and
other rights to acquire any of its capital stock or other equity securities
directly or indirectly) or redeem, purchase or make any payments with respect to
any stock appreciation rights, phantom stock plans or similar rights or plans
relating to the Corporation or its Subsidiaries, except for (w)
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repurchases funded solely with the proceeds of life insurance approved by the
Corporation's Board of Directors (x) redemptions or repurchases of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or Series F Preferred permitted or required under this Certificate of
Incorporation, (y) cashless exercises of options or warrants or (z) as otherwise
provided in the Shareholders' Agreement;
(i) purchase, acquire or obtain any capital stock or other
proprietary interest, directly or indirectly, in any other entity or all or
substantially all of the business or assets of another Person for consideration
(including assumed liabilities) in excess of $250,000;
(j) enter into or commit to enter any joint ventures (other than in
the ordinary course of business) or any partnerships or establish any non-
wholly-owned subsidiaries, in each case, where the contributions or investments
by the Corporation is in excess of $400,000 in cash or assets;
(k) sell, lease, transfer or otherwise dispose of any asset or group
of assets for consideration, in an annual aggregate amount (as to the
Corporation and any and all of its Subsidiaries), in excess of $500,000;
(l) create, incur, assume or suffer to exist any indebtedness of the
Corporation or any of its subsidiaries for borrowed money (which shall include
for purposes hereof capitalized lease obligations and guarantees or other
contingent obligations for indebtedness for borrowed money) in an annual
aggregate net incurred amount (as to the Corporation and all of its
Subsidiaries) in excess of $1,000,000 excluding such indebtedness that exists as
of the Series F Issue Date;
(m) mortgage, encumber, create, incur or suffer to exist, liens on
its assets, in an annual aggregate amount (as to the Corporation and all of its
Subsidiaries) in excess of $1,000,000 excluding liens on assets that exist as of
the Series F Issue Date;
(n) in the case of the Corporation's executive officers, amend,
modify or grant any waiver under any material provision of any employment
agreement or under any non-competition provision or agreement to which the
Corporation is a party or is bound;
(o) create or issue any stock options, warrants or other Common
Stock Equivalents, other than Excluded Securities, or modify, amend or grant any
waiver of any provision of, any stock options, warrants or other Common Stock
Equivalents (other than Excluded Securities described in clause (i) of the
definition of Excluded Securities in Section 3.2.13.), outstanding as of the
date hereof,
(p) agree or otherwise commit to take any actions set forth in the
foregoing subparagraphs (a) through (o).
3.3.12. Reports as to Adjustments. Upon any adjustment of the
Series C Conversion Ratio then in effect and any increase or decrease in the
number of shares of Common Stock issuable upon the operation of the conversion
provisions set forth in Section 3.3.7, then, and in each such case, the
Corporation shall promptly deliver to the registered holders of the Series C
Preferred as shown on the books of the Corporation a copy of a certificate
signed by the
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President or a Vice President and by the Treasurer or an Assistant Treasurer or
the Secretary or an Assistant Secretary of the Corporation, with the original
being delivered to the transfer agent for the Series C Preferred, setting forth
in reasonable detail the event requiring the adjustment and the method by which
such adjustment was calculated and specifying the Series C Conversion Ratio then
in effect following such adjustment and the increased or decreased number of
shares issuable upon the conversion granted pursuant to Section 3.3.7, and shall
set forth in reasonable detail the method of calculation of each and a brief
statement of the facts requiring such adjustment.
3.3.13. No Reissuance of Series C Preferred. No share or shares of
Series C Preferred acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and without further
corporate or stockholder action all such shares shall be canceled, retired and
eliminated from the shares that the Corporation shall be authorized to issue.
3.3.14. Definitions. In addition to any other terms defined herein,
the following terms shall have the meanings indicated for purposes of this
Section 3.3:
"Purchase Price" means, (i) with respect to the issuance of Common
Stock, the cash purchase price per share and (ii) with respect to the issuance
of Common Stock Equivalents, the cash purchase price, plus the applicable
additional consideration payable upon conversion, exercise or exchange of such
Common Stock Equivalent, per share of Common Stock into or for which such Common
Stock Equivalents are convertible, exercisable or exchangeable. In case (x)
shares of Common Stock and one or more Common Stock Equivalents or (y) two or
more different Common Stock Equivalents, are issued as units or in a single
transaction or a series of related transactions, the portion of the cash
purchase price deemed to be paid for the Common Stock Equivalents shall not be
less than the fair value thereof as determined by mutual agreement among (a) the
Corporation, (b) the holders of not less than 50% of the then outstanding Series
B Preferred held by holders of Series NB Warrants and Series C Preferred voting
together as a class on an as-converted and as-exercised basis, and (c) the
holders of not less than 50% of the then outstanding Series D Preferred, and if
the Corporation and such holders have not agreed on the fair value of such
Common Stock Equivalents prior to the date of such issuance, the fair value of
such Common Stock Equivalents shall be determined by a nationally recognized
investment banking firm selected by (a) the holders of not less than 50% of the
then outstanding Series B Preferred held by holders of Series NB Warrants and
Series C Preferred voting together as a class on an as-converted and as-
exercised basis, and (b) the holders of not less than 50% of the then
outstanding Series D Preferred, subject to the consent of the Corporation, which
shall not be unreasonably withheld.
"Series C Conversion Ratio," determined as of any date, shall equal
the number of shares of Common Stock into which one share of Series C Preferred
is convertible pursuant to Section 3.3.7 and shall be determined by dividing (i)
$1.23 (as adjusted for stock splits, reverse splits, stock dividends (other than
a Series C PIK Election) and stock combinations of the Series C Preferred or
pursuant to Section 3.3.7(g)) by (ii) the Series C Conversion Price. The Series
C Conversion Ratio shall equal twenty five one hundredths (.25) as of January
15, 2000 and shall be subject to adjustment as provided in paragraph (c) of
Section 3.3.7.
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"Series C Conversion Price" means, as of January 15, 2000, $4.92,
and, thereafter is subject to adjustment for stock splits, reverse splits, stock
dividends (other than a Series C PIK Election) and stock combinations of the
Series C Preferred and as provided in Section 3.3.7. Notwithstanding the
foregoing, the Series C Conversion Price shall not be less than the par value of
one share of Common Stock.
"Series C Issue Date" means the first date on which shares of Series
C Preferred are issued.
"Series C Liquidation Value" means the greater of (i) $.6547 (as
adjusted for stock splits, reverse splits, stock dividends) (other than a Series
C PIK Election) and stock combinations, in each case of the Series C Preferred),
for each share of Series C Preferred plus all accrued but unpaid dividends on
the Series C Preferred or (ii) the per share amount that the holders of Series C
Preferred would have received upon liquidation if all shares of Series C
Preferred had been converted to Common Stock immediately prior to such
liquidation at the Series C Conversion Ratio then in effect, plus all accrued
but unpaid dividends on the Series C Preferred.
"Series C Stated Value" means $.6547 per share (as adjusted for stock
splits, reverse splits, stock dividends (other than a Series C PIK Election),
and stock combinations of the Series C Preferred or pursuant to Sections
3.3.3(a) (other than in respect of a Series C PIK Election) and 3.3.7(g)).
3.3.15. Combined Redemption or Liquidation of Series C Preferred and
Series B Preferred. If a holder of Series C Preferred elects to receive the
Series C Liquidation Value described in clause (ii) of the definition of Series
C Liquidation Value in Section 3.3.14, and the holder of Series C Preferred is
to receive the Series C Liquidation Value pursuant to Section 3.3.4 or 3.3.6,
such holder must also elect the Series B Liquidation Value described in clause
(ii) of the definition of Series B Liquidation Value in Section 3.2.13 for 1.509
(one point five zero nine) shares of Series B Preferred (as adjusted for Series
B Preferred and Series C Preferred stock splits, stock dividends, stock
combinations, or Series B or Series C recapitalizations, but not for Series B
PIK Elections or Series C PIK Elections) for each share of Series C Preferred
for which such holder elects to receive the Series C Liquidation Value described
in clause (ii) of the definition of Series C Liquidation Value in Section
3.3.14.
3.4 Series D Preferred.
3.4.1. Designation; Rank. This series of Preferred Stock shall be designated
the "Series D Convertible Preferred Stock" with a par value of $.001 per share
(the "Series D Preferred"). The Series D Preferred shall rank, with respect to
dividend rights and rights on liquidation, winding-up and dissolution, (i)
senior to all classes of Common Stock of the Corporation, as they exist on the
date hereof or as such stock may be constituted from time to time and to each
other class of capital stock or series of preferred stock issued by the
Corporation or established by the Corporation's Board of Directors to the extent
the terms of such stock do not expressly provide that it ranks senior to or on
parity with, the Series D Preferred as to dividend rights and rights on
liquidation, winding-up and dissolution (collectively, together with the Common
Stock, the "Series D Junior Securities"), (ii) on a parity with each other class
of
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capital stock or series of preferred stock issued by the Corporation or
established by the Corporation's Board of Directors to the extent the terms of
such stock expressly provide that it will rank on a parity with the Series D
Preferred as to dividend rights and rights on liquidation, winding-up and
dissolution (collectively, the "Series D Parity Securities"), and (iii) junior
to each other class of capital stock or series of preferred stock issued by the
Corporation or established by the Corporation's Board of Directors to the extent
the terms of such stock expressly provide that it will rank senior to the Series
D Preferred as to dividend rights and rights on liquidation, winding-up and
dissolution (collectively, the "Series D Senior Securities"). Without limiting
the generality of the foregoing, the Series A Preferred, Series B Preferred,
Series C Preferred, Series E Preferred and Series F Preferred shall be deemed to
be Series D Parity Securities.
3.4.2. Authorized Number. The authorized number of shares
constituting the Series D Preferred shall be fifteen million, eight hundred
thousand shares (15,800,000).
3.4.3. Dividends.
(a) Dividends shall accrue from day to day and shall be payable when
and as declared by the Corporation's Board of Directors or as otherwise provided
in this Section 3.4.3. as follows, out of funds legally available therefor:
(i) for all periods prior to and including October 15, 1999,
dividends shall accrue and shall be payable solely by issuance by the
Corporation to the holders of the Series D Preferred of additional shares of
Series D Preferred equal to one hundred forty-five thousandths (.145) of a share
of Series D Preferred for each one share of Series D Preferred actually issued
and outstanding on October 15, 1999 which dividend shall be cumulative (whether
or not earned or declared);
(ii) for all periods after October 15, 1999 through and
including the last day of July, 2001, dividends shall accrue and shall be
payable solely by issuance by the Corporation to the holders of the Series D
Preferred of additional shares of Series D Preferred with the number of shares
per share of Series D Preferred being equal to (i) the dollar amount of the cash
dividend which would have accrued on 1.145 shares of Series D Preferred from
October 16, 1999 to the record date for such dividend if a cash dividend had
accrued during that period at a rate of eight percent (8%) compounded annually
with the first compounding occurring on October 16, 2000 of the Series D Stated
Value divided by (ii) the Series D Stated Value as of the record date for such
dividend which dividend shall be cumulative (whether or not earned or declared),
provided, however, that no dividend shall accrue after February 29, 2000, except
that if a Qualified IPO as defined in Section 3.2.13 hereof shall not have
closed before April 16, 2000, then dividends shall again accrue hereunder
effective as of March 1, 2000; and
(iii) commencing on and including August 1, 2001, the foregoing
dividends shall not further accrue (but if unpaid shall remain accrued), and in
lieu of any further accrual, the Corporation shall accrue and, when and as
declared by the Corporation's Board of Directors out of funds legally available
therefor, the Corporation shall pay dividends to the holders of the Series D
Preferred at an annual rate per share of Series D Preferred of (a) 8%
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compounded annually of (b) (X) one plus the number shares of Series D Preferred
which would be issuable on August 1, 2001 pursuant to clauses (i) and (ii) in
respect of a share of Series D Preferred multiplied by (Y) the Series D Stated
Value, and such dividends shall accrue commencing on and including August 1,
2001 and shall be cumulative (whether or not earned or declared). All dividends
first accruing on or after August 1, 2001 as specified in clause (iii) shall be
payable in cash out of funds legally available therefor; provided, however, that
at the election (a "Series D PIK Election") of the holders as of the record date
for such dividend of a majority of the outstanding shares of Series D Preferred,
in lieu of payment thereof in cash, the amount of such dividends may be paid, in
whole or in part, by issuance by the Corporation to the holders of the Series D
Preferred, of additional shares of Series D Preferred, with the number of shares
being equal to (i) the dollar amount of the dividend which the holder has
elected to receive in the form of additional shares of Series D Preferred,
divided by (ii) the Series D Stated Value as of the record date for such
dividend. If the Series D PIK Election is not for the entire amount of the
dividend, each holder of Series D Preferred shall receive the same proportion of
cash and additional shares of Series D Preferred for each share of Series D
Preferred held.
Dividends payable for any period less than a full dividend period
shall be computed on the basis of a 360-day year consisting of twelve 30-day
months.
For definitional purposes of the term "Series D PIK Election" the
shares of Series D Preferred received or receivable pursuant to clauses (i),
(ii) or (iii) are deemed received or receivable pursuant to a "Series D PIK
Election."
All additional shares of Series D Preferred issued upon a Series D PIK
Election shall be deemed issued as of the record date for such dividend. No
fractional shares shall be issued upon a Series D PIK Election, but rather cash
in lieu of fractional shares shall be paid, with the deemed value per whole
share of Series D Preferred being the Series D Stated Value as of the record
date for such dividend. Any dividend (or portion thereof) shall be deemed fully
paid to the extent a Series D PIK Election is made with respect to such dividend
(or portion thereof).
(b) No full dividends may be declared or paid or funds set apart for
the payment of dividends on any Series D Parity Securities (except dividends on
Series D Parity Securities paid in shares of Series D Junior Securities) for any
period unless full cumulative dividends to be paid hereunder prior to the date
thereof shall have been paid on the Series D Preferred. If dividends are not so
paid, the Series D Preferred, if and to the extent a Series D PIK Election has
not been made with respect to such dividends, shall share dividends pro rata
with the Series D Parity Securities according to the amount of dividends due and
payable with respect to each. No dividends may be paid or set aside for such
payment on Series D Junior Securities (except dividends on Series D Junior
Securities paid in additional shares of Series D Junior Securities), and no
Series D Parity Securities or Series D Junior Securities may be repurchased,
redeemed or otherwise retired nor may funds be set aside for payment with
respect thereto, nor shall the Corporation permit any corporation or entity
directly or indirectly controlled by the Corporation to purchase any shares of
Series D Parity Securities or Series D Junior Securities (except in each case
for (a) cashless exercises of stock options (whether effected by surrendering
stock options or outstanding shares of Stock), (b) repurchases by the
Corporation of Series D Parity Securities or Series D Junior Securities solely
funded by life insurance proceeds, or (c) a
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payment in respect of fractional shares) if full cumulative dividends to be paid
hereunder prior to the date thereof have not been paid on the Series D
Preferred.
(c) If, in any year, any cash or other distributions are declared by
the Corporation's Board of Directors to be paid on Common Stock (including,
without limitation, any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the Corporation or any of its
Subsidiaries by way of dividend or spinoff), other than dividends or
distributions of shares of Common Stock that are referred to in clause (i) of
Section 3.4.7(c), then an additional dividend shall be paid at the same time to
the holders of the Series D Preferred at the rate per share equal to the product
of (x) such per share dividend on the Common Stock multiplied by (y) the number
of shares of Common Stock into which each share of Series D Preferred (including
any issuable upon the payment of any accrued but unpaid Series D PIK Election)
is then convertible. Dividends payable to the holders of the Series D Preferred
pursuant to this Section 3.4.3(c) shall be paid in the same form as paid to
holders of Common Stock. Solely for purposes of this Section 3.4.3(c), the term
"distribution" means any transfer of cash or property without consideration,
whether by way of dividend or otherwise (except a dividend in shares of Common
Stock of the Corporation) including, but not limited to, securities of other
persons, evidences of indebtedness issued by the Corporation or other persons
and assets, but does not include (i) any repurchase of shares from a terminated
employee of or consultant to the Corporation in accordance with the terms of the
agreement applicable to such employee or consultant providing for such
repurchase, (ii) any repurchase of shares funded solely with the proceeds of
life insurance covering certain executives of the Corporation as provided in the
Shareholders' Agreement or approved by the Corporation's Board of Directors,
(iii) any distribution that is part of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and (iv) a payment of dissenter's
rights or in respect of fractional shares.
(d) The Corporation shall at all times reserve and keep available for
issuance upon a Series D PIK Election, free from any preemptive rights, such
number of its authorized but unissued shares of Series D Preferred as will from
time to time be necessary to permit the maximum then available Series D PIK
Election, and shall take all action required to increase the authorized number
of shares of Series D Preferred if necessary to permit the maximum then
available Series D PIK Election.
(e) All accrued but unpaid dividends on Series D Preferred shall be
paid pursuant to a liquidation, dissolution or winding up as provided in Section
3.4.4 as a component of the Series D Liquidation Value. All accrued but unpaid
dividends in respect of a particular share of Series D Preferred shall be paid
upon conversion of that share pursuant to Section 3.4.7. All accrued but unpaid
dividends in respect of a particular share of Series D Preferred shall be paid
upon a redemption pursuant to Section 3.4.6 as a component of the Series D
Redemption Price.
3.4.4. Liquidation.
-----------
(a) Upon the dissolution, liquidation or winding up of the Corporation
(whether voluntary or involuntary) the holders of Series D Preferred shall be
entitled to receive out of the assets of the Corporation available for
distribution to stockholders before any payment
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or distribution shall be made on any Series D Junior Securities, an amount equal
to the Series D Liquidation Value with respect to each outstanding share of
Series D Preferred.
(b) Unless waived by the affirmative vote of the holders of at least a
majority of the then outstanding shares of Series D Preferred voting as a single
class on an as converted basis, the sale, lease or exchange (for cash, shares of
stock, securities or other consideration) of all or substantially all the
property and assets of the Corporation or the merger or consolidation of the
Corporation into or with any other corporation or the merger or consolidation of
any other corporation into or with the Corporation (other than a consolidation
or merger in which the Corporation is the continuing entity and which does not
result in any change in the Common Stock) or an exchange or sale of 90% or more
of the capital stock of the Corporation to accomplish an acquisition of the
Corporation in a single or related transaction shall be deemed to be a
liquidation for the purposes of this Section 3.4.4.
(c) After the payment to the holders of the Series D Preferred of the
full amounts provided for in this Section 3.4.4, the holders of Series D
Preferred as such shall have no right or claim to any of the remaining assets of
the Corporation.
(d) In the event the assets of the Corporation available for
distribution to the holders of Series D Preferred upon any dissolution,
liquidation or winding-up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 3.4.4(a) above, no such distribution shall be made
on account of any Series D Parity Securities unless proportionate amounts are
distributed to the holders of Series D Preferred, ratably, in proportion to the
full amounts for which holders of Series D Preferred and all such Series D
Parity Securities are respectively entitled upon such dissolution, liquidation
or winding-up.
3.4.5. Voting Rights. The holder of each share of Series D
-------------
Preferred shall be entitled to vote on all matters and shall be entitled to the
number of votes equal to the largest number of full shares of Common Stock into
which such shares of Series D Preferred could be converted, pursuant to the
provisions of Section 3.4.7 hereof, at the record date for the determination of
shareholders entitled to vote on such matters or, if no such record date is
established, at the date such vote is taken or any written consent of
shareholders is solicited. Except as otherwise expressly provided herein or the
Shareholders' Agreement or as required by law, the holders of shares of Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred, and Series F Preferred and Common Stock shall vote together as a
single class on all matters and not as separate classes.
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3.4.6. Redemption.
----------
(a) The Corporation may not require the redemption of any shares of
Series D Preferred. The holder or holders of at least 66-2/3% of the outstanding
shares of Series D Preferred may, at their option, at any time, or from time to
time, from and after February 20, 2003, upon notice given to the Corporation by
the holder or holders of at least 66-2/3% of the outstanding shares of Series D
Preferred (a "Series D Redemption Notice") require the Corporation to redeem,
out of funds legally available therefor, any or all outstanding shares of Series
D Preferred (including shares not held by such holder or holders). The
redemption price per share of Series D Preferred (the "Series D Redemption
Price") payable pursuant to this Section 3.4.6 shall be the Series D Liquidation
Value of such share as of the Series D Redemption Date (hereinafter defined).
For the purpose of determining the "per share amount" in the definition of
Series D Liquidation Value, the value of each share of Common Stock shall equal
the Fair Market Value. Unless waived by the Corporation, a Series D Redemption
Notice is irrevocable with respect to the holders giving such notice.
(b) Promptly upon the determination of the Series D Redemption Price,
the Corporation shall (i) give notice of the Series D Redemption Price to the
holders requesting redemption and to holders of Series D Preferred required to
accept redemption pursuant to Section 3.4.6(a), if any, stating the redemption
date (the "Series D Redemption Date"), which Series D Redemption Date shall be
no less than twenty (20) days and no more than forty (40) days following the
date of the Series D Redemption Notice, and (ii) give notice to each holder of
Series A Preferred, Series B Preferred, Series C Preferred, Series E Preferred
and Series F Preferred stating the Series D Redemption Date. On the Series D
Redemption Date, the Corporation shall, unless such shares of Series D Preferred
have been previously surrendered for conversion pursuant to Section 3.4.7,
redeem the shares of Series D Preferred set forth in the Series D Redemption
Notice at a price per share equal to the Series D Redemption Price, upon
submission of certificates of the Series D Preferred in accordance with Section
3.4.6(c) hereof.
(c) Except as provided in Section 3.4.6(d), on or after the Series D
Redemption Date, a holder of Series D Preferred requesting redemption of or
otherwise required to redeem Series D Preferred set forth in the Series D
Redemption Notice shall surrender to the Corporation the certificate or
certificates representing such shares, in the manner and at the place designated
by the Corporation, and thereupon the Series D Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. If all the shares of Series D Preferred
evidenced by a certificate are not redeemed, the Corporation shall on the Series
D Redemption Date deliver to the owner a new certificate in the name of the
owner for the unredeemed shares.
