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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission File Number: 0-29281
CYPRESS COMMUNICATIONS, INC.
(Exact name of registrant as specified in its charter)
Delaware 58-2330270
(State or other jurisdiction (I.R.S. Employer
of incorporation) Identification No.)
Fifteen Piedmont Center, Suite 710 (404) 869-2500
Atlanta, Georgia 30305 (Registrant's telephone number)
(Address of principal executive offices)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 Par Value
(Title of Class)
Preferred Stock Purchase Rights
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ ] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of
the registrant was $417,652,929 at March 2, 2000, based on the closing sale
price of $21.34 per share for the common stock on such date on the Nasdaq
National Market on such date. Shares of common stock held by each executive
officer and director and by each person who beneficially owns more than 5% of
the outstanding shares of common stock have been excluded in that such persons
may under certain circumstances be deemed to be affiliates. This determination
of affiliate status is not necessarily a conclusive determination of affiliate
status for any other purpose.
The number of shares of the registrant's common stock outstanding at March
2, 2000 was 47,302,202.
Documents Incorporated by Reference
The following documents (or portions thereof) are incorporated by reference
into the Parts of this Form 10-K noted: None.
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Cypress Communications, Inc.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year Ended December 31, 1999
TABLE OF CONTENTS
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Item Page
Number Number
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PART I
1. Business................................................................................... 2
2. Properties................................................................................. 17
3. Legal Proceedings.......................................................................... 18
4. Submission of Matters to a Vote of Security Holders........................................ 18
PART II
5. Market for the Registrant's Common Equity and Related
Stockholder Matters......................................................................
19
6. Selected Financial Data.................................................................... 23
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................................................ 25
7A. Quantitative and Qualitative Disclosures about Market Risk................................. 41
8. Financial Statements and Supplementary Data................................................ 41
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................................................. 42
PART III
10. Directors and Executive Officers of the Registrant........................................ 42
11. Executive Compensation.................................................................... 47
12. Security Ownership of Certain Beneficial Owners and Management............................ 51
13. Certain Relationships and Related Transactions............................................ 53
PART IV
14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 55
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Note: All information in this report regarding shares of common stock and per
- ---- share amounts has been retroactively adjusted to reflect the 4.5-for-1
stock split which occurred on February 8, 2000.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements, including, in particular,
the statements about our plans, objectives, expectations and prospects under the
headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations." You can identify these forward-
looking statements by words such as "expect," "anticipate," "intend," "plan,"
"believe," "seek," "estimate" and similar expressions. Although we believe that
the plans, objectives, expectations and prospects reflected in, or suggested by,
our forward-looking statements are reasonable, those statements involve
uncertainties and risks, and we can give no assurances that our plans,
objectives, expectations and prospects will be achieved. We undertake no
obligation to publicly update these forward-looking statements to reflect events
or occurrences after the dates hereof or to reflect the occurrence of
unanticipated events. Important factors that could cause our actual results to
differ materially from the results expressed or implied by the forward-looking
statements are contained in "Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations--Risk Factors That May Affect
Future Results" and elsewhere in this report. All written or oral forward-
looking statements attributable to us are expressly qualified in their entirety
by these cautionary statements.
PART I
Item 1. Business
General
We provide a full range of communications services to small and medium-
sized businesses located in multi-tenant office buildings. These buildings are
located in major metropolitan markets throughout the United States. We offer our
customers a full range of communications services, including high speed,
dedicated Internet access and data services, local and long distance voice
services, feature rich digital telephone systems, digital satellite, business
television, voicemail, e-mail, website hosting, security/monitoring services and
other advanced communications services. We deliver these services over state-
of-the-art fiber-optic, digital and broadband networks that we design,
construct, own and operate inside large and medium-sized office buildings. We
differentiate ourselves from other communications companies by providing a
single-source communications solution with a high degree of customer service and
responsiveness. Our customers are assigned a single dedicated on-site or near-
site support team to address their sales and service needs. Our customers also
benefit from the convenience and efficiency of receiving a single integrated
bill for all of their communications services.