(d) From and after the Series D Redemption Date, unless there shall
have been a default in payment of the Series D Redemption Price, all rights of
the holder requesting or required to accept redemption of the shares of Series D
Preferred for which redemption has been requested (except the right to receive
the Series D Redemption Price without interest upon surrender of their
certificate or certificates) shall cease, and such shares shall not thereafter
be transferred on the books of the Corporation or be deemed to be outstanding
for any purpose whatsoever. Subject to paragraphs 3.4.6(e) and 3.4.6(f), if the
funds
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of the Corporation legally available for redemption of shares of Series D
Preferred on the Series D Redemption Date are insufficient to redeem the total
number of shares of Series D Preferred to be redeemed on such date, (i) those
funds that are legally available shall be used to redeem the maximum possible
number of shares ratably among the holders of such shares, (ii) the shares of
Series D Preferred not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein, until any subsequent redemption, and
(iii) at any time thereafter when additional funds of the Corporation are
legally available for redemption of shares of Series D Preferred such funds will
immediately be used to redeem the balance of the shares which the Corporation
has become obliged to redeem but which it has not redeemed.
(e) If and to the extent, not later than five (5) days prior to the
Series D Redemption Date, the Corporation receives a Series A Redemption Notice
pursuant to Section 3.1.6(c), a Series B Redemption Notice pursuant to Section
3.2.6(a), a Series C Redemption Notice pursuant to Section 3.3.6(a), a Series E
Redemption Notice pursuant to Section 3.5.6(a), or a Series F Redemption Notice
pursuant to Section 3.6.6(a), the Series A Redemption Date (as defined in
Section 3.1.6(c)), the Series B Redemption Date (as defined in Section
3.2.6(b)), the Series C Redemption Date (as defined in Section 3.3.6(b)), the
Series E Redemption Date (as defined in Section 3.5.6(b)) or the Series F
Redemption Date (as defined in Section 3.6.6(b)), notwithstanding any contrary
provision in Section 3.1.6(c), Section 3.2.6(b), Section 3.3.6(b), Section
3.5.6(b) or Section 3.6.6(b), shall be the same as the Series D Redemption Date
(such date being the "Redemption Date") with respect to the shares of Series A
Preferred designated for redemption in such Series A Redemption Notice, shares
of Series B Preferred designated for redemption in such Series B Redemption
Notice, shares of Series C Preferred designated for redemption in such Series C
Redemption Notice, shares of Series E Preferred designated for redemption in
such Series E Redemption Notice and shares of Series F Preferred designated for
redemption in such Series F Redemption Notice.
(f) Redemptions of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Series F Preferred that
occur, or would occur but for the absence of funds legally available therefor,
on the same date shall be made, ratably in proportion to the amounts that the
holders of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred and Series F Preferred to be redeemed on
such Redemption Date are entitled to receive in respect of such redemption.
3.4.7. Conversion. (a) Upon the earlier of (i) the consummation
of a Qualified IPO or (ii) for each of at least 20 consecutive trading days
after an initial public offering of the Common Stock the aggregate market
capitalization of the Free Common Stock is at least $25 million and the Common
Stock has a Current Market Price of at least $12.00 per share (subject to
adjustment for stock splits and combinations, recapitalizations and stock
dividends of the Common Stock except for the stock splits described in Article
IX and Article X hereof), each share of Series D Preferred shall automatically
be converted into a number of shares of Common Stock at the then effective
Series D Conversion Ratio. In addition, (x) at the option of the holder of any
Series D Preferred, such holder shall have the right, at any time and from time
to time prior to or after the consummation of an initial public offering of the
Common Stock, by written notice to the Corporation, to convert any and all
shares of Series D Preferred owned by such holder at such time into a number of
shares of Common Stock, at the then effective Series D Conversion Ratio, and (y)
upon the election of holders of at least 51% of the
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then outstanding Series D Preferred either at a duly called shareholders meeting
or by written consent, all of the outstanding Series D Preferred shall
automatically convert into Common Stock at the then applicable conversion ratio
for such stock.
(b) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of the Series D Preferred, free from any preemptive
rights, such number of its authorized but unissued shares of Common Stock as
will from time to time be necessary to permit the conversion of all outstanding
shares of Series D Preferred into shares of Common Stock, and shall take all
action required to increase the authorized number of shares of Common Stock if
necessary to permit the conversion of all outstanding shares of Series D
Preferred.
(c) Except for the stock splits described in Article IX and Article X
hereof the Series D Conversion Ratio shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time or from time to
time after the Series D Issue Date (A) pay a dividend, or make a distribution,
on the outstanding shares of Common Stock in shares of Common Stock, (B)
subdivide the outstanding shares of Common Stock, (C) combine the outstanding
shares of Common Stock into a smaller number of shares or (D) issue by
reclassification of the shares of Common Stock any shares of capital stock of
the Corporation, then, and in each such case, the Series D Conversion Ratio in
effect immediately prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of Series D
Preferred thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock or other securities of the Corporation that
such holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such shares of Series D
Preferred been surrendered for conversion immediately prior to the happening of
such event or the record date therefor, whichever is earlier. An adjustment made
pursuant to this clause (i) shall become effective (x) in the case of any such
dividend or distribution, immediately after the close of business on the record
date for the determination of holders of shares of Common Stock entitled to
receive such dividend or distribution, or (y) in the case of such subdivision,
reclassification or combination, at the close of business on the day upon which
such corporate action becomes effective. No adjustment shall be made pursuant to
this clause (i) in connection with any transaction to which Section 3.4.7(g)
applies.
(ii) Except with respect to Excluded Securities, if the
Corporation shall, while there are any shares of Series D Preferred outstanding,
issue or sell shares of its Common Stock or Common Stock Equivalents without
consideration or at a Purchase Price (as defined in Section 3.4) less than the
applicable Series D Conversion Price in effect immediately prior to such
issuance or sale, then in each such case such applicable Series D Conversion
Price, except as hereinafter provided, shall be lowered so as to be equal to an
amount determined by multiplying such applicable Series D Conversion Price by a
fraction:
(1) the numerator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock or Common Stock Equivalents (calculated on a fully-
diluted basis assuming the conversion of all then presently exercisable options,
warrants, purchase rights or convertible
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securities whose exercise or conversion price is less than the applicable Series
D Conversion Price then in effect), plus (b) the number of shares of Common
Stock or Common Stock Equivalents which the aggregate consideration, if any,
received by the Corporation for the total number of such additional shares of
Common Stock or Common Stock Equivalents so issued would purchase at the
applicable Series D Conversion Price in effect immediately prior to such
issuance, and
(2) the denominator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock or Common Stock Equivalents (calculated on a fully-
diluted basis assuming the exercise or conversion of all then presently
exercisable options, warrants, purchase rights or convertible securities whose
exercise or conversion price is less than the applicable Conversion Price then
in effect), plus (b) the number of such additional shares of Common Stock or
Common Stock Equivalents so issued.
The provisions of the foregoing paragraph as they may apply to the
Series D Preferred may be waived in any instance (without the necessity of
convening any meeting of stockholders of the Corporation) upon the written
agreement of holders of at least 66 2/3% of the then outstanding shares of
Series D Preferred (voting as a separate class).
(iii)(A) For the purposes of Section 3.4.7(c)(ii), the issuance
of any Common Stock Equivalent shall be deemed an issuance of Common Stock with
respect to adjustments in the applicable Series D Conversion Price if the
Purchase Price (as hereinafter determined) which may be received by the
Corporation for such Common Stock shall be less than the applicable Series D
Conversion Price in effect at the time of such issuance. Any obligation,
agreement or undertaking to issue Common Stock Equivalents at any time in the
future shall be deemed to be an issuance at the time such obligation, agreement
or undertaking is made or arises. Except as provided in subparagraph B below,
no adjustment of the applicable Series D Conversion Price shall be made under
3.4.7(c)(ii) upon the issuance of any shares of Common Stock which are issued
pursuant to the exercise, conversion or exchange of any Common Stock Equivalents
if any adjustment shall previously have been made upon the issuance of any such
Common Stock Equivalents as above provided.
(B) Should the Purchase Price of any such Common Stock
Equivalents be decreased from time to time, then, upon the effectiveness of each
such change, the applicable Series D Conversion Price will be that which would
have been obtained (x) had the adjustments made upon the issuance of such Common
Stock Equivalents been made upon the basis of the actual Purchase Price of such
securities, and (y) had the adjustments made to the applicable Series D
Conversion Price since the date of issuance of such Common Stock Equivalents
been made to such applicable Series D Conversion Price as adjusted pursuant to
clause (A) immediately above. Any adjustment of the applicable Series D
Conversion Price with respect to 3.4.7(c)(ii) which relates to any Common Stock
Equivalent shall be disregarded if, as, and when such Common Stock Equivalent
expires or is canceled without being exercised, or is repurchased by the
Corporation at a price per share at or less than the original purchase price, so
that the applicable Series D Conversion Price effective immediately upon such
cancellation or
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expiration shall be equal to the applicable Conversion Price that would have
been in effect had the expired or canceled Common Stock Equivalent not been
issued.
(C) The Purchase Price which may be received by the
Corporation shall be determined in each instance as of the date of issuance of
Common Stock Equivalents without giving effect to any possible future upward
price adjustments or rate adjustments which may be applicable with respect to
such Common Stock Equivalents.
(iv) For purposes of this Section 3.4.7(c), the aggregate
consideration receivable by the Corporation in connection with the issuance of
shares of Common Stock and/or Common Stock Equivalents shall be deemed to be
equal to the sum of the aggregate offering price (before deduction of
underwriting discounts or commissions and expenses payable to third parties, if
any) of all such Common Stock and/or Common Stock Equivalents plus the minimum
aggregate amount, if any, payable upon conversion, exchange or exercise of any
such Common Stock Equivalents. If the consideration received by the Corporation
in connection with the sale or issuance of shares of Common Stock (or Common
Stock Equivalents) consists, in whole or in part, of property other than cash or
its equivalent, the value of such property shall be the Fair Market Value.
(v) The Series D Conversion Ratio shall not be adjusted because
of any "Series F Additional Adjustment" pursuant to Section 3.6.7(c)(v) hereof.
(d) The issuance of certificates for shares of Common Stock upon
conversion of the Series D Preferred shall be made without charge to the holders
thereof for any issuance tax in respect thereof, provided that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the holder of the Series D Preferred which is being
converted.
(e) The Corporation will at no time close its transfer books against
the transfer of any Series D Preferred, or of any shares of Common Stock issued
or issuable upon the conversion of any shares of Series D Preferred, in any
manner which interferes with the timely conversion of such Series D Preferred,
except as may otherwise be required to comply with applicable securities laws.
(f) If any event occurs as to which, in the opinion of the
Corporation's Board of Directors, the provisions of this Section 3.4.7 are not
strictly applicable or if strictly applicable would not fairly protect the
rights of the holders of the Series D Preferred in accordance with the essential
intent and principles of such provisions, the Corporation's Board of Directors
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect such rights of the
holders of the Series D Preferred.
(g) If the Corporation shall be a party to any Transaction (but
excluding (i) any Transaction for which provision for adjustment is otherwise
made in this Section 3.4.7 and (ii) any Transaction that is deemed to be a
liquidation for the purposes of Section 3.4.4), in each case, as a result of
which shares of Common Stock are converted into the
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right to receive stock, securities or other property (including cash or any
combination thereof), each share of Series D Preferred shall thereafter be
convertible into the number of shares of stock or other securities or property
to which a holder of the number of shares of Common Stock of the Corporation
deliverable upon conversion of such Series D Preferred would have been entitled
upon such Transaction; and, in any such case, appropriate adjustment (as
determined by the Corporation's Board of Directors) shall be made in the
application of the provisions set forth in this Section 3.4.7 with respect to
the rights and interest thereafter of the holders of the Series D Preferred, to
the end that the provisions set forth in this Section 3.4.7 shall thereafter be
applicable, as nearly as reasonably may be, in relation to any shares of stock
or other property thereafter deliverable upon the conversion of the Series D
Preferred. Except as provided in the Shareholders' Agreement, the Corporation
shall not effect any Transaction (other than a consolidation or merger in which
the Corporation is the continuing corporation) unless prior to or simultaneously
with the consummation thereof the Corporation, or the successor corporation or
purchaser, as the case may be, shall provide in its charter document that each
share of Series D Preferred shall be converted into such shares of stock,
securities or property as, in accordance with the foregoing provisions, each
such holder is entitled to receive. The provisions of this Section 3.4.7(g)
shall similarly apply to successive Transactions.
(h) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
except as has been approved by the holders of at least 51% of the then
outstanding Series D Preferred voting as a class on an as-converted basis either
at a duly called shareholders meeting or by written consent, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 3.4.7 and in
the taking of all such action as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Series D Preferred against
impairment.
(i) All calculations under this Section 3.4.7 shall be made to the
nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10) of a
share, as the case may be. Upon conversion of the Series D Preferred pursuant
to this Section 3.4.7, the Corporation may pay cash based on the Series D
Conversion Price in lieu of issuing fractional shares.
3.4.8. Notice of Certain Events. In case, at any time while any
shares of Series D Preferred are outstanding:
(a) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock;
(b) the Corporation shall authorize the issuance to the holders of
its Common Stock as a class, of Common Stock Equivalents, or rights or warrants
to subscribe for or purchase shares of its Common Stock or of any other
subscription rights or warrants;
(c) the Corporation shall authorize any reorganization,
reclassification or recapitalization of its Common Stock;
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(d) the Corporation shall authorize the consolidation or merger
of the Corporation into or with any other person, the sale or transfer of a
substantial portion of its capital stock, business or assets to another person,
or any other similar business combination or transaction; or
(e) the Corporation shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation;
then the Corporation shall promptly deliver to the transfer agent of the Series
D Preferred and to each of the holders of shares of Series D Preferred at their
last addresses as shown on the books of the Corporation, at least 15 days before
the date hereinafter specified (or the earlier of the dates hereinafter
specified, in the event that more than one date is specified), a notice
describing such event and stating (A) the date on which a record is to be taken
for the purpose of such dividend, distribution, rights or warrants, or, if a
record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights or warrants are to
be determined, or (B) the date on which any such reclassification,
reorganization, recapitalization, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property
(including cash), if any, deliverable upon such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up. Any notice
required to be given hereunder to the holders of shares of Series D Preferred
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
the Corporation, and such notice may be waived with respect to all of the
outstanding Series D Preferred by the holders of a majority of the outstanding
Series D Preferred.
3.4.9. Certain Remedies. Any registered holder of Series D
Preferred may proceed to protect and enforce its rights and the rights of any
other holders of Series D Preferred with any and all remedies available at law
or in equity.
3.4.10. Protective Provisions. So long as any shares of Series D
Preferred are outstanding, the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holder or
holders of at least 50.1% of the then outstanding shares of Series D Preferred:
(a) alter or change the rights, preference or privileges of the
shares of Series D Preferred or otherwise amend the Certificate of
Incorporation, in either case, whether by merger, consolidation or otherwise, so
as to affect adversely the shares of Series D Preferred;
(b) increase the authorized number of shares of Series D
Preferred except to pay, or reserve for payment, upon a Series D PIK Election;
(c) except as provided by the Shareholders' Agreement or upon a
Series D PIK Election, authorize the issuance of, issue, or sell any additional
shares of Series D Preferred; or
(d) except for Excluded Securities defined in clauses (iii),
(iv), (vi) or (vii) of the definition of Excluded Securities, create or
designate, or authorize the issuance of,
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any new class or series of stock (i) which are Series D Senior Securities or
Series D Parity Securities, (ii) having rights similar to any rights of the
Series D Preferred under Section 3.4.5 hereof or (iii) convertible into any
class or series of stock described in clause (i) of this paragraph (d).
3.4.11. Major Transactions. For so long as the outstanding shares
of Series D Preferred represent, on an as-converted basis, 5% of the aggregate
voting power of all of the outstanding voting stock of the Corporation, the
Corporation shall not, and shall not permit any of its Subsidiaries to, directly
or indirectly, take any of the following actions without first obtaining the
approval (by vote or written consent, as provided by law) of the holders of at
least 50.1% of the then outstanding shares of Series D Preferred:
(a) consolidate or merge with or into any Person or enter into
any similar business combination transaction (including a sale of substantially
all of its assets) or effect any transaction or series of transactions in which
more than 33-1/3% of its voting securities are transferred to another Person,
except (i) pursuant to a Qualified IPO or (ii) any such transaction or series of
transactions, as the case may be, involving only wholly-owned Subsidiaries of
the Corporation;
(b) amend or repeal any provision of, or add any provision to,
this Certificate of Incorporation or the Corporation's By-laws;
(c) alter or change through any means the preferences, rights,
privileges or powers of the Series D Preferred so as to adversely affect the
Series D Preferred;
(d) create or designate, authorize the issuance of, or issue or
sell any new series or class of securities (or warrants, options or convertible
or exchangeable securities), or increase the authorized number of, authorize the
issuance of, or issue, any additional shares of Common Stock or Preferred Stock
(or warrants, options, or rights to acquire, or securities convertible into or
exchangeable for, Common Stock or Preferred Stock), except (i) pursuant to a
Qualified IPO, (ii) as consideration for an acquisition approved by the
Corporation's Board of Directors and which securities are valued in the
acquisition of less than $1,000,000, (iii) pursuant to any stock option plan or
employee stock purchase plan duly adopted by the Corporation's Board of
Directors or (iv) Excluded Securities;
(e) increase the number of authorized directors of the
Corporation's Board of Directors above ten, except for an increase to eleven if
holders of the Series F Preferred Stock appoints a Director as provided in the
Shareholder's Agreement;
(f) voluntarily liquidate, dissolve or wind up;
(g) pay, declare or set aside any sums for the payment of, any
dividends, or make any distributions on, any shares of its capital stock or
other equity securities except as required by the terms of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred and Series F Preferred;
(h) redeem, purchase or otherwise acquire, any of its capital
stock or other equity securities (including, without limitation, warrants,
options and other rights to
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acquire any of its capital stock or other equity securities directly or
indirectly) or redeem, purchase or make any payments with respect to any stock
appreciation rights, phantom stock plans or similar rights or plans relating to
the Corporation or its Subsidiaries, except for (w) repurchases funded solely
with the proceeds of life insurance approved by the Corporation's Board of
Directors, (x) redemptions or repurchases of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred or Series
F Preferred permitted or required under this Certificate of Incorporation, (y)
cashless exercises of options or warrants or (z) as otherwise provided in the
Shareholders' Agreement;
(i) purchase, acquire or obtain any capital stock or other
proprietary interest, directly or indirectly, in any other entity or all or
substantially all of the business or assets of another Person for consideration
(including assumed liabilities) in excess of $250,000;
(j) enter into or commit to enter any joint ventures (other than
in the ordinary course of business) or any partnerships or establish any non-
wholly-owned subsidiaries, in each case, where the contributions or investments
by the Corporation is in excess of $400,000 in cash or assets;
(k) sell, lease, transfer or otherwise dispose of any asset or
group of assets for consideration, in an annual aggregate amount (as to the
Corporation and any and all of its Subsidiaries), in excess of $500,000;
(l) create, incur, assume or suffer to exist any indebtedness of
the Corporation or any of its subsidiaries for borrowed money (which shall
include for purposes hereof capitalized lease obligations and guarantees or
other contingent obligations for indebtedness for borrowed money) in an annual
aggregate net incurred amount (as to the Corporation and all of its
Subsidiaries) in excess of $1,000,000 excluding such indebtedness that exists as
of the Series F Issue Date;
(m) mortgage, encumber, create, incur or suffer to exist, liens
on its assets, in an annual aggregate amount (as to the Corporation and all of
its Subsidiaries) in excess of $1,000,000 excluding liens on assets that exist
as of the Series F Issue Date;
(n) in the case of the Corporation's executive officers, amend,
modify or grant any waiver under any material provision of any employment
agreement or under any non-competition provision or agreement to which the
Corporation is a party or is bound;
(o) create or issue any stock options, warrants or other Common
Stock Equivalents, other than Excluded Securities, or modify, amend or grant any
waiver of any provision of, any stock options, warrants or other Common Stock
Equivalents, other than Excluded Securities described in clause (i) of the
definition of Excluded Securities in Section 3.2.13, outstanding as of the date
hereof,
(p) agree or otherwise commit to take any actions set forth in
the foregoing subparagraphs (a) through (o).
3.4.12. Reports as to Adjustments. Upon any adjustment of the
Series D Conversion Ratio then in effect and any increase or decrease in the
number of shares of Common
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Stock issuable upon the operation of the conversion provisions set forth in
Section 3.4.7, then, and in each such case, the Corporation shall promptly
deliver to the registered holders of the Series D Preferred as shown on the
books of the Corporation a copy of a certificate signed by the President or a
Vice President and by the Treasurer or an Assistant Treasurer or the Secretary
or an Assistant Secretary of the Corporation, with the original being delivered
to the transfer agent for the Series D Preferred, setting forth in reasonable
detail the event requiring the adjustment and the method by which such
adjustment was calculated and specifying the Series D Conversion Ratio then in
effect following such adjustment and the increased or decreased number of shares
issuable upon the conversion granted pursuant to Section 3.4.7, and shall set
forth in reasonable detail the method of calculation of each and a brief
statement of the facts requiring such adjustment.
3.4.13. No Reissuance of Series D Preferred. No share or shares of
Series D Preferred acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and without further
corporate or stockholder action all such shares shall be canceled, retired and
eliminated from the shares that the Corporation shall be authorized to issue.
3.4.14. Definitions. In addition to any other terms defined herein,
the following terms shall have the meanings indicated for purposes of this
Section 3.4:
"Purchase Price" has the meaning given that term in Section 3.3.14.
"Series D Conversion Ratio," determined as of any date, shall equal
the number of shares of Common Stock into which one share of Series D Preferred
is convertible pursuant to Section 3.4.7 and shall be determined by dividing (i)
$1.23 (as adjusted for stock splits, reverse splits, stock dividends (other than
a Series D PIK Election) and stock combinations of the Series D Preferred or
pursuant to Section 3.4.7(g)) by (ii) the Series D Conversion Price. The Series
D Conversion Ratio shall equal twenty five one hundredths (.25) as of January
15, 2000 and shall be subject to adjustment as provided in paragraph (c) of
Section 3.4.7.
"Series D Conversion Price" means, as of January 15, 2000, $4.92 and,
thereafter is subject to adjustment for stock splits, reverse splits, stock
dividends (other than a Series D PIK Election) and stock combinations of the
Series D Preferred and as provided in Section 3.4.7. Notwithstanding the
foregoing, the Series D Conversion Price shall not be less than the par value of
one share of Common Stock.
"Series D Issue Date" means the first date on which shares of Series D
Preferred are issued.
"Series D Liquidation Value" means the greater of (i) $1.23 (as
adjusted for stock splits, reverse splits, stock dividends (other than a Series
D PIK Election) and stock combinations, in each case of the Series D Preferred),
for each share of Series D Preferred plus all accrued but unpaid dividends on
the Series D Preferred or (ii) the per share amount that the holders of the
Series D Preferred would have received upon liquidation if all shares of Series
D Preferred had been converted to Common Stock immediately prior to such
liquidation at the
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Series D Conversion Price then in effect, plus all accrued but unpaid dividends
on the Series D Preferred.
"Series D Stated Value" means $1.23 per share (as adjusted for stock
splits, reverse splits, stock dividends (other than a Series D PIK Election),
and stock combinations of the Series D Preferred or pursuant to Sections
3.4.3(a) (other than in respect of a Series D PIK Election) and 3.4.7(g)).
3.5 Series E Preferred.
3.5.1. Designation; Rank. This series of Preferred Stock
shall be designated the "Series E Convertible Preferred Stock" with a par value
of $.001 per share (the "Series E Preferred"). The Series E Preferred shall
rank, with respect to dividend rights and rights on liquidation, winding-up and
dissolution, (i) senior to all classes of Common Stock of the Corporation, as
they exist on the date hereof or as such stock may be constituted from time to
time and to each other class of capital stock or series of preferred stock
issued by the Corporation or established by the Corporation's Board of Directors
to the extent the terms of such stock do not expressly provide that it ranks
senior to or on parity with, the Series E Preferred as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively, together with
the Common Stock, the "Series E Junior Securities"), (ii) on a parity with each
other class of capital stock or series of preferred stock issued by the
Corporation or established by the Corporation's Board of Directors to the extent
the terms of such stock expressly provide that it will rank on a parity with the
Series E Preferred as to dividend rights and rights on liquidation, winding-up
and dissolution (collectively, the "Series E Parity Securities"), and (iii)
junior to each other class of capital stock or series of preferred stock issued
by the Corporation or established by the Corporation's Board of Directors to the
extent the terms of such stock expressly provide that it will rank senior to the
Series E Preferred as to dividend rights and rights on liquidation, winding-up
and dissolution (collectively, the "Series E Senior Securities"). Without
limiting the generality of the foregoing, the Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred and Series F Preferred shall
be deemed to be Series E Parity Securities.
3.5.2. Authorized Number. The authorized number of shares
constituting the Series E Preferred shall be eight million three hundred
thousand (8,300,000).
3.5.3. Dividends.
(a) Dividends shall accrue from day to day and shall be
payable when and as declared by the Corporation's Board of Directors or as
otherwise provided in this Section 3.5.3. as follows, out of funds legally
available therefor:
(i) for all periods prior to and including October 15,
1999, dividends shall accrue and shall be payable solely by issuance by the
Corporation to the holders of the Series E Preferred of additional shares of
Series E Preferred equal to one tenth (.10) of a share of Series E Preferred for
each one share of Series E Preferred actually issued and outstanding on October
15, 1999 which dividend shall be cumulative (whether or not earned or declared);
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(ii) for all periods after October 15, 1999 through and
including the last day of July, 2001, dividends shall accrue and shall be
payable solely by issuance by the Corporation to the holders of the Series E
Preferred of additional shares of Series E Preferred with the number of shares
per share of Series E Preferred being equal to (i) the dollar amount of the cash
dividend which would have accrued on 1.100 shares of Series E Preferred from
October 16, 1999, to the record date for such dividend if a cash dividend had
accrued during that period at a rate of eight percent (8%) compounded annually
with the first compounding occurring on October 16, 2000 of the Series E Stated
Value divided by (ii) the Series E Stated Value as of the record date for such
dividend which dividend shall be cumulative (whether or not earned or declared),
provided, however, that no dividend shall accrue after February 29, 2000, except
that if a Qualified IPO as defined in Section 3.2.13 hereof shall not have
closed before April 16, 2000, then dividends shall again accrue hereunder
effective as of March 1, 2000; and
(iii) commencing on and including August 1, 2001, the
foregoing dividends shall not further accrue (but if unpaid shall remain
accrued), and in lieu of any further accrual, the Corporation shall accrue and,
when and as declared by the Corporation's Board of Directors out of funds
legally available therefor, the Corporation shall pay dividends to the holders
of the Series E Preferred at an annual rate per share of Series E Preferred of
(a) 8% compounded annually of (b) (X) one plus the number shares of Series E
which would be issuable on August 1, 2001 pursuant to clauses (i) and (ii) in
respect of a share of Series E Preferred multiplied by (Y) the Series E Stated
Value, and such dividends shall accrue commencing on and including August 1,
2001 and shall be cumulative (whether or not earned or declared). All dividends
first accruing on or after August 1, 2001 as specified in clause (iii) shall be
payable in cash out of funds legally available therefor; provided, however, that
at the election (a "Series E PIK Election") of the holders as of the record date
for such dividend of a majority of the outstanding shares of Series E Preferred,
in lieu of payment thereof in cash, the amount of such dividends may be paid, in
whole or in part, by issuance by the Corporation to the holders of the Series E
Preferred, of additional shares of Series E Preferred, with the number of shares
being equal to (i) the dollar amount of the dividend which the holder has
elected to receive in the form of additional shares of Series E Preferred,
divided by (ii) the Series E Stated Value as of the record date for such
dividend. If the Series E PIK Election is not for the entire amount of the
dividend, each holder of Series E Preferred shall receive the same proportion of
cash and additional shares of Series E Preferred for each share of Series E
Preferred held.
Dividends payable for any period less than a full dividend period
shall be computed on the basis of a 360-day year consisting of twelve 30-day
months.
For definitional purposes of the term "Series E PIK Election" the
shares of Series E Preferred received or receivable pursuant to clauses (i),
(ii) or (iii) are deemed received or receivable pursuant to a "Series E PIK
Election."
All additional shares of Series E Preferred issued upon a Series E PIK
Election shall be deemed issued as of the record date for such dividend. No
fractional shares shall be issued upon a Series E PIK Election, but rather cash
in lieu of fractional shares shall be paid, with the deemed value per whole
share of Series E Preferred being the Series E Stated Value as of the record
date for such dividend. Any dividend (or portion thereof) shall be deemed fully
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paid to the extent a Series E PIK Election is made with respect to such dividend
(or portion thereof).
(b) No full dividends may be declared or paid or funds set apart
for the payment of dividends on any Series E Parity Securities (except dividends
on Series E Parity Securities paid in shares of Series E Junior Securities) for
any period unless full cumulative dividends to be paid hereunder prior to the
date thereof shall have been paid on the Series E Preferred. If dividends are
not so paid, the Series E Preferred, if and to the extent a Series E PIK
Election has not been made with respect to such dividends, shall share dividends
pro rata with the Series E Parity Securities according to the amount of
dividends due and payable with respect to each. No dividends may be paid or set
aside for such payment on Series E Junior Securities (except dividends on Series
E Junior Securities paid in additional shares of Series E Junior Securities),
and no Series E Parity Securities or Series E Junior Securities may be
repurchased, redeemed or otherwise retired nor may funds be set aside for
payment with respect thereto, nor shall the Corporation permit any corporation
or entity directly or indirectly controlled by the Corporation to purchase any
shares of Series E Parity Securities or Series E Junior Securities (except in
each case for (a) cashless exercises of stock options (whether effected by
surrendering stock options or outstanding shares of Stock), (b) repurchases by
the Corporation of Series E Parity Securities or Series E Junior Securities
solely funded by life insurance proceeds, or (c) a payment in respect of
fractional shares) if full cumulative dividends to be paid hereunder prior to
the date thereof have not been paid on the Series E Preferred.
(c) If, in any year, any cash or other distributions are declared
by the Corporation's Board of Directors to be paid on Common Stock (including,
without limitation, any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the Corporation or any of its
Subsidiaries by way of dividend or spinoff), other than dividends or
distributions of shares of Common Stock that are referred to in clause (i) of
Section 3.5.7(c), then an additional dividend shall be paid at the same time to
the holders of the Series E Preferred at the rate per share equal to the product
of (x) such per share dividend on the Common Stock multiplied by (y) the number
of shares of Common Stock into which each share of Series E Preferred (including
any issuable upon the payment of any accrued but unpaid Series E PIK Election)
is then convertible. Dividends payable to the holders of the Series E Preferred
pursuant to this Section 3.5.3(c) shall be paid in the same form as paid to
holders of Common Stock. Solely for purposes of this Section 3.5.3(c), the term
"distribution" means any transfer of cash or property without consideration,
whether by way of dividend or otherwise (except a dividend in shares of Common
Stock of the Corporation) including, but not limited to, securities of other
persons, evidences of indebtedness issued by the Corporation or other persons
and assets, but does not include (i) any repurchase of shares from a terminated
employee of or consultant to the Corporation in accordance with the terms of the
agreement applicable to such employee or consultant providing for such
repurchase, (ii) any repurchase of shares funded solely with the proceeds of
life insurance covering certain executives of the Corporation as provided in the
Shareholders' Agreement or approved by the Corporation's Board of Directors,
(iii) any distribution that is part of a voluntary or involuntary liquidation,
dissolution or winding up of the Corporation and (iv) a payment of dissenter's
rights or in respect of fractional shares.
(d) The Corporation shall at all times reserve and keep available
for issuance upon a Series E PIK Election, free from any preemptive rights, such
number of its
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authorized but unissued shares of Series E Preferred as will from
time to time be necessary to permit the maximum then available Series E PIK
Election, and shall take all action required to increase the authorized number
of shares of Series E Preferred if necessary to permit the maximum then
available Series E PIK Election.
(e) All accrued but unpaid dividends on Series E Preferred shall
be paid pursuant to a liquidation, dissolution or winding up as provided in
Section 3.5.4 as a component of the Series E Liquidation Value. All accrued but
unpaid dividends in respect of a particular share of Series E Preferred shall be
paid upon conversion of that share pursuant to Section 3.5.7. All accrued but
unpaid dividends in respect of a particular share of Series E Preferred shall be
paid upon a redemption pursuant to Section 3.5.6 as a component of the Series E
Redemption Price.
3.5.4. Liquidation.
-----------
(a) Upon the dissolution, liquidation or winding up of the
Corporation (whether voluntary or involuntary) the holders of Series E Preferred
shall be entitled to receive out of the assets of the Corporation available for
distribution to stockholders before any payment or distribution shall be made on
any Series E Junior Securities, an amount equal to the Series E Liquidation
Value with respect to each outstanding share of Series E Preferred.
(b) Unless both (i) waived by the affirmative vote of the holders
of at least a majority of the then outstanding shares of Series B Preferred,
Series C Preferred, Series D Preferred, Series E Preferred and Series F
Preferred voting as a single class on an as converted basis, and (ii) waived by
the Series B Preferred under Section 3.2.3(b), Series C Preferred under Section
3.3.3(b) and Series D Preferred under Section 3.4.3(b), the sale, lease or
exchange (for cash, shares of stock, securities or other consideration) of all
or substantially all the property and assets of the Corporation or the merger or
consolidation of the Corporation into or with any other corporation or the
merger or consolidation of any other corporation into or with the Corporation
(other than a consolidation or merger in which the Corporation is the continuing
entity and which does not result in any change in the Common Stock) or an
exchange or sale of 90% or more of the capital stock of the Corporation to
accomplish an acquisition of the Corporation in a single or related transaction
shall be deemed to be a liquidation for the purposes of this Section 3.5.4.
(c) After the payment to the holders of the Series E Preferred of
the full amounts provided for in this Section 3.5.4, the holders of Series E
Preferred as such shall have no right or claim to any of the remaining assets of
the Corporation.
(d) In the event the assets of the Corporation available for
distribution to the holders of Series E Preferred upon any dissolution,
liquidation or winding-up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 3.5.4(a) above, no such distribution shall be made
on account of any Series E Parity Securities unless proportionate amounts are
distributed to the holders of Series E Preferred, ratably, in proportion to the
full amounts for which holders of Series E Preferred and all such Series E
Parity Securities are respectively entitled upon such dissolution, liquidation
or winding-up.
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3.5.5. Voting Rights. The holder of each share of Series E Preferred
shall be entitled to vote on all matters and shall be entitled to the number of
votes equal to the largest number of full shares of Common Stock into which such
shares of Series E Preferred could be converted, pursuant to the provisions of
Section 3.5.7 hereof, at the record date for the determination of shareholders
entitled to vote on such matters or, if no such record date is established, at
the date such vote is taken or any written consent of shareholders is solicited.
Except as otherwise expressly provided herein or the Shareholders' Agreement or
as required by law, the holders of shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Series
F Preferred and Common Stock shall vote together as a single class on all
matters and not as separate classes.
3.5.6. Redemption.
(a) The Corporation may not require the redemption of any shares
of Series E Preferred. The holder or holders of at least 66-2/3% of the
outstanding shares of Series E Preferred may, at their option, at any time, or
from time to time, from and after February 20, 2003, upon notice given to the
Corporation by the holder or holders of at least 66-2/3% of the outstanding
shares of Series E Preferred (a "Series E Redemption Notice") require the
Corporation to redeem, out of funds legally available therefor, any or all
outstanding shares of Series E Preferred (including shares not held by such
holder or holders). The redemption price per share of Series E Preferred (the
"Series E Redemption Price") payable pursuant to this Section 3.5.6 shall be the
Series E Liquidation Value of such share as of the Series E Redemption Date
(hereinafter defined). For the purpose of determining the "per share amount" in
the definition of Series E Liquidation Value, the value of each share of Common
Stock shall equal the Fair Market Value. Unless waived by the Corporation, a
Series E Redemption Notice is irrevocable with respect to the holders giving
such notice.
(b) Promptly upon the determination of the Series E Redemption
Price, the Corporation shall (i) give notice of the Series E Redemption Price to
the holders requesting redemption and to holders of Series E Preferred required
to accept redemption pursuant to Section 3.5.6(a), if any, stating the
redemption date (the "Series E Redemption Date"), which Series E Redemption Date
shall be no less than twenty (20) days and no more than forty (40) days
following the date of the Series E Redemption Notice, and (ii) give notice to
each holder of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series F Preferred stating the Series E Redemption Date.
On the Series E Redemption Date, the Corporation shall, unless such shares of
Series E Preferred have been previously surrendered for conversion pursuant to
Section 3.5.7, redeem the shares of Series E Preferred set forth in the Series E
Redemption Notice at a price per share equal to the Series E Redemption Price,
upon submission of certificates of the Series E Preferred in accordance with
Section 3.5.6(c) hereof.
(c) Except as provided in Section 3.5.6(d), on or after the
Series E Redemption Date, a holder of Series E Preferred requesting redemption
of or otherwise required to redeem Series E Preferred set forth in the Series E
Redemption Notice shall surrender to the Corporation the certificate or
certificates representing such shares, in the manner and at the place designated
by the Corporation, and thereupon the Series E Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. If all the shares of Series E
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Preferred evidenced by a certificate are not redeemed, the Corporation shall on
the Series E Redemption Date deliver to the owner a new certificate in the name
of the owner for the unredeemed shares.
(d) From and after the Series E Redemption Date, unless there
shall have been a default in payment of the Series E Redemption Price, all
rights of the holder requesting or required to accept redemption of the shares
of Series E Preferred for which redemption has been requested (except the right
to receive the Series E Redemption Price without interest upon surrender of
their certificate or certificates) shall cease, and such shares shall not
thereafter be transferred on the books of the Corporation or be deemed to be
outstanding for any purpose whatsoever. Subject to paragraphs 3.5.6(e) and
3.5.6(f), if the funds of the Corporation legally available for redemption of
shares of Series E Preferred on the Series E Redemption Date are insufficient to
redeem the total number of shares of Series E Preferred to be redeemed on such
date, (i) those funds that are legally available shall be used to redeem the
maximum possible number of shares ratably among the holders of such shares, (ii)
the shares of Series E Preferred not redeemed shall remain outstanding and
entitled to all the rights and preferences provided herein, until any subsequent
redemption, and (iii) at any time thereafter when additional funds of the
Corporation are legally available for redemption of shares of Series E Preferred
such funds will immediately be used to redeem the balance of the shares which
the Corporation has become obliged to redeem but which it has not redeemed.
(e) If and to the extent, not later than five (5) days prior to
the Series E Redemption Date, the Corporation receives a Series A Redemption
Notice pursuant to Section 3.1.6(c), a Series B Redemption Notice pursuant to
Section 3.2.6(a), a Series C Redemption Notice pursuant to Section 3.3.6(a) a
Series D Redemption Notice pursuant to Section 3.4.6(a), or a Series F
Redemption Notice pursuant to Section 3.6.6(a), the Series A Redemption Date (as
defined in Section 3.1.6(c)), the Series B Redemption Date (as defined in
Section 3.2.6(b)), the Series C Redemption Date (as defined in Section
3.3.6(b)), the Series D Redemption Date (as defined in Section 3.4.6(b)) or the
Series F Redemption Date (as defined in Section 3.6.6(b)), notwithstanding any
contrary provision in Section 3.1.6(c), Section 3.2.6(b), Section 3.3.6(b),
Section 3.4.6(b) or Section 3.6.6(b), shall be the same as the Series E
Redemption Date (such date being the "Redemption Date") with respect to the
shares of Series A Preferred designated for redemption in such Series A
Redemption Notice, shares of Series B Preferred designated for redemption in
such Series B Redemption Notice, shares of Series C Preferred designated for
redemption in such Series C Redemption Notice, shares of Series D Preferred
designated for redemption in such Series D Redemption Notice and shares of
Series F Preferred designated for redemption in such Series F Redemption Notice.
(f) Redemptions of Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred, Series E Preferred and Series F Preferred that
occur, or would occur but for the absence of funds legally available therefor,
on the same date shall be made, ratably in proportion to the amounts that the
holders of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred and Series F Preferred to be redeemed on
such Redemption Date are entitled to receive in respect of such redemption.
3.5.7. Conversion. (a) Upon the earlier of (i) the consummation
of a Qualified IPO or (ii) for each of at least 20 consecutive trading days
after an initial public
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offering of the Common Stock the aggregate market capitalization of the Free
Common Stock is at least $25 million and the Common Stock has a Current Market
Price of at least $12.00 per share (subject to adjustment for stock splits and
combinations, recapitalizations and stock dividends of the Common Stock except
for the stock splits described in Article IX and Article X hereof), each share
of Series E Preferred shall automatically be converted into a number of shares
of Common Stock at the then effective Series E Conversion Ratio. In addition,
(x) at the option of the holder of any Series E Preferred, such holder shall
have the right, at any time and from time to time prior to or after the
consummation of an initial public offering of the Common Stock, by written
notice to the Corporation, to convert any and all shares of Series E Preferred
owned by such holder at such time into a number of shares of Common Stock, at
the then effective Series E Conversion Ratio, and (y) upon the election of
holders of at least 51% of the then outstanding Series E Preferred either at a
duly called shareholders meeting or by written consent, all of the outstanding
Series E Preferred shall automatically convert into Common Stock at the then
applicable conversion ratio for such stock.
(b) The Corporation shall at all times reserve and keep available
for issuance upon the conversion of the Series E Preferred, free from any
preemptive rights, such number of its authorized but unissued shares of Common
Stock as will from time to time be necessary to permit the conversion of all
outstanding shares of Series E Preferred into shares of Common Stock, and shall
take all action required to increase the authorized number of shares of Common
Stock if necessary to permit the conversion of all outstanding shares of Series
E Preferred.
(c) Except for the stock splits described in Article IX and
Article X hereof the Series E Conversion Ratio shall be subject to adjustment
from time to time as follows:
(i) In case the Corporation shall at any time or from time to
time after the Series E Issue Date (A) pay a dividend, or make a distribution,
on the outstanding shares of Common Stock in shares of Common Stock, (B)
subdivide the outstanding shares of Common Stock, (C) combine the outstanding
shares of Common Stock into a smaller number of shares or (D) issue by
reclassification of the shares of Common Stock any shares of capital stock of
the Corporation, then, and in each such case, the Series E Conversion Ratio in
effect immediately prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of Series E
Preferred thereafter surrendered for conversion shall be entitled to receive the
number of shares of Common Stock or other securities of the Corporation that
such holder would have owned or have been entitled to receive after the
happening of any of the events described above, had such shares of Series E
Preferred been surrendered for conversion immediately prior to the happening of
such event or the record date therefor, whichever is earlier. An adjustment made
pursuant to this clause (i) shall become effective (x) in the case of any such
dividend or distribution, immediately after the close of business on the record
date for the determination of holders of shares of Common Stock entitled to
receive such dividend or distribution, or (y) in the case of such subdivision,
reclassification or combination, at the close of business on the day upon which
such corporate action becomes effective. No adjustment shall be made pursuant to
this clause (i) in connection with any transaction to which Section 3.5.7(g)
applies.
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(ii) Except with respect to Excluded Securities, if the
Corporation shall, while there are any shares of Series E Preferred outstanding,
issue or sell shares of its Common Stock or Common Stock Equivalents without
consideration or at a Purchase Price (as defined in Section 3.5) less than the
applicable Series E Conversion Price in effect immediately prior to such
issuance or sale, then in each such case such applicable Series E Conversion
Price, except as hereinafter provided, shall be lowered so as to be equal to an
amount determined by multiplying such applicable Series E Conversion Price by a
fraction:
(1) the numerator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock or Common Stock Equivalents (calculated on a fully-
diluted basis assuming the conversion of all then presently exercisable options,
warrants, purchase rights or convertible securities whose exercise or conversion
price is less than the applicable Series E Conversion Price then in effect),
plus (b) the number of shares of Common Stock or Common Stock Equivalents which
the aggregate consideration, if any, received by the Corporation for the total
number of such additional shares of Common Stock or Common Stock Equivalents so
issued would purchase at the applicable Series E Conversion Price in effect
immediately prior to such issuance, and
(2) the denominator of which shall be (a) the number of shares of
Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock or Common Stock Equivalents (calculated on a fully-
diluted basis assuming the exercise or conversion of all then presently
exercisable options, warrants, purchase rights or convertible securities whose
exercise or conversion price is less than the applicable Conversion Price then
in effect), plus (b) the number of such additional shares of Common Stock or
Common Stock Equivalents so issued.
The provisions of the foregoing paragraph as they may apply
to the Series E Preferred may be waived in any instance (without the necessity
of convening any meeting of stockholders of the Corporation) upon the written
agreement of holders of at least 66 2/3% of the then outstanding shares of
Series E Preferred (voting as a separate class).
(iii)(A) For the purposes of Section 3.5.7(c)(ii), the issuance of any
Common Stock Equivalent shall be deemed an issuance of Common Stock with respect
to adjustments in the applicable Series E Conversion Price if the Purchase Price
(as hereinafter determined) which may be received by the Corporation for such
Common Stock shall be less than the applicable Series E Conversion Price in
effect at the time of such issuance. Any obligation, agreement or undertaking to
issue Common Stock Equivalents at any time in the future shall be deemed to be
an issuance at the time such obligation, agreement or undertaking is made or
arises. Except as provided in subparagraph B below, no adjustment of the
applicable Series E Conversion Price shall be made under 3.5.7(c)(ii) upon the
issuance of any shares of Common Stock which are issued pursuant to the
exercise, conversion or exchange of any Common Stock Equivalents if any
adjustment shall previously have been made upon the issuance of any such Common
Stock Equivalents as above provided.
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(B) Should the Purchase Price of any such Common Stock
Equivalents be decreased from time to time, then, upon the effectiveness of each
such change, the applicable Series E Conversion Price will be that which would
have been obtained (x) had the adjustments made upon the issuance of such Common
Stock Equivalents been made upon the basis of the actual Purchase Price of such
securities, and (y) had the adjustments made to the applicable Series E
Conversion Price since the date of issuance of such Common Stock Equivalents
been made to such applicable Series E Conversion Price as adjusted pursuant to
clause (A) immediately above. Any adjustment of the applicable Series E
Conversion Price with respect to 3.5.7(c)(ii) which relates to any Common Stock
Equivalent shall be disregarded if, as, and when such Common Stock Equivalent
expires or is canceled without being exercised, or is repurchased by the
Corporation at a price per share at or less than the original purchase price, so
that the applicable Series E Conversion Price effective immediately upon such
cancellation or expiration shall be equal to the applicable Conversion Price
that would have been in effect had the expired or canceled Common Stock
Equivalent not been issued.
(C) The Purchase Price which may be received by the
Corporation shall be determined in each instance as of the date of issuance of
Common Stock Equivalents without giving effect to any possible future upward
price adjustments or rate adjustments which may be applicable with respect to
such Common Stock Equivalents.
(iv) For purposes of this Section 3.5.7(c), the aggregate
consideration receivable by the Corporation in connection with the issuance of
shares of Common Stock and/or Common Stock Equivalents shall be deemed to be
equal to the sum of the aggregate offering price (before deduction of
underwriting discounts or commissions and expenses payable to third parties, if
any) of all such Common Stock and/or Common Stock Equivalents plus the minimum
aggregate amount, if any, payable upon conversion, exchange or exercise of any
such Common Stock Equivalents. If the consideration received by the Corporation
in connection with the sale or issuance of shares of Common Stock (or Common
Stock Equivalents) consists, in whole or in part, of property other than cash or
its equivalent, the value of such property shall be the Fair Market Value.
(v) The Series E Conversion Ratio shall not be adjusted because
of any "Series F Additional Adjustment" pursuant to Section 3.6.7(c)(v) hereof.
(d) The issuance of certificates for shares of Common Stock upon
conversion of the Series E Preferred shall be made without charge to the holders
thereof for any issuance tax in respect thereof, provided that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the holder of the Series E Preferred which is being
converted.
(e) The Corporation will at no time close its transfer books against
the transfer of any Series E Preferred, or of any shares of Common Stock issued
or issuable upon the conversion of any shares of Series E Preferred, in any
manner which interferes with the timely conversion of such Series E Preferred,
except as may otherwise be required to comply with applicable securities laws.
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(f) If any event occurs as to which, in the opinion of the
Corporation's Board of Directors, the provisions of this Section 3.5.7 are not
strictly applicable or if strictly applicable would not fairly protect the
rights of the holders of the Series E Preferred in accordance with the essential
intent and principles of such provisions, the Corporation's Board of Directors
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect such rights of the
holders of the Series E Preferred.
(g) If the Corporation shall be a party to any Transaction (but
excluding (i) any Transaction for which provision for adjustment is otherwise
made in this Section 3.5.7 and (ii) any Transaction that is deemed to be a
liquidation for the purposes of Section 3.5.4), in each case, as a result of
which shares of Common Stock are converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Series E Preferred shall thereafter be convertible into the number of
shares of stock or other securities or property to which a holder of the number
of shares of Common Stock of the Corporation deliverable upon conversion of such
Series E Preferred would have been entitled upon such Transaction; and, in any
such case, appropriate adjustment (as determined by the Corporation's Board of
Directors) shall be made in the application of the provisions set forth in this
Section 3.5.7 with respect to the rights and interest thereafter of the holders
of the Series E Preferred, to the end that the provisions set forth in this
Section 3.5.7 shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Series E Preferred. Except as provided in the
Shareholders' Agreement, the Corporation shall not effect any Transaction (other
than a consolidation or merger in which the Corporation is the continuing
corporation) unless prior to or simultaneously with the consummation thereof the
Corporation, or the successor corporation or purchaser, as the case may be,
shall provide in its charter document that each share of Series E Preferred
shall be converted into such shares of stock, securities or property as, in
accordance with the foregoing provisions, each such holder is entitled to
receive. The provisions of this Section 3.5.7(g) shall similarly apply to
successive Transactions.
(h) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
except as has been approved by the holders of at least 51% of the then
outstanding Series E Preferred voting as a class on an as-converted basis either
at a duly called shareholders meeting or by written consent, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 3.5.7 and in
the taking of all such action as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Series E Preferred against
impairment.
(i) All calculations under this Section 3.5.7 shall be made to the
nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10) of a
share, as the case may be. Upon conversion of the Series E Preferred pursuant
to this Section 3.5.7, the Corporation may pay cash based on the Series E
Conversion Price in lieu of issuing fractional shares.
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3.5.8. Notice of Certain Events. In case, at any time while any
shares of Series E Preferred are outstanding:
(a) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock;
(b) the Corporation shall authorize the issuance to the
holders of its Common Stock as a class, of Common Stock Equivalents, or rights
or warrants to subscribe for or purchase shares of its Common Stock or of any
other subscription rights or warrants;
(c) the Corporation shall authorize any reorganization,
reclassification or recapitalization of its Common Stock;
(d) the Corporation shall authorize the consolidation or
merger of the Corporation into or with any other person, the sale or transfer of
a substantial portion of its capital stock, business or assets to another
person, or any other similar business combination or transaction; or
(e) the Corporation shall authorize the voluntary or
involuntary dissolution, liquidation or winding up of the Corporation;
then the Corporation shall promptly deliver to the transfer agent of the Series
E Preferred and to each of the holders of shares of Series E Preferred at their
last addresses as shown on the books of the Corporation, at least 15 days before
the date hereinafter specified (or the earlier of the dates hereinafter
specified, in the event that more than one date is specified), a notice
describing such event and stating (A) the date on which a record is to be taken
for the purpose of such dividend, distribution, rights or warrants, or, if a
record is not to be taken, the date as of which the holders of Common Stock of
record to be entitled to such dividend, distribution, rights or warrants are to
be determined, or (B) the date on which any such reclassification,
reorganization, recapitalization, consolidation, merger, sale, transfer,
dissolution, liquidation or winding up is expected to become effective, and the
date as of which it is expected that holders of Common Stock of record shall be
entitled to exchange their Common Stock for securities or other property
(including cash), if any, deliverable upon such reclassification, consolidation,
merger, sale, transfer, dissolution, liquidation or winding up. Any notice
required to be given hereunder to the holders of shares of Series E Preferred
shall be deemed given if deposited in the United States mail, postage prepaid,
and addressed to each holder of record at his address appearing on the books of
the Corporation, and such notice may be waived with respect to all of the
outstanding Series E Preferred by the holders of a majority of the outstanding
Series E Preferred.
3.5.9. Certain Remedies. Any registered holder of Series E
Preferred may proceed to protect and enforce its rights and the rights of any
other holders of Series E Preferred with any and all remedies available at law
or in equity.
3.5.10. Protective Provisions. So long as any shares of Series E
Preferred are outstanding, the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holder or
holders of at least 50.1% of the then outstanding shares of Series E Preferred:
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(a) alter or change the rights, preference or privileges of the
shares of Series E Preferred or otherwise amend the Certificate of
Incorporation, in either case, whether by merger, consolidation or otherwise, so
as to affect adversely the shares of Series E Preferred (provided, however, that
the approval of the holders of Series E Preferred shall not be required for any
alteration or change of the rights of such holders upon liquidation as set forth
in Section 3.5.4 or redemption as set forth in Section 3.5.6 (including changes
to the definition of Series E Liquidation Value) so long as similar changes are
made to the terms of the Series B Preferred, Series C Preferred and Series D
Preferred);
(b) increase the authorized number of shares of Series E
Preferred except to pay, or reserve for payment, upon a Series E PIK Election;
or
(c) except as provided by the TCI Purchase Agreement or the
Shareholders' Agreement or upon a Series E PIK Election, authorize the issuance
of, issue, or sell any additional shares of Series E Preferred.
3.5.11. Reports as to Adjustments. Upon any adjustment of the
Series E Conversion Ratio then in effect and any increase or decrease in the
number of shares of Common Stock issuable upon the operation of the conversion
provisions set forth in Section 3.5.7, then, and in each such case, the
Corporation shall promptly deliver to the registered holders of the Series E
Preferred as shown on the books of the Corporation a copy of a certificate
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Corporation, with
the original being delivered to the transfer agent for the Series E Preferred,
setting forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated and specifying the Series E
Conversion Ratio then in effect following such adjustment and the increased or
decreased number of shares issuable upon the conversion granted pursuant to
Section 3.5.7, and shall set forth in reasonable detail the method of
calculation of each and a brief statement of the facts requiring such
adjustment.
3.5.12. No Reissuance of Series E Preferred. No share or shares of
Series E Preferred acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and without further
corporate or stockholder action all such shares shall be canceled, retired and
eliminated from the shares that the Corporation shall be authorized to issue.
3.5.13. Definitions. In addition to any other terms defined herein,
the following terms shall have the meanings indicated for purposes of this
Section 3.5:
"Purchase Price" has the meaning given that term in Section 3.3.14.
"Series E Conversion Ratio," determined as of any date, shall equal the
number of shares of Common Stock into which one share of Series E Preferred is
convertible pursuant to Section 3.5.7 and shall be determined by dividing (i)
$1.48 (as adjusted for stock splits, reverse splits, stock dividends (other than
a Series E PIK Election) and stock combinations of the Series E Preferred or
pursuant to Section 3.5.7(g)) by (ii) the Series E Conversion Price. The Series
E
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Conversion Ratio shall equal twenty five one hundredths (.25) as of January
15, 2000 and shall be subject to adjustment as provided in paragraph (c) of
Section 3.5.7.
"Series E Conversion Price" means, as of January 15, 2000, $5.92 and,
thereafter is subject to adjustment for stock splits, reverse splits, stock
dividends (other than a Series E PIK Election) and stock combinations of the
Series E Preferred and as provided in Section 3.5.7. Notwithstanding the
foregoing, the Series E Conversion Price shall not be less than the par value of
one share of Common Stock.
"Series E Issue Date" means the first date on which shares of Series E
Preferred are issued.
"Series E Liquidation Value" means the greater of (i) $1.48 (as
adjusted for stock splits, reverse splits, stock dividends (other than a Series
E PIK Election) and stock combinations, in each case of the Series E Preferred),
for each share of Series E Preferred plus all accrued but unpaid dividends on
the Series E Preferred or (ii) the per share amount that the holders of the
Series E Preferred would have received upon liquidation if all shares of Series
E Preferred had been converted to Common Stock immediately prior to such
liquidation at the Series E Conversion Price then in effect, plus all accrued
but unpaid dividends on the Series E Preferred.
"Series E Stated Value" means $1.48 per share (as adjusted for stock
splits, reverse splits, stock dividends (other than a Series E PIK Election) and
stock combinations of the Series E Preferred or pursuant to Sections 3.5.3(a)
(other than in respect of a Series E PIK Election) and 3.5.7(g)).
3.6 Series F Preferred.
3.6.1. Designation; Rank. This series of Preferred Stock shall
be designated the "Series F Convertible Preferred Stock" with a par value of
$.001 per share (the "Series F Preferred"). The Series F Preferred shall rank,
with respect to dividend rights and rights on liquidation, winding-up and
dissolution, (i) senior to all classes of Common Stock of the Corporation, as
they exist on the date hereof or as such stock may be constituted from time to
time and to each other class of capital stock or series of preferred stock
issued by the Corporation or established by the Corporation's Board of Directors
to the extent the terms of such stock do not expressly provide that it ranks
senior to or on parity with, the Series F Preferred as to dividend rights and
rights on liquidation, winding-up and dissolution (collectively, together with
the Common Stock, the "Series F Junior Securities"), (ii) on a parity with each
other class of capital stock or series of preferred stock issued by the
Corporation or established by the Corporation's Board of Directors to the extent
the terms of such stock expressly provide that it will rank on a parity with the
Series F Preferred as to dividend rights and rights on liquidation, winding-up
and dissolution (collectively, the "Series F Parity Securities"), and (iii)
junior to each other class of capital stock or series of preferred stock issued
by the Corporation or established by the Corporation's Board of Directors to the
extent the terms of such stock expressly provide that it will rank senior to the
Series F Preferred as to dividend rights and rights on liquidation, winding-up
and dissolution (collectively, the "Series F Senior Securities"). Without
limiting the
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generality of the foregoing, the Series A Preferred, Series B Preferred, Series
C Preferred, Series D Preferred and Series E Preferred shall be deemed to be
Series F Parity Securities.
3.6.2. Authorized Number. The authorized number of shares constituting
the Series F Preferred shall be nine million one hundred sixty thousand
(9,160,000).
3.6.3. Dividends.
(a) Dividends shall accrue from day to day and shall be payable when
and as declared by the Corporation's Board of Directors or as otherwise provided
for in this Section 3.6.3. as follows, out of funds legally available therefor:
(i) for all periods after the Series F Issue Date through and
including the last day of July, 2001, dividends shall accrue and shall be
payable solely by issuance by the Corporation to the holders of the Series F
Preferred of additional shares of Series F Preferred with the number of shares
per share of Series F Preferred being equal to (i) the dollar amount of the cash
dividend which would have accrued on one share of Series F Preferred from the
Series F Issue Date, to the record date for such dividend if a cash dividend had
accrued during that period at a rate of eight percent (8%) compounded annually
with the first compounding occurring on October 16, 2000 of the Series F Stated
Value divided by (ii) the Series F Stated Value as of the record date for such
dividend which dividend shall be cumulative (whether or not earned or declared),
provided, however, that no dividend shall accrue after February 29, 2000, except
that if a Qualified IPO as defined in Section 3.2.13 hereof shall not have
closed before April 16, 2000, then dividends shall again accrue hereunder
effective as of March 1, 2000; and
(ii) commencing on and including August 1, 2001, the foregoing
dividends shall not further accrue (but if unpaid shall remain accrued), and in
lieu of any further accrual, the Corporation shall accrue and, when and as
declared by the Corporation's Board of Directors out of funds legally available
therefor, the Corporation shall pay dividends to the holders of the Series F
Preferred at an annual rate per share of Series F Preferred of (a) 8%
compounded annually of (b) (X) one plus the number shares of Series F which
would be issuable on August 1, 2001 pursuant to clause (i) in respect of a share
of Series F Preferred multiplied by (Y) the Series F Stated Value, and such
dividends shall accrue commencing on and including August 1, 2001 and shall be
cumulative (whether or not earned or declared). All dividends first accruing on
or after August 1, 2001 as specified in clause (ii) shall be payable in cash out
of funds legally available therefor; provided, however, that at the election (a
"Series F PIK Election") of the holders as of the record date for such dividend
of a majority of the outstanding shares of Series F Preferred, in lieu of
payment thereof in cash, the amount of such dividends may be paid, in whole or
in part, by issuance by the Corporation to the holders of the Series F
Preferred, of additional shares of Series F Preferred, with the number of shares
being equal to (i) the dollar amount of the dividend which the holder has
elected to receive in the form of additional shares of Series F Preferred,
divided by (ii) the Series F Stated Value as of the record date for such
dividend. If the Series F PIK Election is not for the entire amount of the
dividend, each holder of Series F Preferred shall receive the same proportion of
cash and additional shares of Series F Preferred for each share of Series F
Preferred held.
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Dividends payable for any period less than a full dividend period
shall be computed on the basis of a 360-day year consisting of twelve 30-day
months.
For definitional purposes of the term "Series F PIK Election" the
shares of Series F Preferred received or receivable pursuant to clauses (i) or
(ii) are deemed received or receivable pursuant to a "Series F PIK Election."
All additional shares of Series F Preferred issued upon a Series F PIK
Election shall be deemed issued as of the record date for such dividend. No
fractional shares shall be issued upon a Series F PIK Election, but rather cash
in lieu of fractional shares shall be paid, with the deemed value per whole
share of Series F Preferred being the Series F Stated Value as of the record
date for such dividend. Any dividend (or portion thereof) shall be deemed fully
paid to the extent a Series F PIK Election is made with respect to such dividend
(or portion thereof).
(b) No full dividends may be declared or paid or funds set apart for
the payment of dividends on any Series F Parity Securities (except dividends on
Series F Parity Securities paid in shares of Series F Junior Securities) for any
period unless full cumulative dividends to be paid hereunder prior to the date
thereof shall have been paid on the Series F Preferred. If dividends are not so
paid, the Series F Preferred, if and to the extent a Series F PIK Election has
not been made with respect to such dividends, shall share dividends pro rata
with the Series F Parity Securities according to the amount of dividends due and
payable with respect to each. No dividends may be paid or set aside for such
payment on Series F Junior Securities (except dividends on Series F Junior
Securities paid in additional shares of Series F Junior Securities), and no
Series F Parity Securities or Series F Junior Securities may be repurchased,
redeemed or otherwise retired nor may funds be set aside for payment with
respect thereto, nor shall the Corporation permit any corporation or entity
directly or indirectly controlled by the Corporation to purchase any shares of
Series F Parity Securities or Series F Junior Securities (except in each case
for (a) cashless exercises of stock options (whether effected by surrendering
stock options or outstanding shares of Stock), (b) repurchases by the
Corporation of Series F Parity Securities or Series F Junior Securities solely
funded by life insurance proceeds, or (c) a payment in respect of fractional
shares) if full cumulative dividends to be paid hereunder prior to the date
thereof have not been paid on the Series F Preferred.
(c) If, in any year, any cash or other distributions are declared by
the Corporation's Board of Directors to be paid on Common Stock (including,
without limitation, any distribution of stock or other securities or property or
rights or warrants to subscribe for securities of the Corporation or any of its
Subsidiaries by way of dividend or spinoff), other than dividends or
distributions of shares of Common Stock that are referred to in clause (i) of
Section 3.6.7(c), then an additional dividend shall be paid at the same time to
the holders of the Series F Preferred at the rate per share equal to the product
of (x) such per share dividend on the Common Stock multiplied by (y) the number
of shares of Common Stock into which each share of Series F Preferred (including
any issuable upon the payment of any accrued but unpaid Series F PIK Election)
is then convertible. Dividends payable to the holders of the Series F Preferred
pursuant to this Section 3.6.3(c) shall be paid in the same form as paid to
holders of Common Stock. Solely for purposes of this Section 3.6.3(c), the term
"distribution" means any transfer of cash or property without consideration,
whether by way of dividend or otherwise (except a dividend in
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shares of Common Stock of the Corporation) including, but not limited to,
securities of other persons, evidences of indebtedness issued by the Corporation
or other persons and assets, but does not include (i) any repurchase of shares
from a terminated employee of or consultant to the Corporation in accordance
with the terms of the agreement applicable to such employee or consultant
providing for such repurchase, (ii) any repurchase of shares funded solely with
the proceeds of life insurance covering certain executives of the Corporation as
provided in the Shareholders' Agreement or approved by the Corporation's Board
of Directors, (iii) any distribution that is part of a voluntary or involuntary
liquidation, dissolution or winding up of the Corporation and (iv) a payment of
dissenter's rights or in respect of fractional shares.
(d) The Corporation shall at all times reserve and keep available for
issuance upon a Series F PIK Election, free from any preemptive rights, such
number of its authorized but unissued shares of Series F Preferred as will from
time to time be necessary to permit the maximum then available Series F PIK
Election, and shall take all action required to increase the authorized number
of shares of Series F Preferred if necessary to permit the maximum then
available Series F PIK Election.
(e) All accrued but unpaid dividends on Series F Preferred shall be
paid pursuant to a liquidation, dissolution or winding up as provided in Section
3.6.4 as a component of the Series F Liquidation Value. All accrued but unpaid
dividends in respect of a particular share of Series F Preferred shall be paid
upon conversion of that share pursuant to Section 3.6.7. All accrued but unpaid
dividends in respect of a particular share of Series F Preferred shall be paid
upon a redemption pursuant to Section 3.6.6 as a component of the Series F
Redemption Price.
3.6.4. Liquidation.
(a) Upon the dissolution, liquidation or winding up of the
Corporation (whether voluntary or involuntary) the holders of Series F Preferred
shall be entitled to receive out of the assets of the Corporation available for
distribution to stockholders before any payment or distribution shall be made on
any Series F Junior Securities, an amount equal to the Series F Liquidation
Value with respect to each outstanding share of Series F Preferred.
(b) Unless both (i) waived by the affirmative vote of the holders of
at least a majority of the then outstanding shares of Series B Preferred, Series
C Preferred, Series D Preferred, Series E Preferred and Series F Preferred
voting as a single class on an as converted basis, and (ii) waived by the Series
B Preferred under Section 3.2.3(b), Series C Preferred under Section 3.3.3(b)
and Series D Preferred under Section 3.4.3(b), the sale, lease or exchange (for
cash, shares of stock, securities or other consideration) of all or
substantially all the property and assets of the Corporation or the merger or
consolidation of the Corporation into or with any other corporation or the
merger or consolidation of any other corporation into or with the Corporation
(other than a consolidation or merger in which the Corporation is the continuing
entity and which does not result in any change in the Common Stock) or an
exchange or sale of 90% or more of the capital stock of the Corporation to
accomplish an acquisition of the Corporation in a single or related transaction
shall be deemed to be a liquidation for the purposes of this Section 3.6.4.
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(c) After the payment to the holders of the Series F Preferred of
the full amounts provided for in this Section 3.6.4, the holders of Series F
Preferred as such shall have no right or claim to any of the remaining assets of
the Corporation.
(d) In the event the assets of the Corporation available for
distribution to the holders of Series F Preferred upon any dissolution,
liquidation or winding-up of the Corporation, whether voluntary or involuntary,
shall be insufficient to pay in full all amounts to which such holders are
entitled pursuant to Section 3.6.4(a) above, no such distribution shall be made
on account of any Series F Parity Securities unless proportionate amounts are
distributed to the holders of Series F Preferred, ratably, in proportion to the
full amounts for which holders of Series F Preferred and all such Series F
Parity Securities are respectively entitled upon such dissolution, liquidation
or winding-up.
3.6.5. Voting Rights. The holder of each share of Series F Preferred
shall be entitled to vote on all matters and shall be entitled to the number of
votes equal to the largest number of full shares of Common Stock into which such
shares of Series F Preferred could be converted, pursuant to the provisions of
Section 3.6.7 hereof, at the record date for the determination of shareholders
entitled to vote on such matters or, if no such record date is established, at
the date such vote is taken or any written consent of shareholders is solicited.
Except as otherwise expressly provided herein or the Shareholders' Agreement or
as required by law, the holders of shares of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Series
F Preferred and Common Stock shall vote together as a single class on all
matters and not as separate classes.
3.6.6. Redemption.
(a) The Corporation may not require the redemption of any shares
of Series F Preferred. The holder or holders of at least 60% of the outstanding
shares of Series F Preferred may, at their option, at any time, or from time to
time, from and after February 20, 2003, upon notice given to the Corporation by
the holder or holders of at least 60% of the outstanding shares of Series F
Preferred (a "Series F Redemption Notice") require the Corporation to redeem,
out of funds legally available therefor, any or all outstanding shares of Series
F Preferred (including shares not held by such holder or holders). The
redemption price per share of Series F Preferred (the "Series F Redemption
Price") payable pursuant to this Section 3.6.6 shall be the Series F Liquidation
Value of such share as of the Series F Redemption Date (hereinafter defined).
For the purpose of determining the "per share amount" in the definition of
Series F Liquidation Value, the value of each share of Common Stock shall equal
the Fair Market Value. Unless waived by the Corporation, a Series F Redemption
Notice is irrevocable with respect to the holders giving such notice.
(b) Promptly upon the determination of the Series F Redemption
Price, the Corporation shall (i) give notice of the Series F Redemption Price to
the holders requesting redemption and to holders of Series F Preferred required
to accept redemption pursuant to Section 3.6.6(a), if any, stating the
redemption date (the "Series F Redemption Date"), which Series F Redemption Date
shall be no less than twenty (20) days and no more than forty (40) days
following the date of the Series F Redemption Notice, and (ii) give notice to
each holder of Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred and Series E
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Preferred stating the Series F Redemption Date. On the Series F Redemption Date,
the Corporation shall, unless such shares of Series F Preferred have been
previously surrendered for conversion pursuant to Section 3.6.7, redeem the
shares of Series F Preferred set forth in the Series F Redemption Notice at a
price per share equal to the Series F Redemption Price, upon submission of
certificates of the Series F Preferred in accordance with Section 3.6.6(c)
hereof.
(c) Except as provided in Section 3.6.6(d), on or after the Series F
Redemption Date, a holder of Series F Preferred requesting redemption of or
otherwise required to redeem Series F Preferred set forth in the Series F
Redemption Notice shall surrender to the Corporation the certificate or
certificates representing such shares, in the manner and at the place designated
by the Corporation, and thereupon the Series F Redemption Price of such shares
shall be payable to the order of the person whose name appears on such
certificate or certificates as the owner thereof and each surrendered
certificate shall be canceled. If all the shares of Series F Preferred
evidenced by a certificate are not redeemed, the Corporation shall on the Series
F Redemption Date deliver to the owner a new certificate in the name of the
owner for the unredeemed shares.
(d) From and after the Series F Redemption Date, unless there shall
have been a default in payment of the Series F Redemption Price, all rights of
the holder requesting or required to accept redemption of the shares of Series F
Preferred for which redemption has been requested (except the right to receive
the Series F Redemption Price without interest upon surrender of their
certificate or certificates) shall cease, and such shares shall not thereafter
be transferred on the books of the Corporation or be deemed to be outstanding
for any purpose whatsoever. Subject to paragraphs 3.6.6(e) and 3.6.6(f), if the
funds of the Corporation legally available for redemption of shares of Series F
Preferred on the Series F Redemption Date are insufficient to redeem the total
number of shares of Series F Preferred to be redeemed on such date, (i) those
funds that are legally available shall be used to redeem the maximum possible
number of shares ratably among the holders of such shares, (ii) the shares of
Series F Preferred not redeemed shall remain outstanding and entitled to all the
rights and preferences provided herein, until any subsequent redemption, and
(iii) at any time thereafter when additional funds of the Corporation are
legally available for redemption of shares of Series F Preferred such funds will
immediately be used to redeem the balance of the shares which the Corporation
has become obliged to redeem but which it has not redeemed.
(e) If and to the extent, not later than five (5) days prior to the
Series F Redemption Date, the Corporation receives a Series A Redemption Notice
pursuant to Section 3.1.6(c), a Series B Redemption Notice pursuant to Section
3.2.6(a), a Series C Redemption Notice pursuant to Section 3.3.6(a) a Series D
Redemption Notice pursuant to Section 3.4.6(a), or a Series E Redemption Notice
pursuant to Section 3.5.6(a), the Series A Redemption Date (as defined in
Section 3.1.6(c)), the Series B Redemption Date (as defined in Section
3.2.6(b)), the Series C Redemption Date (as defined in Section 3.3.6(b)), the
Series D Redemption Date (as defined in Section 3.4.6(b)) or the Series E
Redemption Date (as defined in Section 3.5.6(b)), notwithstanding any contrary
provision in Section 3.1.6(c), Section 3.2.6(b), Section 3.3.6(b), Section
3.4.6(b) or Section 3.5.6(b), shall be the same as the Series F Redemption Date
(such date being the "Redemption Date") with respect to the shares of Series A
Preferred designated for redemption in such Series A Redemption Notice, shares
of Series B Preferred designated for redemption in such Series B Redemption
Notice, shares of Series C Preferred designated for
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redemption in such Series C Redemption Notice, shares of Series D Preferred
designated for redemption in such Series D Redemption Notice and shares of
Series E Preferred designated for redemption in such Series E Redemption Notice.
(f) Redemptions of Series A Preferred, Series B Preferred, Series C
Preferred, Series D Preferred, Series E Preferred and Series F Preferred that
occur, or would occur but for the absence of funds legally available therefor,
on the same date shall be made, ratably in proportion to the amounts that the
holders of the Series A Preferred, Series B Preferred, Series C Preferred,
Series D Preferred, Series E Preferred and Series F Preferred to be redeemed on
such Redemption Date are entitled to receive in respect of such redemption.
3.6.7. Conversion.
(a) Upon the earlier of (i) the consummation of a Qualified IPO or
(ii) for each of at least 20 consecutive trading days after an initial public
offering of the Common Stock the aggregate market capitalization of the Free
Common Stock is at least $25 million and the Common Stock has a Current Market
Price of at least $12.00 per share (subject to adjustment for stock splits and
combinations, recapitalizations and stock dividends of the Common Stock except
for the stock splits described in Article IX and Article X hereof), each share
of Series F Preferred shall automatically be converted into a number of shares
of Common Stock at the then effective Series F Conversion Ratio. In addition,
(x) at the option of the holder of any Series F Preferred, such holder shall
have the right, at any time and from time to time prior to or after the
consummation of an initial public offering of the Common Stock, by written
notice to the Corporation, to convert any and all shares of Series F Preferred
owned by such holder at such time into a number of shares of Common Stock, at
the then effective Series F Conversion Ratio, and (y) upon the election of
holders of at least 51% of the then outstanding Series F Preferred either at a
duly called shareholders meeting or by written consent, all of the outstanding
Series F Preferred shall automatically convert into Common Stock at the then
applicable conversion ratio for such stock.
(b) The Corporation shall at all times reserve and keep available for
issuance upon the conversion of the Series F Preferred, free from any preemptive
rights, such number of its authorized but unissued shares of Common Stock as
will from time to time be necessary to permit the conversion of all outstanding
shares of Series F Preferred (including those issuable upon the occurrence of a
Series F IPO Adjustment) into shares of Common Stock, and shall take all action
required to increase the authorized number of shares of Common Stock if
necessary to permit the conversion of all such shares of Series F Preferred.
(c) Except for the stock splits described in Article IX and Article X
hereof the Series F Conversion Ratio shall be subject to adjustment from time to
time as follows:
(i) In case the Corporation shall at any time or from time to
time after the Series F Issue Date (A) pay a dividend, or make a distribution,
on the outstanding shares of Common Stock in shares of Common Stock, (B)
subdivide the outstanding shares of Common Stock, (C) combine the outstanding
shares of Common Stock into a smaller number of shares or (D) issue by
reclassification of the shares of Common Stock any shares of capital stock of
the Corporation, then, and in each such case, the Series F Conversion Ratio in
effect immediately prior to such event or the record date therefor, whichever is
earlier, shall be adjusted so that the holder of any shares of Series F
Preferred thereafter surrendered for conversion shall
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be entitled to receive the number of shares of Common Stock or other securities
of the Corporation that such holder would have owned or have been entitled to
receive after the happening of any of the events described above, had such
shares of Series F Preferred been surrendered for conversion immediately prior
to the happening of such event or the record date therefor, whichever is
earlier. An adjustment made pursuant to this clause (i) shall become effective
(x) in the case of any such dividend or distribution, immediately after the
close of business on the record date for the determination of holders of shares
of Common Stock entitled to receive such dividend or distribution, or (y) in the
case of such subdivision, reclassification or combination, at the close of
business on the day upon which such corporate action becomes effective. No
adjustment shall be made pursuant to this clause (i) in connection with any
transaction to which Section 3.6.7(g) applies .
(ii) Except with respect to Excluded Securities, if the Corporation
shall, while there are any shares of Series F Preferred outstanding, issue or
sell shares of its Common Stock or Common Stock Equivalents without
consideration or at a Purchase Price (as defined in Section 3.6) less than the
applicable Series F Conversion Price in effect immediately prior to such
issuance or sale, then in each such case such applicable Series F Conversion
Price, except as hereinafter provided, shall be lowered so as to be equal to an
amount determined by multiplying such applicable Series F Conversion Price by a
fraction:
(1) the numerator of which shall be (a) the number of shares
of Common Stock outstanding immediately prior to the issuance of such additional
shares of Common Stock or Common Stock Equivalents (calculated on a fully-
diluted basis assuming the conversion of all then presently exercisable options,
warrants, purchase rights or convertible securities whose exercise or conversion
price is less than the applicable Series F Conversion Price then in effect),
plus (b) the number of shares of Common Stock or Common Stock Equivalents which
the aggregate consideration, if any, received by the Corporation for the total
number of such additional shares of Common Stock or Common Stock Equivalents so
issued would purchase at the applicable Series F Conversion Price in effect
immediately prior to such issuance, and
(2) the denominator of which shall be (a) the number of
shares of Common Stock outstanding immediately prior to the issuance of such
additional shares of Common Stock or Common Stock Equivalents (calculated on a
fully-diluted basis assuming the exercise or conversion of all then presently
exercisable options, warrants, purchase rights or convertible securities whose
exercise or conversion price is less than the applicable Conversion Price then
in effect), plus (b) the number of such additional shares of Common Stock or
Common Stock Equivalents so issued.
The provisions of the foregoing paragraph as they may apply to
the Series F Preferred may be waived in any instance (without the necessity of
convening any meeting of stockholders of the Corporation) upon the written
agreement of holders of at least 60% of the then outstanding shares of Series F
Preferred (voting as a separate class).
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(iii) (A) For the purposes of Section 3.6.7(c)(ii), the issuance
of any Common Stock Equivalent shall be deemed an issuance of Common Stock with
respect to adjustments in the applicable Series F Conversion Price if the
Purchase Price (as hereinafter determined) which may be received by the
Corporation for such Common Stock shall be less than the applicable Series F
Conversion Price in effect at the time of such issuance. Any obligation,
agreement or undertaking to issue Common Stock Equivalents at any time in the
future shall be deemed to be an issuance at the time such obligation, agreement
or undertaking is made or arises. Except as provided in subparagraph (B) below,
no adjustment of the applicable Series F Conversion Price shall be made under
3.6.7(c)(ii) upon the issuance of any shares of Common Stock which are issued
pursuant to the exercise, conversion or exchange of any Common Stock Equivalents
if any adjustment shall previously have been made upon the issuance of any such
Common Stock Equivalents as above provided.
(B) Should the Purchase Price of any such Common Stock Equivalents
be decreased from time to time, then, upon the effectiveness of each such
change, the applicable Series F Conversion Price will be that which would have
been obtained (x) had the adjustments made upon the issuance of such Common
Stock Equivalents been made upon the basis of the actual Purchase Price of such
securities, and (y) had the adjustments made to the applicable Series F
Conversion Price since the date of issuance of such Common Stock Equivalents
been made to such applicable Series F Conversion Price as adjusted pursuant to
clause (A) immediately above. Any adjustment of the applicable Series F
Conversion Price with respect to 3.6.7(c)(ii) which relates to any Common Stock
Equivalent shall be disregarded if, as, and when such Common Stock Equivalent
expires or is canceled without being exercised, or is repurchased by the
Corporation at a price per share at or less than the original purchase price, so
that the applicable Series F Conversion Price effective immediately upon such
cancellation or expiration shall be equal to the applicable Conversion Price
that would have been in effect had the expired or canceled Common Stock
Equivalent not been issued.
(C) The Purchase Price which may be received by the Corporation
shall be determined in each instance as of the date of issuance of Common Stock
Equivalents without giving effect to any possible future upward price
adjustments or rate adjustments which may be applicable with respect to such
Common Stock Equivalents.
(iv) For purposes of this Section 3.6.7(c), the aggregate consideration
receivable by the Corporation in connection with the issuance of shares of
Common Stock and/or Common Stock Equivalents shall be deemed to be equal to the
sum of the aggregate offering price (before deduction of underwriting discounts
or commissions and expenses payable to third parties, if any) of all such Common
Stock and/or Common Stock Equivalents plus the minimum aggregate amount, if any,
payable upon conversion, exchange or exercise of any such Common Stock
Equivalents. If the consideration received by the Corporation in connection with
the sale or issuance of shares of Common Stock (or Common Stock Equivalents)
consists, in whole or in part, of property other than cash or its equivalent,
the value of such property shall be the Fair Market Value.
(v) In addition to the other adjustments to the Series F Conversion
Price contemplated by this Section 3.6.7, the Series F Conversion Price shall be
adjusted from
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time to time as follows (collectively, the "Series F Additional Adjustments" and
each a "Series F Additional Adjustment"):
(A) If the Corporation closes an initial public offering of
shares of Common Stock pursuant to an effective registration statement under the
Securities Act of 1933, as amended, covering the offer and sale of Common Stock
for the account of the Corporation with an initial public offering price to the
public of less than two times the Series F Conversion Price in effect
immediately prior to such closing, the Series F Conversion Price in effect
immediately prior to such closing (after making all other adjustments required
to be made pursuant to this Section 3.6.7 prior to such closing) shall be
reduced to an amount equal to fifty percent (50%) of such initial public
offering price to the public, which reduction shall be deemed effective as of
the closing of such public offering; and
(B) If a Qualified IPO is not consummated before July 31, 2000,
the Series F Conversion Price shall be reduced to an amount equal to seventy-
five percent (75%) of the Series F Conversion Price in effect as of the close of
business on July 30, 2000 (after making all other adjustments required to be
made pursuant to this Section 3.6.7 prior through such date), which reduction
shall be deemed effective as of immediately after the close of business on July
30, 2000.
(d) The issuance of certificates for shares of Common Stock upon
conversion of the Series F Preferred shall be made without charge to the holders
thereof for any issuance tax in respect thereof, provided that the Corporation
shall not be required to pay any tax which may be payable in respect of any
transfer involved in the issuance and delivery of any certificate in a name
other than that of the holder of the Series F Preferred which is being
converted.
(e) The Corporation will at no time close its transfer books against
the transfer of any Series F Preferred, or of any shares of Common Stock issued
or issuable upon the conversion of any shares of Series F Preferred, in any
manner which interferes with the timely conversion of such Series F Preferred,
except as may otherwise be required to comply with applicable securities laws.
(f) If any event occurs as to which, in the opinion of the
Corporation's Board of Directors, the provisions of this Section 3.6.7 are not
strictly applicable or if strictly applicable would not fairly protect the
rights of the holders of the Series F Preferred in accordance with the essential
intent and principles of such provisions, the Corporation's Board of Directors
shall make an adjustment in the application of such provisions, in accordance
with such essential intent and principles, so as to protect such rights of the
holders of the Series F Preferred.
(g) If the Corporation shall be a party to any Transaction (but
excluding (i) any Transaction for which provision for adjustment is otherwise
made in this Section 3.6.7 and (ii) any Transaction that is deemed to be a
liquidation for the purposes of Section 3.6.4), in each case, as a result of
which shares of Common Stock are converted into the right to receive stock,
securities or other property (including cash or any combination thereof), each
share of Series F Preferred shall thereafter be convertible into the number of
shares of stock
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or other securities or property to which a holder of the number of shares of
Common Stock of the Corporation deliverable upon conversion of such Series F
Preferred would have been entitled upon such Transaction; and, in any such case,
appropriate adjustment (as determined by the Corporation's Board of Directors)
shall be made in the application of the provisions set forth in this Section
3.6.7 with respect to the rights and interest thereafter of the holders of the
Series F Preferred, to the end that the provisions set forth in this Section
3.6.7 shall thereafter be applicable, as nearly as reasonably may be, in
relation to any shares of stock or other property thereafter deliverable upon
the conversion of the Series F Preferred. Except as provided in the
Shareholders' Agreement, the Corporation shall not effect any Transaction (other
than a consolidation or merger in which the Corporation is the continuing
corporation) unless prior to or simultaneously with the consummation thereof the
Corporation, or the successor corporation or purchaser, as the case may be,
shall provide in its charter document that each share of Series F Preferred
shall be converted into such shares of stock, securities or property as, in
accordance with the foregoing provisions, each such holder is entitled to
receive. The provisions of this Section 3.6.7(g) shall similarly apply to
successive Transactions.
(h) The Corporation will not, by amendment of its Certificate of
Incorporation or through any reorganization, recapitalization, consolidation,
merger, dissolution, issue or sale of securities or any other voluntary action,
except as has been approved by the holders of at least 50.1% of the then
outstanding Series F Preferred voting as a class on an as-converted basis either
at a duly called shareholders meeting or by written consent, avoid or seek to
avoid the observance or performance of any of the terms to be observed or
performed hereunder by the Corporation, but will at all times in good faith
assist in the carrying out of all the provisions of this Section 3.6.7 and in
the taking of all such action as may be necessary or appropriate in order to
protect the conversion rights of the holders of the Series F Preferred against
impairment.
(i) All calculations under this Section 3.6.7 shall be made to the
nearest one hundredth (1/100) of a cent or the nearest one tenth (1/10) of a
share, as the case may be. Upon conversion of the Series F Preferred pursuant
to this Section 3.6.7, the Corporation may pay cash based on the Series F
Conversion Price in lieu of issuing fractional shares.
3.6.8. Notice of Certain Events. In case, at any time while any
shares of Series F Preferred are outstanding:
(a) the Corporation shall declare a dividend (or any other
distribution) on its Common Stock;
(b) the Corporation shall authorize the issuance to the holders of
its Common Stock as a class, of Common Stock Equivalents, or rights or warrants
to subscribe for or purchase shares of its Common Stock or of any other
subscription rights or warrants;
(c) the Corporation shall authorize any reorganization,
reclassification or recapitalization of its Common Stock;
(d) the Corporation shall authorize the consolidation or merger of
the Corporation into or with any other person, the sale or transfer of a
substantial portion of its
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capital stock, business or assets to another person, or any other similar
business combination or transaction; or
(e) the Corporation shall authorize the voluntary or involuntary
dissolution, liquidation or winding up of the Corporation; then the Corporation
shall promptly deliver to the transfer agent of the Series F Preferred and to
each of the holders of shares of Series F Preferred at their last addresses as
shown on the books of the Corporation, at least 15 days before the date
hereinafter specified (or the earlier of the dates hereinafter specified, in the
event that more than one date is specified), a notice describing such event and
stating (A) the date on which a record is to be taken for the purpose of such
dividend, distribution, rights or warrants, or, if a record is not to be taken,
the date as of which the holders of Common Stock of record to be entitled to
such dividend, distribution, rights or warrants are to be determined, or (B) the
date on which any such reclassification, reorganization, recapitalization,
consolidation, merger, sale, transfer, dissolution, liquidation or winding up is
expected to become effective, and the date as of which it is expected that
holders of Common Stock of record shall be entitled to exchange their Common
Stock for securities or other property (including cash), if any, deliverable
upon such reclassification, consolidation, merger, sale, transfer, dissolution,
liquidation or winding up. Any notice required to be given hereunder to the
holders of shares of Series F Preferred shall be deemed given if deposited in
the United States mail, postage prepaid, and addressed to each holder of record
at his address appearing on the books of the Corporation, and such notice may be
waived with respect to all of the outstanding Series F Preferred by the holders
of a majority of the outstanding Series F Preferred.
3.6.9. Certain Remedies. Any registered holder of Series F
Preferred may proceed to protect and enforce its rights and the rights of any
other holders of Series F Preferred with any and all remedies available at law
or in equity.
3.6.10. Protective Provisions. So long as any shares of Series F
Preferred are outstanding, the Corporation shall not without first obtaining the
approval (by vote or written consent, as provided by law) of the holder or
holders of at least 50.1% of the then outstanding shares of Series F Preferred:
(a) alter or change the rights, preference or privileges of the
shares of Series F Preferred or otherwise amend the Certificate of
Incorporation, in either case, whether by merger, consolidation or otherwise, so
as to affect adversely the shares of Series F Preferred (provided, however, that
the approval of the holders of Series F Preferred shall not be required for any
alteration or change of the rights of such holders upon liquidation as set forth
in Section 3.6.4 or redemption as set forth in Section 3.6.6 (including changes
to the definition of Series F Liquidation Value) so long as similar changes are
made to the terms of the Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred);
(b) increase the authorized number of shares of Series F Preferred
except to pay, or reserve for payment, upon a Series F PIK Election; or
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(c) except as provided by the Brinson Purchase Agreement, the
Shareholders' Agreement or upon a Series F PIK Election, authorize the issuance
of, issue, or sell any additional shares of Series F Preferred.
3.6.11. Reports as to Adjustments. Upon any adjustment of the
Series F Conversion Ratio then in effect and any increase or decrease in the
number of shares of Common Stock issuable upon the operation of the conversion
provisions set forth in Section 3.6.7, then, and in each such case, the
Corporation shall promptly deliver to the registered holders of the Series F
Preferred as shown on the books of the Corporation a copy of a certificate
signed by the President or a Vice President and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary of the Corporation, with
the original being delivered to the transfer agent for the Series F Preferred,
setting forth in reasonable detail the event requiring the adjustment and the
method by which such adjustment was calculated and specifying the Series F
Conversion Ratio then in effect following such adjustment and the increased or
decreased number of shares issuable upon the conversion granted pursuant to
Section 3.6.7, and shall set forth in reasonable detail the method of
calculation of each and a brief statement of the facts requiring such
adjustment.
3.6.12. No Reissuance of Series F Preferred. No share or shares of
Series F Preferred acquired by the Corporation by reason of redemption,
purchase, conversion or otherwise shall be reissued, and without further
corporate or stockholder action all such shares shall be canceled, retired and
eliminated from the shares that the Corporation shall be authorized to issue.
3.6.13. Definitions. In addition to any other terms defined herein,
the following terms shall have the meanings indicated for purposes of this
Section 3.6:
"Purchase Price" has the meaning given that term in Section 3.3.14.
"Series F Conversion Ratio," determined as of any date, shall equal
the number of shares of Common Stock into which one share of Series F Preferred
is convertible pursuant to Section 3.6.7 and shall be determined by dividing (i)
$2.13 (as adjusted for stock splits, reverse splits, stock dividends (other than
a Series F PIK Election) and stock combinations of the Series F Preferred, or
pursuant to Section 3.6.7(g)) and, if applicable, a Series F IPO Adjustment
pursuant to Section 3.6.7.(j)) by (ii) the Series F Conversion Price. The
Series F Conversion Ratio shall equal twenty five one hundredths (.25) as of
January 15, 2000 and shall be subject to adjustment as provided in paragraphs
(c) and (j) of Section 3.6.7.
"Series F Conversion Price" means, as of January 15, 2000, $8.52 and,
thereafter is subject to adjustment for stock splits, reverse splits, stock
dividends (other than a Series F PIK Election) and stock combinations of the
Series F Preferred and as provided in Section 3.6.7. Notwithstanding the
foregoing, the Series F Conversion Price shall not be less than the par value of
one share of Common Stock.
"Series F Issue Date" means the first date on which shares of Series F
Preferred are issued.
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"Series F Liquidation Value" means the greater of (i) $2.13 (as
adjusted for stock splits, reverse splits, stock dividends (other than a Series
F PIK Election) and stock combinations, in each case of the Series F Preferred),
for each share of Series F Preferred plus all accrued but unpaid dividends on
the Series F Preferred or (ii) the per share amount that the holders of the
Series F Preferred would have received upon liquidation if all shares of Series
F Preferred had been converted to Common Stock immediately prior to such
liquidation at the Series F Conversion Price then in effect, plus all accrued
but unpaid dividends on the Series F Preferred.
"Series F Stated Value" means $2.13 per share (as adjusted for stock
splits, reverse splits, stock dividends (other than a Series F PIK Election) and
stock combinations of the Series F Preferred or pursuant to Sections 3.6.3(a)
(other than in respect of a Series F PIK Election) and 3.6.7(g)).
3.7. Supermajority Vote.
3.7.1 In addition to any affirmative vote of a holder of a
class or series of capital stock of the Corporation required by law or this
Certificate of Incorporation, except as set forth in the Shareholders'
Agreement, the merger or consolidation of the Corporation with another
corporation or entity, or the sale by the Corporation of substantially all of
the Corporation's assets used or useful in its businesses, shall require the
affirmative vote of the holders of at least 66-2/3% of the combined voting power
of the Preferred Stock (voting on an as-converted basis) and the Common Stock,
voting together as a single class. Such an affirmative vote shall be required
notwithstanding the fact that no vote may be required, or that a lesser
percentage may be specified, by law or the Corporation's Board of Directors .
3.7.2 The approval by the holders of a majority of the Common
Stock, Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred, Series E Preferred and Series F Preferred, each voting as a separate
Class (as to the Common Stock) or Series (as to the Preferred Stock) is required
prior to any stock split, reverse split or combination of the Series A
Preferred, Series B Preferred, Series C Preferred, Series D Preferred, Series E
Preferred or Series F Preferred, or declaration or payment of any dividend or
distribution thereon payable in the form of such preferred stock (other than
with respect of a Series A PIK Election, Series B PIK Election, Series C PIK
Election, Series D PIK Election, Series E PIK Election or Series F PIK
Election). Any amendment to this Section 3.7.2 requires the approval by the
holders of a majority of the Common Stock, Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Series
F Preferred, each voting as a separate Class (as to the Common Stock) or Series
(as to the Preferred Stock).
3.8. Spider. The distribution of shares of the capital stock of
Spider Technologies, Inc. occurred pursuant to the Distribution Plan
("Distribution Plan") approved by the Corporation's Board of Directors on or
about October 26, 1999, and by the holders of a majority of each of the Common
Stock, Series A Preferred, Series B Preferred, Series C Preferred, Series D
Preferred and Series E Preferred and more than 66-2/3% of the combined voting
power of the Preferred Stock (voting on an as-converted basis) and the Common
Stock, voting together as a single class, as of October 1, 1999. The
Distribution Plan and the actions contemplated thereby shall not constitute a
dividend, distribution, dissolution, winding up,
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liquidation, recapitalization, reclassification, reorganization, sale or
transfer of a substantial portion of the Corporation's capital stock, business
or assets, or any similar business combination or transaction, an issuance or
sale of its capital stock or a Common Stock Equivalent, subscription right, or
warrant, event permitting the exercise of preemptive or similar rights, a
Transaction, a Stock Adjustment, or cause any adjustment in the Series A
Original Purchase Price, Series A Liquidation Value, Series A Conversion Price,
Series A Redemption Price, Series B Stated Value, Series B Liquidation Value,
Series B Redemption Price, Series B Conversion Ratio, Series B Conversion Price,
Series C Stated Value, Series C Liquidation Value, Series C Redemption Price,
Series C Conversion Ratio, Series C Conversion Price, Series D Stated Value,
Series D Liquidation Value, Series D Redemption Price, Series D Conversion
Ratio, Series D Conversion Price, Series E Stated Value, Series E Liquidation
Value, Series E Redemption Price, Series E Conversion Ratio, or Series E
Conversion Price, Series F Stated Value, Series F Liquidation Value, Series F
Redemption Price, Series F Conversion Ratio, or Series F Conversion Price, or
otherwise result in the application of any term hereof or of the Series NB
Warrant, or require any notice to any holder of capital stock of the Corporation
except as given. The provisions of this Amended and Restated Certificate of
Incorporation fully address each matter, adjustment or notice which may
otherwise have been affected by or resulted in the application of any term of
this, or the preceding, Amended and Restated Certificate of Incorporation;
provided that the definition of "Fair Market Value" shall take into account the
fact that Spider Technologies, Inc. is, as of the distribution pursuant to the
Distribution Plan, no longer an asset of the Corporation and hence not a
component of determining Fair Market Value. Further, a holder of the
Corporation's capital stock or Series NB Warrant shall not be entitled (in
respect of such capital stock or Series NB Warrant) to receive capital stock or
other securities of Spider Technologies, Inc. except as provided in the
Distribution Plan.
3.9 Liquidation Preference Notice. The Shareholders' Agreement may
contain provisions whereby holders of the Corporation's capital stock subject
thereto have agreed in certain circumstances to vote their shares to reduce or
increase the amounts receivable by holders of Series A Preferred, Series B
Preferred, Series C Preferred, Series D Preferred, Series E Preferred and Series
F Preferred upon a liquidation or redemption, all as further set forth therein.
This Section is set forth solely as a matter of notice, does not grant any
person any rights, does not alter any provision of the Shareholders' Agreement
(including the consents required for amendment, modification, waiver or
termination thereof), and does not expressly or impliedly create any obligation
to amend this provision to reflect any amendment, modification, waiver or
termination of the Shareholders' Agreement.
3.10. References. All Section references in this Article IV are to
Sections of this Article IV unless otherwise expressly stated.
ARTICLE V
Election of directors need not be by written ballot unless required by
the Corporation's by-laws. In furtherance and not in limitation of the power
conferred upon the Corporation's Board of Directors by law, the Corporation's
Board of Directors shall have the power to make, adopt, alter, amend and repeal
from time to time by-laws of this Corporation, subject to the right of the
stockholders entitled to vote with respect thereto to alter and repeal by-laws
made by the Corporation's Board of Directors.
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Notwithstanding any other provisions of this Certificate, if the
consolidated financial statements of the Corporation for the twelve month period
ending March 31, 2001, do not report a positive number for earnings before taxes
and before amortization of goodwill in respect of companies or operations
acquired by the Corporation or its subsidiaries after January 1, 1998,
(utilizing the same accounting principles, standards and assumptions as in
effect on May 5, 1998 and excluding the effects of (i) performance based
compensation paid to executives of companies or operations acquired by the
Corporation or its subsidiaries in an amount (which may be all or a part of such
compensation) as determined by the audit committee of the Corporation prior to
the time of signing of the letter of intent or the term sheet for the
acquisition, and (ii) such similar or other charges and costs as the
Corporation's Board of Directors, Conning and Beacon may agree in writing are
appropriate in respect of a particular purchase of a business, and (iii)
accounting charges in respect of stock options, including repriced options, if
such option or repricing was approved by the Corporation's Board of Directors,
then from and after the date of such financial statements (regardless of whether
the Corporation subsequently reports a positive such number with respect to any
subsequent fiscal year), action of the Corporation's Board of Directors shall
require twelve affirmative votes, and (A) each Beacon Director (as defined in
the Shareholders' Agreement) shall be entitled to cast three votes, (B) each
Conning Director (as defined in the Shareholders' Agreement) shall be entitled
to cast three votes, (C) each other director shall be entitled to cast one vote,
and (D) the Beacon Directors and Conning Directors will use good faith efforts
to exercise their voting rights together.
ARTICLE VI
1. Indemnification of Directors and Officers. The Corporation shall
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action, suit or proceeding, whether
civil, criminal, administrative or investigative (other than an action by or in
the right of the Corporation) by reason of the fact that he is or was a director
or officer of the Corporation, or is or was serving at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or other enterprise (including, without limitation, pension,
profit sharing and other benefit plans), against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction, or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal action or
proceeding, had reasonable cause to believe that his conduct was unlawful.
2. Derivative Actions. The Corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened, pending or
completed action or suit by or in the right of the Corporation to procure a
judgment in its favor by reason of the fact that he is or was a director or
officer of the Corporation, or is or was serving at the request of the
Corporation as a director or officer of another corporation, partnership, joint
venture, trust or
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other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation, provided that
no indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the Corporation
unless and only to the extent that the Court of Chancery of the State of
Delaware or the court in which such action or suit was brought shall determine
upon application that, despite the adjudication of liability but in view of all
the circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
3. Indemnification in Certain Cases. To the extent that a director,
officer, employee or agent of the Corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
Sections 1 and 2 of this Article VI, or in defense of any claim, issue or matter
therein, he shall be indemnified against expenses (including attorneys' fees)
actually and reasonably incurred by him in connection therewith.
4. Procedure. Any indemnification under Sections 1 and 2 of this Article
VI (unless ordered by a court) shall be made by the Corporation only as
authorized in the specific case upon a determination that indemnification of the
director, officer, employee or agent is proper in the circumstances because he
has met the applicable standard of conduct set forth in such Sections 1 and 2.
Such determination shall be made (a) by a majority vote of the directors who are
not parties to such action, suit or proceeding even though less than a quorum of
the Corporation's Board of Directors, or (b) if there are no such directions,
or, even if such directors so direct, by independent legal counsel in a written
opinion, or (c) by the stockholders.
5. Advances for Expenses. Expenses (including attorneys' fees) incurred
by an officer or director in defending a civil, criminal, administrative or
investigative action, suit or proceeding shall be paid by the Corporation in
advance of the final disposition of such action, suit or proceeding upon receipt
of an undertaking by or on behalf of such director or officer to repay such
amount if it shall be ultimately determined that he is not entitled to be
indemnified by the Corporation as authorized in this Article VI. Such expense
(including attorneys' fees) incurred by other employees and agents may be paid
upon such terms and conditions, if any, as the Corporation's Board of Directors
deems appropriate.
6. Rights Not-Exclusive. The indemnification and advancement of expenses
provided by, or granted pursuant to, the other subsections of this Article VI
shall not be deemed exclusive of any other rights to which those seeking
indemnification or advancement of expenses may be entitled under any by-law,
agreement, vote of stockholders or disinterested directors or otherwise, both as
to action in his official capacity and as to action in another capacity while
holding such office.
7. Insurance. The Corporation shall have power to purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Corporation, or is or was serving at the request of the Corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
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such, whether or not the Corporation would have the power to indemnify him
against such liability under the provisions of this Article VI.
8. Definition of Corporation. For purposes of this Article VI, references
to the "Corporation" shall include, in addition to the resulting corporation,
any constituent corporation (including any constituent of a constituent)
absorbed in a consolidation or merger which, if its separate existence had
continued, would have had power and authority to indemnify its directors,
officers and employees or agents, so that any person who is or was a director,
officer, employee or agent of such constituent corporation, or is or was serving
at the request of such constituent corporation as a director, officer, employee
or agent of another corporation, partnership, joint venture, trust or other
enterprise, shall stand in the same position under this section with respect to
such constituent corporation if its separate existence had continued.
9. Construction. For purposes of this Article VI, references to "other
enterprises" shall include employee benefit plans; references to "fines" shall
include any excise taxes assessed on a person with respect to any employee
benefit plan; and references to "serving at the request of the Corporation"
shall include any service as a director, officer, employee or agent of the
Corporation which imposes duties on, or involves services by, such director,
officer, employee, or agent with respect to an employee benefit plan, its
participants or beneficiaries; and a person who acted in good faith and in a
manner he reasonably believed to be in the interest of the participants and
beneficiaries of an employee benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the Corporation" as referred to in
this Article VI.
10. Survival of Rights. The indemnification and advancement of expenses
provided by, or granted pursuant to, this Article VI shall continue as to a
person who has ceased to be a director, officer, employee or agent and shall
inure to the benefit of the heirs, executors and administrators of such a
person. No subsequent amendment of this Article VI shall diminish the rights
hereunder of any director or officer with respect to any action taken or claim
made prior to such amendment.
ARTICLE VII
No director of the Corporation shall be liable to the Corporation or
any of its stockholders for monetary damages for breach of fiduciary duty as a
director, provided that this provision does not eliminate the liability of a
director (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) under
Section 174 of the GCL or (iv) for any transaction from which the director
derived an improper personal benefit. For purposes of the prior sentence, the
term "damages" shall, to the extent permitted by law, include without
limitation, any judgment, fine, amount paid in settlement, penalty, punitive
damages, excise or other tax assessed with respect to an employee benefit plan,
or expense of any nature (including, without limitation, counsel fees and
disbursements). Each person who serves as a director of the Corporation while
this Article VII is in effect shall be deemed to be doing so in reliance on the
provisions of this Article VII, and neither the amendment or repeal of this
Article VII, nor the adoption of any provision of this Amended and Restated
Certificate of Incorporation inconsistent with this Article VII, shall apply to
or have any effect on the liability or alleged liability of any director of the
Corporation for, arising out of, based upon, or in connection with
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any acts or omissions of such director occurring prior to such amendment,
repeal, or adoption of an inconsistent provision. The provisions of this Article
VII are cumulative and shall be in addition to and independent of any and all
other limitations on or eliminations of the liabilities of directors of the
Corporation, as such, whether such limitations or eliminations arise under or
are created by any law, rule, regulation, by-law, agreement, vote of
stockholders or disinterested directors, or otherwise. If the GCL is hereafter
amended to permit further elimination or limitation of the personal liability of
directors, then the liability of a director of the Corporation shall be
eliminated or limited to the fullest extent permitted by the GCL as so amended.
Any repeal or modification of this Article VII by the stockholders of the
Corporation or otherwise shall not adversely affect any right or protection of a
director of the Corporation existing at the time of such repeal or modification.
For purposes of this Article VII, all references to a director shall also be
deemed to refer to any person or persons, if any, who, pursuant to a provision
of this Amended and Restated Certificate of Incorporation, exercise or perform
any of the powers or duties otherwise conferred or imposed upon the
Corporation's Board of Directors.
ARTICLE VIII
The Corporation hereby elects pursuant to Section 203(b)(3) not to be
governed by Section 203(a) of the GCL.
ARTICLE IX
Stock Split
By action of the Corporation's Board of Directors and stockholders and the
filing of an amendment to the Corporation's Amended and Restated Certificate of
Incorporation each share of the Common Stock issued and outstanding as of
December 29, 1999 (the "December Effective Date") was automatically and without
further action reclassified, converted and changed into 0.286 of a share of
Common Stock, par value $0.0001 per share, provided, that each outstanding share
of Common Stock held of record as of the December Effective Date was divided by
the same divisor as every other share of such Common Stock; provided further
that no fractional shares were issued to any stockholder pursuant to such change
and reclassification. The Corporation issued to each stockholder who would
otherwise have been entitled to a fractional share as a result of such change
and reclassification a number of shares rounded up to the next whole share.
Each certificate for Common Stock outstanding on the December Effective Date
thereupon and thereafter evidenced such new number of shares of Common Stock,
and may be surrendered to the Corporation for cancellation in exchange for new
certificates representing such number of shares.
ARTICLE X
Reverse Stock Split
By action of the Corporation's Board of Directors and stockholders and the
filing of an amendment to the Corporation's Amended and Restated Certificate of
Incorporation, each share of the Common Stock issued and outstanding as of
January 14, 2000 (the "Split Effective Date") was automatically and without
further action reclassified, converted and changed into .874125 of
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a share of Common Stock, par value $0.0001 per share, provided, that each
outstanding share of Common Stock held of record as of the Effective Date was
divided by the same divisor as every other share of such Common Stock; and
provided further that no fractional shares were issued to any stockholder
pursuant to such change and reclassification. The Corporation issued to each
holder of Common Stock who would otherwise have been entitled to a fractional
share of Common Stock as a result of such change and reclassification a number
of shares of Common Stock rounded up to the next whole share. Each certificate
for Common Stock outstanding on the Effective Date thereupon and thereafter
evidenced such new number of shares of Common Stock, and may be surrendered to
the Corporation for cancellation in exchange for new certificates representing
such number of shares.
.
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IN WITNESS WHEREOF, Etinuum, Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed and attested by its duly authorized
officers, this 2nd day of March, 2000.
ETINUUM, INC.
By: /S/ TIMOTHY C. O'CROWLEY
------------------------------
Timothy C. O'Crowley, President
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EXHIBIT 3.2.1
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION
OF
ETINUUM, INC.
ETINUUM, INC, a corporation organized and existing under the laws of the
State of Delaware (the "Corporation"), hereby certifies that:
A. The name of this Corporation is: Etinuum, Inc.
B. The date of filing of the Corporation's original Certificate of
Incorporation with the Secretary of State of Delaware was June 4, 1996, an
Amended and Restated Certificate of Incorporation of the Corporation was filed
with the Secretary of State of the State of Delaware on February 14, 1997, an
Amendment thereto was filed on December 18, 1997, an Amended and Restated
Certificate of Incorporation was filed on December 22, 1997, an Amended and
Restated Certificate of Incorporation was filed on May 7, 1998, an Amendment
thereto was filed on June 23, 1998, an Amended and Restated Certificate of
Incorporation was filed on April 16, 1999, an Amended and Restated Certificate
of Incorporation was filed on November 3, 1999, an Amended and Restated
Certificate of Incorporation was filed November 22, 1999 and an Amendment
thereto was filed on January 14, 2000.
C. This Amended and Restated Certificate of Incorporation has been duly
adopted by written consent pursuant to Sections 228 and 245 of the General
Corporation Law of the State of Delaware. The Corporation certifies that
amendments effected by this Amended and Restated Certificate of Incorporation
have been adopted in accordance with Section 242 of the General Corporation Law
of the State of Delaware.
D. Pursuant to Sections 242 and 245 of the Delaware General Corporation
law, this Amended and Restated Certificate of Incorporation restates, integrates
and amends the provisions of the Corporation's Amended and Restated Certificate
of Incorporation as follows:
FIRST: The name of this Corporation is: Etinuum, Inc.
SECOND: The address of the Corporation's registered office in the State of
Delaware is 15 E. North Street, City of Dover, County of Kent, Delaware 19901.
The name of its registered agent at such address is Incorporating Services, Inc.
THIRD: The purpose of this Corporation is to engage in any lawful act or
activity for which corporations may be organized under the General Corporation
Law of Delaware.
FOURTH: A. This Corporation is authorized to issue two classes of shares
to be designated, respectively, Common Stock and Preferred Stock. The total
number of shares of Common Stock which this corporation is authorized to issue
is 100,000,000 with a par value per share of $0.0001, and the total number of
shares of Preferred Stock which this corporation is authorized to issue is
10,000,000, with a par value per share of $0.001.
B. The Preferred Stock may be issued from time to time in one or more
series pursuant to a resolution or resolutions providing for such issue duly
adopted by the Board of Directors (authority to do so being hereby expressly
vested in the Board). The Board of Directors is further authorized to determine
or alter the rights, preferences, privileges and restrictions granted to or
imposed upon any wholly unissued series of Preferred Stock and, to fix the
number of shares of any such series of Preferred Stock and the designation of
any such series of Preferred Stock. The Board of Directors is authorized, within
the limits and restrictions stated in any resolution or resolutions of the Board
of Directors originally fixing the
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number of shares constituting any series, to increase or decrease (but not below
the number of shares thereof then outstanding) the number of shares of any such
series subsequent to the issue of shares of that series, to determine the
designation of any series, and to fix the number of shares of any series.
C. Each holder of Common Stock, as such, shall be entitled to one vote
for each share of Common Stock held of record by such holder on all matters on
which stockholders generally are entitled to vote; provided, however, that,
except as otherwise required by law, holders of Common Stock, as such, shall not
be entitled to vote on any amendment to this Certificate of Incorporation
(including any certificate of designations relating to any series of Preferred
Stock) that relates solely to the terms of one or more then outstanding series
of Preferred Stock if the holders of such affected series are entitled, either
separately or together with the holders of one more other such series, to vote
thereon pursuant to this Certificate of Incorporation (including any certificate
of designations relating to any series of Preferred Stock) or pursuant to the
General Corporation Law of the State of Delaware.
Except as otherwise required by law, holders of a series of Preferred
Stock, as such, shall be entitled only to such voting rights, if any, as shall
expressly be granted thereto by this Certificate of Incorporation (including any
certificate of designations relating to such series).
Subject to applicable law and the rights, if any, of the holders of any
outstanding series of Preferred Stock or any class or series of stock having a
preference over or the right to participate with the Common Stock with respect
to the payment of dividends, dividends may be declared and paid on the Common
Stock at such times and in such amounts as the Board of Directors in its
discretion shall determine.
Upon the dissolution, liquidation or winding up of the Corporation, subject
to the rights, if any, of the holders of any outstanding series of Preferred
Stock or any class or series of stock having a preference over or the right to
participate with the Common Stock with respect to the distribution of assets of
the Corporation upon such dissolution, liquidation or winding up of the
Corporation, the holders of the Common Stock, as such, shall be entitled to
receive the assets of the Corporation available for distribution to its
stockholders ratably in proportion to the number of shares held by them.
FIFTH: The Corporation is to have perpetual existence.
SIXTH: Elections of directors need not be by written ballot unless a
stockholder demands election by written ballot at the meeting and before voting
begins or unless the Bylaws of the Corporation shall so provide.
SEVENTH: A. The management of the business and the conduct of the affairs
of the Corporation shall be vested in its Board of Directors. The number of
directors which shall constitute the whole Board of Directors shall be
designated in the Bylaws of the Corporation.
B. The Board of Directors shall be divided into three classes designated
as Class I, Class II, and Class III, respectively. Directors shall be assigned
to each class in accordance with a resolution or resolutions adopted by the
Board of Directors. At the first annual meeting of stockholders following the
date hereof, the term of office of the Class I directors shall expire, and Class
I directors shall be elected for a full term of three years. At the second
annual meeting of stockholders following the date hereof, the term of office of
the Class II directors shall expire, and Class II directors shall be elected for
a full term of three years. At the third annual meeting of stockholders
following the date hereof, the term of office of the Class III directors shall
expire, and Class III directors shall be elected for a full term of three years.
At each succeeding annual meeting of stockholders, directors shall be elected
for a full term of three years to succeed the directors of the class whose terms
expire at such annual meeting.
C. Notwithstanding the foregoing provisions of this Article, each
director shall serve until his or her successor is duly elected and qualified or
until his or her death, resignation, or removal. No decrease in the number of
directors constituting the Board of Directors shall shorten the term of any
incumbent director.
2
<PAGE>
D. Any vacancies on the Board of Directors resulting from death,
resignation, disqualification, removal, or other causes shall be filled by
either (i) a plurality of the votes cast at a meeting of the stockholders by the
holders of voting stock of the Corporation entitled to vote generally in the
election of directors (the "Voting Stock") voting together as a single class; or
(ii) by the affirmative vote of a majority of the remaining directors then in
office, even though less than a quorum of the Board of Directors or by a sole
remaining director. Newly created directorships resulting from any increase in
the number of directors elected by all of the stockholders having the right to
vote as a single class shall, unless the Board of Directors determines by
resolution that any such newly created directorship shall be filled by the
stockholders, be filled only by the affirmative vote of the directors then in
office, even though less than a quorum of the Board of Directors, or by the sole
remaining director. Any director elected in accordance with the preceding
sentences shall hold office for the remainder of the full term of the class of
directors in which the new directorship was created or the vacancy occurred and
until such director's successor shall have been elected and qualified.
E. Notwithstanding the foregoing, whenever the holders of any one or more
series of Preferred Stock issued by the Corporation shall have the right, voting
separately as a series or separately as a class with one or more such other
series, to elect directors at an annual or special meting of stockholders, the
election, term of office, removal, filling of vacancies and other features of
such directorships shall be governed by the terms of this Certificate of
Incorporation (including any certificate of designations relating to any series
of Preferred Stock) applicable thereto, and such directors so elected shall not
be divided into classes pursuant to this Article Seventh unless expressly
provided by such terms.
F. The affirmative vote of sixty-six and two-thirds percent (66-2/3%) of
the voting power of the then outstanding shares of Voting Stock, voting together
as a single class, shall be required for the adoption, amendment or repeal of
the following sections of the Corporation's Bylaws by the stockholders of the
Corporation: 2.2 (Annual Meeting) and 2.3 (Special Meeting).
G. No action shall be taken by the holders of the Common Stock except at
an annual or special meeting of the stockholders called in accordance with the
Bylaws.
H. Any director, or the entire Board of Directors, may be removed from
office at any time (i) with or without cause by the affirmative vote of holders
of at least eighty percent (80%) of the voting power of all of the then-
outstanding shares of the Voting Stock, voting together as a single class.
EIGHTH: A. To the fullest extent permitted by the Delaware General
Corporation Law as the same exists or as may hereafter be amended, a director of
the Corporation or any subsidiary of the Corporation shall not be personally
liable to the Corporation or its stockholders and shall otherwise be indemnified
by the Corporation for monetary damages for breach of fiduciary duty as a
director of the Corporation, any predecessor of the Corporation or any
subsidiary of the Corporation.
B. The Corporation shall indemnify (and advance expenses) to the fullest
extent permitted by law any person made or threatened to be made a party to an
action or proceeding, whether criminal, civil, administrative or investigative,
by reason of the fact that he, his testator or intestate is or was a director or
officer of the Corporation, any predecessor of the Corporation or any subsidiary
of the Corporation or serves or served at any other enterprise as a director or
officer at the request of the Corporation, any predecessor to the Corporation or
any subsidiary of the Corporation.
C. Neither any amendment nor repeal of this Article EIGHTH, nor the
adoption of any provision of the Corporation's Certificate of Incorporation
inconsistent with this Article EIGHTH, shall eliminate or reduce the effect of
this Article EIGHTH, in respect of any matter occurring, or any action or
proceeding accruing or arising or that, but for this Article EIGHTH, would
accrue or arise, prior to such amendment, repeal, or adoption of an inconsistent
provision.
NINTH: Notwithstanding any other provisions of this Certificate of
Incorporation or any provision of law which might otherwise permit a lesser vote
or no vote, but in addition to any affirmative vote of the holders of any
particular class or series of the Voting Stock required by law, this Certificate
of
3
<PAGE>
Incorporation or any rights of designation of Preferred Stock conferred on
the Board of Directors pursuant to Article FOURTH, the affirmative vote of the
holders of at least sixty-six and two-thirds percent (66-2/3%) of the voting
power of all of the then-outstanding shares of the Voting Stock, voting together
as a single class, shall be required to alter, amend or repeal Paragraphs A
through G of Article SEVENTH or this Article NINTH if such repeal or alteration
is recommended by a majority of the directors, or by the affirmative vote of the
holders of at least eighty percent (80%) of the voting power of all of the then-
outstanding shares of the Voting Stock, voting together as a single class, if
not so recommended by a majority of the directors or to alter, amend or repeal
Paragraph H of Article SEVENTH.
TENTH: The Corporation reserves the right to amend, alter, change or repeal
any provision contained in this Certificate of Incorporation, in the manner now
or hereafter prescribed by statute, except as provided in Article NINTH of this
Certificate, and all rights conferred upon the stockholders herein are granted
subject to this right.
ELEVENTH: In furtherance and not in limitation of the powers conferred by
statute, the Board of Directors is expressly authorized to make, alter, amend or
repeal the Bylaws of the Corporation.
TWELFTH: Meetings of stockholders may be held within or without the State of
Delaware, as the Bylaws may provide. The books of the Corporation may be kept
(subject to any provision contained in the statutes) outside of the State of
Delaware at such place or places as may be designated from time to time by the
Board of Directors or in the Bylaws of the Corporation.
THIRTEENTH: Advance written notice of new business and stockholder
nominations for the election of directors shall be given in the manner and to
the extent provided in the Bylaws of the Corporation.
FOURTEENTH: Stockholders shall not be entitled to cumulative voting rights
for the election of directors.
FIFTEENTH: The Corporation hereby elects to be governed by Section 203(a)
of the General Corporation Law of the State of Delaware.
4
<PAGE>
IN WITNESS WHEREOF, Etinuum, Inc. has caused this Amended and Restated
Certificate of Incorporation to be signed by Timothy O'Crowley, its President,
and attested by __________________ its Secretary, this ____ day of __________,
_____.
ETINUUM, INC..
By: _______________________________________
Timothy C. O'Crowley, President
Attested:
_______________________________________
________________, Secretary
5
<PAGE>
[CHRISMAN BYNUM & JOHNSON LETTERHEAD]
EXHIBIT 5.1.1
March 3, 2000
Etinuum, Inc.
5619 DTC Parkway, 12th Floor
Englewood, CO 80111
Re: Registration Statement on Form S-1
Gentlemen:
We have acted as counsel to Etinuum, Inc. (the "Company"), formerly Intek
Information, Inc., in connection with the preparation and filing of a
Registration Statement on Form S-1 (the "Registration Statement") registering
under the Securities Act of 1933, as amended, an aggregate of 5,175,000 shares
(the "Shares") of common stock of the Company ("Common Stock"). As such, we
have examined the Registration Statement, the Company's Amended and Restated
Certificate of Incorporation and Bylaws (as amended), and minutes of meetings of
the Company's Board of Directors.
Based upon the foregoing, and assuming that the Shares will be sold in
accordance with the Registration Statement at a time when effective, we are of
the opinion that, the shares of Common Stock will be validly issued, fully paid
and non-assessable securities of the Company.
We consent to the use of this opinion as an exhibit to the Registration
Statement and to the references to our firm in the Prospectus which is made a
part of the Registration Statement.
Sincerely,
/s/ Chrisman, Bynum & Johnson, P.C.
CHRISMAN, BYNUM & JOHNSON, P.C.
<PAGE>
Exhibit 10.1.1
AMENDMENT TO
INTEK INFORMATION, INC.
1997 AMENDED AND RESTATED
STOCK OPTION PLAN
Section 6.1 of the Intek Information, Inc. 1997 Amended and Restated Stock
Option Plan is hereby replaced in its entirety with the following:
6.1. Maximum Number. The maximum aggregate number of shares of Common Stock
--------------
that may be made subject to Stock Options shall be 7,455,552 authorized
shares. To the extent the aggregate Fair Market Value (determined as of the
time the ISO is granted) of the stock with respect to which ISOs are
exercisable for the first time by an individual in a particular calendar
year exceeds $100,000, such excess Stock Options shall be treated as NSOs.
If any shares of Common Stock subject to Stock Options are not purchased or
otherwise paid for before such Stock Options expire, such shares may again
be made subject to Stock Options.
This Amendment was approved by the Board of Directors and by the requisite
percentage of stockholders of Intek Information, Inc. on February 24, 2000. The
effective date of this Amendment is February 24, 2000.
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
EXHIBIT 10.28.1
AMENDMENT TO SERVICES AGREEMENT
This Amendment (the "Amendment"), dated as of April 1, 1999 (the "Effective
Date") amends the Services Agreement between Direct Sales Division, a division
of Sony Electronics Inc. ("Sony") and Intek Information Inc. ("Vendor") dated as
of May 1, 1997 and amended March 31, 1999 (the "Agreement").
1. AMENDMENT
---------
The Agreement is hereby further modified and amended as follows:
a. The term of the Agreement shall be extended for an additional two
years from the Effective Date of this Amendment.
b. Exhibit A of the Agreement and related referenced Attachments shall be
replaced in its entirety with the new Exhibit A and related referenced
Attachments attached hereto, effective as of April 1, 1999.
2. GENERAL
-------
a. The terms of this Amendment shall supersede any inconsistent or different
terms contained in the Agreement.
b. Defined terms used and not defined herein shall have the meanings assigned
to them in the Agreement.
c. This Amendment shall not be interpreted nor construed as waiving any
rights, obligations, remedies or claims the parties may otherwise have
under the Agreement.
d. Except as expressly modified herein, all terms and conditions of the
Agreement shall remain in full force and effect.
IN WITNESS WHEREOF, the parties, through their respective authorized
representatives, have executed this Amendment as of the Effective Date.
DIRECT SALES DIVISION, A DIVISION OF
SONY ELECTRONICS INC. INTEK INFORMATION INC.
By: /s/ H. Komiyama By: /s/ Frank Richards
---------------- ----------------------
Name: H. Komiyama Name: Frank D. Richards
Title: President, PNSC Title: Executive Vice President/
a division of Sony Electronics, Inc. Chief Operating Officer
1
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
SERVICES AGREEMENT
EXHIBIT A
---------
SERVICES AND FEES
-----------------
Effective Date: July 1, 1999
This Exhibit A is attached to and made a part of the Services Agreement between
the Direct Sales Division of Sony Electronics Inc. ("Sony") and Intek
Information Inc. ("Vendor").
I. SCOPE OF SERVICES.
Vendor shall perform inbound and outbound telesales and related customer support
for Sony in connection with certain direct sales programs, which will offer
computer and computer related products and services to end-user customers (the
"Program"). Sony shall in its sole discretion determine the products and
services to be included in the Program and the nature of promotions to be
utilized in the Program. Vendor support shall be transparent to Sony customers
so that, to the extent permitted by applicable law, such customers will not know
whether they are speaking to Sony or Vendor acting on behalf of Sony. In
supporting the Program Vendor will provide the following services: order entry
systems, inventory systems, return merchandise authorization systems, EDI
transmission into Sony's STN system, processing files, online product
information systems, credit card authorization services/technology, welcome kit
with invoice to customer, database feeds to Sony or Sony designated third
parties, and sales reporting. Vendor will either address or route non-Program
related calls as Sony directs. Vendor shall implement such third party credit
verification and granting procedures as Sony may direct. Vendor shall follow the
EDI protocol designated by Sony, including but not limited to the items listed
in Attachment 1 hereto. Vendor shall use reasonable commercial effort to
implement an automated IVR that provides order tracking and shipping information
no later than December 1, 1999 (any cost to Sony for such IVR implementation
shall be limited to costs related to support of Sony-specific legacy systems
such as STN).
a. Recruiting, Hiring and Training of Personnel. Vendor will at all times
--------------------------------------------
ensure that sufficient trained personnel are available to meet the performance
standards in (d) below. Vendor will recruit, interview and hire dedicated sales
and customer service representatives (ISRs) to provide both inbound and outbound
telesales and customer service. Vendor will provide both initial and ongoing
training of such personnel. Sony will be billed [______] per hour for continuing
classroom product and development training (as opposed to initial training) that
exceeds 7.5% of ISR billable hours per fiscal quarter. Sony shall approve the
general characteristics of all ISR groups hired as well as the size of the Home
Office/ Business ISR groups.
b. Reporting. Vendor will provide reports in such format and frequency as
---------
reasonably requested by Sony in any standard electronic or non-electronic
format. Such reports may include daily real time reporting online as well as
weekly and monthly quantitative reporting including total calls by marketing
program, total sales by product by marketing program, cost per call
2
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
analysis, average call length, calls and sales analysis by hour, day, week and
month, and aspect reports by ISR. Notwithstanding any agreed reporting schedule,
Vendor will immediately notify Sony of any critical developments.
c. Database. Vendor will maintain a complete database of all Sony customers
--------
related to the Services hereunder containing such information as Sony shall
specify. Such database system shall be flexible enough to support multiple
marketing campaigns and categorize different information by campaign. Vendor
shall provide data from such database to Sony or third parties as designated by
Sony in accordance with a fee schedule to be mutually agreed by the parties no
later than November 1, 1999 and attached hereto as Attachment 3. Sony shall
approve all Vendor internal procedures regarding database management and
maintenance in writing, and Vendor shall follow such procedures without
exception. Upon termination or expiration of this Agreement Vendor shall deliver
such database in its entirety to Sony in standard electronic format and retain
no copies.
d. Performance Standards. Vendor will meet Sony's minimum performance
---------------------
standards as specified below in conducting telesales services:
i. On a monthly basis, monitor each ISR a minimum of three times
per forty (40) hours.
ii. On a monthly basis, maintain a ISR to supervisor ratio of 12:1.
iii. Provide a dedicated manager for the Program with no other
responsibilities.
iv. Provide a minimum hourly pay rate of [__________ (____)] per ISR
employed in the Northern California area beginning no later than
the ninety-first day of employment by Vendor.
v. On a monthly basis, answer eighty percent of incoming calls
within 30 seconds during both peak and non-peak times (three
minutes for Customer Service calls). "Customer Service" call
shall be defined as all outbound customer service calls and all
inbound calls that select the post sales customer service prompt
within the Sony IVR and are actually answered by Vendor customer
service representatives.
vi. On a monthly basis, maintain a call abandonment rate of less
than three percent (3%) during both peak and non-peak times
(twenty-five percent (25%) for Customer Service calls unless the
total percentage of Customer Service calls is below twenty
percent (20%) of the total calls answered, in which case the
abandonment percentage maximum for Customer Service calls shall
be reduced to ten percent (10%)).
vii. On a monthly basis, maintain a call blockage (busy) rate of less
than two percent (2%) during both peak and non-peak times
(twenty-five percent (25%) for Customer Service calls unless the
total percentage of Customer Service calls is below twenty
percent (20%) of the total calls answered, in which case the
abandonment percentage maximum for Customer Service calls shall
be reduced to ten percent (10%)).
viii. On a monthly basis, average hold time once a customer is within
the voice response unit must average less than 30 seconds (three
minutes for Customer Service calls unless customer service calls
exceed 20% of total calls.
3
<PAGE>
ix. ISRs performing below quality standards must be coached and
counseled by Vendor in accordance with Vendor's corrective
action procedures and brought up to baseline quality standards
within 30 days.
x. With respect to Home Office/Business staffing, on a monthly
basis, Vendor shall not perform more than one hour daily of
training, focus groups or other meetings or breaks per 8 hour
day per ISR. ISRs shall be either engaged in a customer phone
call, engaged in wrap-up of a previous customer phone call (90
second average expectation of required time) or fully available
for customer phone calls 87% of their total work day.
xi. Automated support shall be provided 24 hours per day, 7 days per
week, 365 days per year.
xii. Live ISR's shall be available Monday-Friday 8 AM to 11 PM CST;
Saturday and Sunday 8 AM to 7 PM CST; 365 days a year. Changes
to such hours shall be mutually agreed by the parties in
writing. Customer service reps shall be available Monday -
Friday 8 AM to 5 PM PST. Home office reps shall be available
Monday - Friday 6 AM to 6 PM PST.
xiii. Vendor shall follow the EDI profile and procedures set forth in
Attachment 1.
xiv. Vendor shall utilize the staffing model generated by the Prime
Time software as used by Vendor on January 1, 1998, or such
other software or upgrade to Prime Time mutually agreed upon in
writing by the parties.
Vendor shall provide equipment and connections to allow Sony to perform remote,
undetected monitoring of ISR calls (Vendor shall ensure that all legally
required disclosure of such monitoring shall be made) at all times. Vendor shall
participate in such monitoring at Sony's request with 24 hours notice. Vendor
shall allow Sony nondisruptive on-site monitoring with 24 hours notice.
Vendor shall supply Sony with drafts of all sales and other scripts for Sony's
approval, which may be withheld in Sony's sole discretion.
e. Fee for Teleservicing Services.
------------------------------
i. Percentage of Revenues for all Sales other than "Home Office/Business"
Sales. For the period beginning July 1, 1999 through March 31, 2000,
Vendor shall be compensated for all of its services other than "Home
Office/Business Sales" on a percentage of revenue basis as set forth
in the chart below. For purposes of this Agreement, "Sony Revenues"
shall mean actual (April 1 to March 31) telesales revenue received by
Sony from customers ordering via Vendor, less taxes, refunds, fraud
charge writeoffs and shipping charges (if any). Taxes, refunds, and
shipping charges will be capped at [______] of Gross Revenue. "Sony
Revenue" shall never be less than [____] of telesales revenue received
by Sony from customers ordering via Vendor.
4
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
Sony Revenues Percent due Vendor
------------- ------------------
$ [__________] [____]
[_________] [____]
[__________] [____]
[______________] [____]
[______________] [____]
[______________] [____]
[______________] [____]
Upon attainment of $[________] in revenues, Vendor shall be paid a one time
bonus of [__]% of $[______________ ($____________)]. Upon attainment of the rate
of [____]% (greater than $[__________] but less than $[____________)] , the
reductions in percentage due Vendor based on Sony revenues are for incremental
revenue only.
ii. Home Office/Business Sales Compensation. For the period beginning
July 1, 1999 through March 31, 2000, Vendor shall be compensated for
all revenues related to Home Office / Business Sales at a rate of [$ ]
per hour based on ISR billable hours as determined by mutually agreed
scheduling software parameters. For purposes of this Agreement, "Home
Office / Business" sales shall be any sales developed or secured
through the Sony Financial Services Program plus any credit card
transactions discounted by Sony as part of its Sony Business Direct
program(s). Sony represents in good faith that the Sony Business
Direct program shall be directed toward business (including home and
small business) market segments. All Home Office / Business ISRs shall
be compensated an average of $[_____] per hour (base plus incentive).
iii. Sony shall pay Vendor a $[________] retainer on a monthly basis by the
last day of each month, subject to quarterly reconciliation to be
completed by the tenth (10/th/) business day after the end of a
quarter (June 30, September 30, December 31 and March 31.) At the time
of such reconciliation, any amount due from one party to the other
shall be paid within thirty (30) days.
iv. The fee for the period beginning April 1, 2000 and ending March 31,
2001 will be mutually agreed by the parties and memorialized in a
written amendment to this agreement prior to February 28, 2000; in the
event the parties do not agree after good faith negotiation (including
in person meetings with responsible management) on such fee this
Agreement shall expire as of March 31, 2000 and Sony shall pay Vendor
a one-time fee of $[__________] in lieu of any other termination
obligation (including any obligation to provide minimum call volume).
v. Adjustments. The fee payable to Vendor shall be subject to adjustment
as set forth in this Section (e) (v).
5
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
(A) If over twenty percent (20%) of total inbound and outbound calls to Vendor
constitute "Customer Service" calls as defined in Section I(d)(v), through no
fault of Vendor, such number of calls that are incremental over the twenty
percent (20%) limit shall be billed to Sony at $[_____] per hour or such other
amount as the parties may mutually agree.
(B) Sony shall provide Vendor with rolling three month advance inbound call
forecasts by the fifteenth (15/th/) of each month for the next three full month
period. If actual realized call volume for the first month of such three month
forecast period is less than eighty seven point twenty five percent (87.25%) of
such three month forecast's prediction, the incremental difference between
actual call volume and the eighty seven point twenty five percent (87.25%)
requirement shall be billed to Sony at the rate of $[_____] per hour. Vendor
will not be held to performance standards I (d) (v--viii) for any month when
actual volume variance is + 12.75% of the three month forecast.
Example: May forecast 1 000 calls
May actual 700 calls
Percent to forecast 70%
Percent to forecast goal 87.5%
Percent under goal 17.5%
Staffing hours for forecast 100 hours
Percent hours at hourly rate 17.5 hours
Hourly bill rate $ [__]
Incremental billing amount $[______]
(C) Sony shall provide Vendor with a confidential quarterly forecast of
expected sales of Sony desktop and notebook PC CPU units through Vendor. On a
product build cycle basis, if Sony does not maintain at least an average 87.5
percent (87.5%) order fill rate (orders other than pre-orders shipped within a
sixty (60) day period) by product build basis forecast of orders on PC notebook
and desktop computer CPU units, Vendor shall bill Sony such incremental amount,
if any, as Vendor would have realized if such forecast amounts, had been
fulfilled at an average 87.5 percent (87.5%) fill rate. Such financial
adjustment shall not be made for Sony's delay or inability to fulfill due to
force majeure.
(D) Vendor agrees to provide information technology (IT) customization services
beyond those within the scope of the inclusive retainer relationship herein
("New IT Services") at negotiated mutually agreed rates. Sony shall approve all
such New IT Services in writing before such New IT Services and rates are
initiated. The mutually agreed upon rates for all New IT Services, definition of
scope of such services, and any special terms or payment considerations will be
attached to this document by November 1, 1999.
(E) For any period of time Vendor is not in compliance with the minimum
performance standards set forth in I (d) above and Vendor has been notified in
writing of such default during the applicable cure period, Vendor or any
extension to such cure period, Vendor's fee percentage of revenues for such
period shall be adjusted downward by one-half percent (0.50%) and Vendor's
hourly rate shall be adjusted downward to $[______] per hour. No adjustment
shall be
6
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
made if the actual call volume is more than 12.75% of the first month of the
three month call forecast.
(F) If Vendor's customer fulfillment activity increases more than ten percent
as a percentage of total units sold beyond the level for the year ending April
1, 1999, Sony shall pay for incremental fulfillment beyond such April 1, 1999
fulfillment percentage plus ten percent on a per unit basis. Such incremental
units shall be billed by Vendor in accordance with the feeds outlined in
Attachment 4 along with related supplies and postage.
iii. ISR Incentive Plan. Sony at its sole discretion may fund an
additional ISR Incentive Program, the terms of which the parties shall mutually
agree to in writing. Vendor will pay any agreed incentives within 30 days of ISR
accrual and Sony shall find such payment within thirty days of Vendor invoice
(which shall not be issued prior to Vendor payment to ISRs).
iv. Call Volume. Subject to Section 1(e)(iv) Sony shall provide
Vendor the data and authority to receive at least 25,000 calls per month; Sony
however provides no guarantee, in the event of a business downturn, that such
call volume will be achieved. For purposes of this section, business downturn
shall be defined as circumstances not controlled directly or indirectly by Sony
that causes a material decline in telephone traffic, sales and/or the
profitability of the VAIO business segment of business for Sony no longer meets
the internal business requirements of Sony to continue in, such business segment
through direct marketing. In the event that Sony relies on this section in order
to justify the decline in call volume as outlined above, it is understood and
agreed that Sony shall not change the business requirements for continuation in
said business segment in order to invoke this section. It is further understood
and agreed that in the event that call volume goes below 25,000 per month and/or
Sony determines that Sony shall no longer participate in the VAIO segment,
Vendor shall be entitled to payment as if the campaign continued to the ending
date of this Agreement with incoming call volumes of ten thousand (10,000) per
month at the average Sony revenues attributable to such a call volume for the
ninety (90) days prior to the announcement by Sony of Sony's discontinuation of
participation in such business segment.
v. Vendor shall conduct Sony teleservices activities only at the
following call center locations at the following percentages: Northern
California (excluding Hayward after a to be mutually agreed point in time): 55-
75%; Fort Scott, Kansas: 25-45% and Denver. The parties will mutually agree on
a plan to transition services from Denver. Any changes outside of the above
ranges and locations must be approved by Sony in writing.
f. Hardware and Software. The hardware and software referenced on Attachment
---------------------
3A, is the property of Sony. If Vendor has not already, Vendor shall take all
appropriate actions to transfer ownership and otherwise secure for Sony's
benefit the use of such hardware and software. Except as provided in Attachment
3A, Vendor shall be required to provide all hardware, software,
telecommunications and infrastructural resources to enable full customer support
services.
7
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
g. Invoice and Thank-You Kit Project. Vendor shall perform additional
---------------------------------
services in connection with invoicing and inclusion of a thank you kit in
invoice mailings per Attachment 4. The Percentage of Revenues fee in e(i) above
shall constitute Vendor's sole compensation for such services.
h. Sony Loan of Equipment/Products. Vendor shall execute an Equipment Loan
-------------------------------
Agreement with Sony for all equipment loaned by Sony to Vendor in the form of
Attachment 5. Such equipment shall include any hardware or software purchased
for Sony by Vendor as provided in Attachment 3A.
i. Ownership of Telephone Numbers. Sony shall own all telephone numbers,
------------------------------
including 800 numbers, used in connection with the Services unless owned by some
other service provider.
j. Training Fees. Sony shall pay the fees specified in Attachment 6 with
-------------
respect to the training services. Notwithstanding the foregoing, Vendor shall
be responsible for all new-hire training cost as a result of annual attrition
rates greater than twenty eight percent (28%).
8
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
ATTACHMENT 1
------------
EDI PROTOCAL
- ------------
9
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
Intek Profile and Procedures
[_______
___________________________
___________________________
___________________________
___________ ________________
___________ ________________
___________ ________________
___________ ________________
___________ ________________
____________________
______________________________________________________________________________
______________________________________________________________________________
____________________________________________
____________________________________________]
10
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
ATTACHMENT 3A
-------------
LIST OF HARDWARE AND SOFTWARE PURCHASED BY VENDOR AND
-----------------------------------------------------
SOLD TO SONY
------------
Exhibit A
---------
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Equipment Quantity Unit Price Extended Price
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compaq Servers
Compaq Proliant 50000R 6/200 2 12,307.00 24,614.00
Pentium Pro 6/200 Processor Kit 2 2,125.00 4,250.00
Rack-Mountable Storage System 2 1,118.00 2,232.00
Rack - 42U 1 1,678.00 1,678.00
Rack Stabilizing Kit 1 124.00 124.00
Rack Sidewall Kit for Rack - 42U 1 208.00 208.00
Rack Blanking panel Kit 1 45.00 45.00
2.1 GB Hard Drive Hot Pluggable 10 770.00 7,700.00
Smart UPS 30000RM, 30000VA 2 1,712.00 3,424.00
Netflex Controller 2 169.00 338.00
10/100 Base TX UTP Module 2 97.00 194.00
SCSI Storage Expander For Rack 2 661.00 1,322.00
V50 Monitor 2 361.00 722.00
Rack External Keyboard 2 30.00 60.00
Compaq Mouse 2 35.00 70.00
Backup Exec Software for Windows NT v.6.1 2 437.00 874.00
126MB DIMM RAM Memory Kit 2 1,397.00 2,794.00
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal 50,649.00
- ------------------------------------------------------------------------------------------------------------------------------
Freight 121.44
Tax 3,925.30
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal Compaq Servers with Freight and Tax 54,695.74
- ------------------------------------------------------------------------------------------------------------------------------
Sybase Database Licenses
Sybase Replication Server 2 [________] [_________]
SQL Server NT - 64 User 1 [_________] [________]
Replication Server Manager 1 [_______] [________]
Sybase Replications Server Support 2 [_______] [________]
SQL Server NT - 64 User Support 1 [_______] [________]
Replication Server Manager Support 1 [______] [________]
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal 40,255.30
- ------------------------------------------------------------------------------------------------------------------------------
Freight 150.00
Tax 3,119.79
- ------------------------------------------------------------------------------------------------------------------------------
Subtotal Sybase Database Licenses with Freight and Tax 43,525.09
- ------------------------------------------------------------------------------------------------------------------------------
Grand Total All Equipment Freight and Tax 98,220.82
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
ATTACHMENT 4
------------
Sony Invoice & Thank You Kit Proposal
Invoicing will require the following items be custom hand picked, packed,
sealed, metered and mailed 1st class:
Invoice
Personalized letter - customer name & address, ISR name & extension who placed
order
Full Line Catalog - 6" x 9", 41 pages
Product Return Labels
Return Request Process/Instructions - 2 pages
Return Checklist - 1 page
Gift - Package of Klear Screen Wipes
Assumptions
- -----------
. Sony will provide Intek with custom 9" x 12" envelopes w/ Sony "Direct"
Logo
. Sony will provide Intek with all preprinted materials; catalogs, brochures,
labels, envelopes, etc...
. Sony will provide Intek with 1 month inventory of all above items - Intek
will provide Sony inventory usage reports
. Intek will supply and laser print the Return Request Process/Instructions,
Return Checklist, and Terms and Conditions
. Sony has requested a "Blurb" box-advertising message on invoice; this can
change monthly but it is not product specific
. Thank you kit to include a "checklist of items required to be returned to
receive full RMA credit"
. Sony is responsible for all mailing charges; Intek will use its own postage
account, track costs, and pass through mailing costs
. Based on $[___] volume 1st full year and average order price of $[_____]
this is estimated at 115 invoices/day
. Setup charges for creating the invoice and creating personalized letters
are billed at $[__]/hour.
. Setup charges requiring senior level programming skills are billed at
$[_____]/hour.
. Daily Minimum Charge of $[___] to cover both invoicing and literature
fulfillment
. Invoicing will be done Monday through Friday (Saturday and Sunday's
invoicing will be done on Monday)
. Intek will provide a daily invoicing confirmation report online
. The prices listed below are priced on a "per thousand" basis
<TABLE>
<CAPTION>
Service Provided Unit Cost Daily Qty Daily $'s Monthly $'s Annual $'s
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Invoicing/Thank You Kit Fees
Laser Print Invoice $ [___] 115 $ [_____] $ [______] $ [ __________]
Laser Print Personalized Letter $ [___] 115 $ [_____] $ [ _______] $ [_________]
Laser Print/Copy Return Process, Checklist $ [___] 115 $ [_____] $ [______] $ [_______]
Insert Invoice, Letter, Process & Checklist $ [___] 115 $ [_____] $ [______] $ [_______]
Insert Full Line Catalog, Gift, Return $ [___] 115 $ [_____] $ [______] $ [________]
Labels
Print Label 1 1/3" x 4" Avery labels $ [___] 115 $ [_____] $ [______] $ [_______]
Hand Label $ [___] 115 $ [____] $ [______] $ [_______]
Seal Flat (9 x 12), meter, and mail $ [___] 115 $ [____] $ [______] $ [_______]
- -------------------------------------------------------------------------------------------------------------------
Total Unit Cost Invoice/Thank You Kit $ [___] 115 $ [______] $ [_________] $ [___________]
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Warehousing of materials
<S> <C>
Pallet Storage Fees - per pallet/month $ [_____]
Box Storage Fees - per box/month $ [_____]
- approximately 4 boxes/pallet
Rack Storage Fees - per rack/month $ [____]
</TABLE>
12
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
ATTACHMENT 4
------------
Literature Fulfillment Proposal
Literature Fulfillment will require the following items be custom hand picked,
packed, sealed, metered and mailed 1st class:
Personalized letter - customer name & address, ISR name & extension who placed
the order
Full Line Catalog - 6" x 9", 41 pages
Personalized address label
Assumptions
- -----------
. Sony will provide Intek with custom 6" x 9" windowed envelopes w/Sony
"Direct" Logo
. 6" x 9" envelope will have window customized and address on letter will be
formatted to fit within window
. Sony will provide Intek with all preprinted materials; envelopes, catalogs,
spec sheets, etc.
. Sony will provide Intek with 1 month inventory of all above items - Intek
will provide Sony inventory usage reports
. Sony is responsible for all mailing charges; Intek will use its own postage
account, track costs, and pass through mailing costs
. Based on a potential call volume of 10,000 calls/month, Intek has estimated
25% or 2500 literature fulfillments/month
. Setup charges for creating personalized letters are billed at $[__] /hour.
. Setup charges requiring senior level programming skills are billed at
$[___] /hour.
. Daily Minimum Charge of $[___] to cover both invoicing and literature
fulfillment.
. Literature Fulfillment will be done Monday through Friday (Saturday and
Sunday's invoicing will be done on Monday)
. Intek will provide a daily literature fulfillment confirmation report
online
. The prices listed below are priced on a "per thousand" basis
<TABLE>
<CAPTION>
Service Provided Unit Cost Daily Qty Daily $'s Monthly $'s Annual $'s
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Literature Fulfillment Fees
Laser Print Personalized Letter $ [ ] 125 $ [ ] $ [ ] $ [ ]
Fold and Insert Letter $ [ ] 125 $ [ ] $ [ ] $ [ ]
Insert 6" x 9" Full Line Catalog $ [ ] 125 $ [ ] $ [ ] $ [ ]
Seal 6" x 9" Envelope, meter and mail $ [ ] 125 $ [ ] $ [ ] $ [ ]
- ----------------------------------------------------------------------------------------------------------------
Total Unit Cost Literature Fulfillment $ [ ] $ [ ] $ [ ] $ [ ]
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Warehousing of materials
<S> <C>
Pallet Storage Fees - per pallet/month $ [ ]
Box Storage Fees - per box/month $ [ ]
approximately 4 boxes/pallet
Rack Storage Fees - per rack/month $ [ ]
</TABLE>
13
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
ATTACHMENT 4
------------
Literature Fulfillment Services & Price List
(Prices are per Thousand)
. Sony will provide Intek with all custom envelopes w/ Sony "Direct" Logo
. Sony will provide Intek with all preprinted materials; catalogs, labels,
spec sheets
. Sony will provide Intek with 1 month inventory of all above items - Intek
will provide Sony inventory usage reports
. Sony is responsible for all mailing charges; Intek will use its own postage
account, track costs, and pass through mailing costs
. Setup charges for creating personalized letters are billed at $[ ]/hour.
. Setup charges requiring senior level programming skills are billed at
$[ ]/hour.
. Daily Minimum Charge of $[ ] to cover both invoicing and literature
fulfillment
. Literature Fulfillment will be done Monday through Friday (Saturday and
Sunday's invoicing will be done on Monday)
. The prices listed below are priced on a "per thousand" basis.
<TABLE>
<CAPTION>
Service Provided Unit Cost
- -------------------------------------------------------------------------------
<S> <C> <C>
Printing-Standard Letter (per piece)
Laser Printing Invoice $ [ ]
Laser Printing Personalized Letter $ [ ]
Laser Printing Standard Letter $ [ ]
Laser Printing Label $ [ ]
Folding (per fold)
Machine Fold $ [ ]
Hand Fold $ [ ]
Hand Inserting (per Insert)
Letters (# 10) $ [ ]
Flats (9 x 12) $ [ ]
Odd Shaped - Catalogs, Magazines $ [ ]
Pens, etc... $ [ ]
Hand Labeling (pressure sensitive)
Letters (# 10) 1 1/3" x 4" Avery laser printable labels [ ]
Flats (9 x 12) 1 1/3"' x 4" Avery laser printable labels [ ]
Sealing
Letters (#10) $ [ ]
Flats (9 x 12) $ [ ]
Metering
Meter Stamp $ [ ]
Hand Stamp $ [ ]
Hand Sorting (per piece)
Zip Order
Letters (#10) $ [ ]
Flats (9 x 12) $ [ ]
Non-Zip Order
Letters (#10) $ [ ]
Flats (9 x 12) $ [ ]
Hand Counting (per piece) $ [ ]
</TABLE>
14
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
ATTACHMENT 5
------------
EQUIPMENT LOAN AGREEMENT
------------------------
Date: December 2, 1997
THIS AGREEMENT is between the following parties:
Sony Electronics Inc. Intek Information, Inc.
Information Technologies of America 1455 Frazee Road
3300 Zanker Road Suite 220
San Jose, CA 95134-1940 San Diego, CA 92108
("Sony") ("Company")
Sony agrees to lend to the Company and Company agrees to accept the following
Equipment on the following terms and conditions:
1. Description and value of the Equipment: Attached as Exhibit A
2. The Equipment shall be located at the following location: Intek
-----
Information, Inc. 1455 Frazee Road, Suite 220, San Diego, CA 92108.
------------------------------------------------------------------
Company agrees not to remove the Equipment from this location without prior
written consent of Sony.
3. Delivery of the Equipment to Company shall be the sole responsibility of
Sony. Sony shall assume all risk of loss or damage in transit until
delivery to the aforementioned location.
4. Upon the expiration or termination of this Agreement, Company agrees to
return the Equipment to Sony at the Sony location designated by Sony for
such return. All costs of return delivery shall be borne solely by Company.
The Company shall assume all risk of loss or damage in transit until
delivery to Sony.
5. Title to the Equipment shall at all times remain with Sony. Company assumes
all risk of loss regardless of cause.
6. Company shall exercise due care for the safekeeping of the Equipment and
keep the Equipment in a safe and secure environment at all times.
7. Company agrees to pay for any Equipment which is not returned at the value
listed above plus any applicable sales and use taxes. Sony agrees to pay
the cost of repairs on any Equipment which becomes defective during the
loan period.
8. The loan shall be for the term of that Services Agreement between the
parties dated May 1, 1997 unless otherwise extended in writing by the
parties to this Agreement.
15
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
9. Company agrees to use the Equipment only for the purpose(s) stated below:
To host Sony Electronics Teleservicing Application and Sybase Database.
----------------------------------------------------------------------
10. Sony shall not be liable for any incidental or consequential damages
arising out of use of the Equipment.
11. Company acknowledges that the Equipment has been inspected and is in good
repair and operating condition.
12. Sony lends the Equipment to the Company AS IS AND WITH ALL FAULTS and
specifically disclaims ANY WARRANTIES, EXPRESS OR IMPLIED, INCLUDING THE
WARRANTIES OF MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE.
Sony Electronics Inc. Intek Information, Inc.
By: ______________________ By: ________________________
Print Name: ________________ Print Name: _________________
Title: _____________________ Title: ______________________
Date: _____________________ Date: ______________________
16
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
Exhibit A to Attachment 5
-------------------------
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Equipment Quantity Unit Price Extended Price
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Compaq Servers
Compaq Proliant 50000R 6/200 2 12,307.00 24,614.00
Pentium Pro 6/200 Processor Kit 2 2,125.00 4,250.00
Rack-Mountable Storage System 2 1,118.00 2,232.00
Rack - 42U 1 1,678.00 1,678.00
Rack Stabilizing Kit 1 124.00 124.00
Rack Sidewall Kit for Rack - 42U 1 208.00 208.00
Rack Blanking panel Kit 1 45.00 45.00
2.1GB Hard Drive Hot Pluggable 10 770.00 7,700.00
Smart UPS 30000RM, 30000VA 2 1,712.00 3,424.00
Netflex Controller 2 169.00 338.00
10/100 Base TX UTP Module 2 97.00 194.00
SCSI Storage Expander For Rack 2 661.00 1,322.00
V50 Monitor 2 361.00 722.00
Rack External Keyboard 2 30.00 60.00
Compaq Mouse 2 35.00 70.00
Backup Exec Software for Windows NT v.6.1 2 437.00 874.00
126MB DIMM RAM Memory Kit 2 1,397.00 2,794.00
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 50,649.00
- -----------------------------------------------------------------------------------------------------------------------------
Freight 121.44
Tax 3,925.30
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal Compaq Servers with Freight and Tax 54,695.74
- -----------------------------------------------------------------------------------------------------------------------------
Sybase Database Licenses
Sybase Replication Server 2 [ ] [ ]
SQL Server NT - 64 User 1 [ ] [ ]
Replication Server Manager 1 [ ] [ ]
Sybase Replications Server Support 2 [ ] [ ]
SQL Server NT - 64 User Support 1 [ ] [ ]
Replication Server Manager Support 1 [ ] [ ]
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal 40,255.30
- -----------------------------------------------------------------------------------------------------------------------------
Freight 150.00
Tax 3,119.79
- -----------------------------------------------------------------------------------------------------------------------------
Subtotal Sybase Database Licenses with Freight and Tax 43,525.09
- -----------------------------------------------------------------------------------------------------------------------------
Grand Total All Equipment Freight and Tax 98,220.82
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
17
<PAGE>
CONFIDENTIAL TREATMENT OF REDACTED PORTIONS REQUESTED BY
INTEK INFORMATION, INC.
ATTACHMENT 6
------------
FEE SCHEDULE
- ------------
<TABLE>
<CAPTION>
Campaign Set-Up Fee Schedule
- --------------- ------------
<S> <C>
Program Design and Set-Up $[ ]/hour
IT Programming and Services Per Attachment 3 & 4
Training $ [ ] /hour
Travel and Expenses At Vendor cost without
Markup (passthrough)
Trainer Included
Recruiting Included
Project Management Included
Campaign Administrator $[ ]/hour
DEI Sales Training At Vendor cost without
Markup (passthrough)
Operating Features Fee Schedule
- ------------------ ------------
Automated Support (VRU) $[ ]/min
Live Support (ISRs) Per Attachment 2
Training (New Hire, Replacement, Ongoing, Enhancement) $[ ]/hour
E-Mail Communication to Consumers $[ ]/hour
IT Programming and Services Per Attachment 3 & 4
Trainer Included
Fax/E-Mail Communication with Sony Included
Project Management Included
Quality Assurance Included
Supervisors Included
Voice Talent $[ ]/hour
Campaign Administration $[ ]/hour
ISR Incentive Plan At Vendor cost without
Markup (passthrough)
Fax on Demand to Consumers $[ ]/page
Travel and Expenses At Vendor cost without
Markup (passthrough)
</TABLE>
18
<PAGE>
Exhibit 23.2
ARTHUR ANDERSEN LLP
CONSENT OF INDEPENDENT ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Denver, Colorado,
March 3, 2000
<PAGE>
Exhibit 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in this Registration Statement on Form S-1 of Intek
Information, Inc. of our report dated June 28, 1999, except as to the proposed
acqusition described in the second and third paragraphs of Note 10 which is as
of July 16, 1999, relating to the financial statements of Acorn Information
Services, Inc., which appear in such Registration Statement. We also consent to
the reference to us under the headings "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Stamford, Connecticut
March 3, 2000