We began providing bundled communications services and operating in-
building networks in June 1996 in Atlanta. As of December 31, 1999, we were
operating our networks in 116 buildings representing approximately 30 million
rentable square feet in 12 major metropolitan areas, including Atlanta, Boston,
Chicago, Dallas, Denver, Houston, Los Angeles, Miami, New Orleans, Orange
County, San Diego and Washington, D.C. Overall, as of December 31, 1999, we had
license agreements with building owners and property managers, including AEW,
Boston Properties, Brookfield, Colonnade (formerly known as Taylor Simpson),
Cornerstone, Cousins, Lend Lease, Shorenstein, Tower Realty, Transwestern,
TrizecHahn, Vornado and Westbrook, giving us the right to install and operate
our networks in more than 730 buildings representing more than 229 million
rentable square feet in 50 major metropolitan areas.
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Cypress's Corporate History
We were formed as a limited liability company under the laws of Georgia on
August 16, 1995 under the name Cypress Communications, L.L.C. We completed a
reorganization on July 15, 1997 in which the operations of the predecessor
company were merged into Cypress Communications, Inc., a Delaware corporation.
In December 1998, we acquired certain of the assets and business of MTS
Communications, a provider of building-centric communications services in
California. In addition, in November 1999, we entered into a binding letter of
intent to acquire approximately 18% of Site Connect, Inc., a Seattle based
provider of Internet access, Web hosting and other advanced data services, for
281,250 shares of our common stock. In February 2000, we completed an initial
public offering of our common stock.
Our Market Opportunity
Communications services continue to experience growth and expansion. Data
services in particular are experiencing rapid growth as an important global
medium for communications and electronic business. According to industry
sources, there are approximately 1.3 million small and medium-sized businesses
in the United States, which typically employ between 10 and 500 employees.
According to International Data Corporation, small and medium-sized businesses
spent over $47 billion in 1998 for voice communication services. While
Dataquest, another industry source, estimates that the demand for voice services
will grow at a modest pace to over $53 billion in 2002, the demand for data and
Internet services from this market segment is projected to grow at a
substantially greater pace. We believe, based on our industry sources, that
small and medium-sized businesses spent more than $14 billion for data and
Internet services during 1998 and that growth in data and Internet services will
increase at a compound annual growth rate of approximately 29% per year through
2002.
We are targeting this growing market segment by constructing our fiber-
optic, digital and broadband networks in the office buildings in which many
small and medium-sized businesses are located. We estimate that there are more
than 8,100 office buildings with greater than 100,000 square feet representing
over 2.2 billion rentable square feet of office space located in the 50 major
metropolitan areas in which we currently operate or plan to operate in the
future.
As the communications market has grown rapidly over the past five years,
businesses have become inundated with offerings of new products, services and
carriers. As a result, it has become increasingly difficult for small and
medium-sized businesses, most of which do not have a dedicated communications
staff, to evaluate the vast array of communications options that are available.
In addition, these businesses have had to contend with the cost and complexity
of retaining multiple vendors in order to procure the various communications
services they require.
We believe there is a significant demand in the market for an integrated
communications provider who can offer the various communications services that
small and medium-sized businesses require. While most large enterprises build or
lease dedicated high speed networks and complex communications equipment, most
small and medium-sized businesses, due to cost and network infrastructure
constraints, are not able to enjoy the levels of service and functionality that
such facilities and equipment can provide. For example, the majority of small
and medium-sized businesses access the Internet through relatively slow dial-up
connections, often at speeds of 56,000 bits per second or less. We believe that
dedicated high speed connections to the Internet for small and medium-sized
businesses will grow significantly over the next two years, and that this will
create a significant opportunity for communications providers with the ability
to provide affordable high-speed Internet connectivity in addition to other
enhanced communications services.
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The Cypress Solution
We provide small and medium-sized businesses a broad range of
communications services over our own in-building state-of-the-art fiber-optic,
digital and broadband networks. Our solution offers these businesses a number of
important advantages, including:
. A comprehensive communications solution from a single source. We
with a "one stop shopping" solution. As a result, we greatly reduce the
administrative burden typically associated with managing multiple
communications vendors. Our comprehensive package of communications services
typically includes providing high speed, dedicated Internet access and data
services, local and long distance voice services, digital satellite business
television, voicemail and e-mail. We also offer web site hosting, domain name
registration, 24x7 remote systems monitoring, firewall, or data security,
protection and many other advanced communications services. We offer our
services at competitive prices and deliver a single bill for all services
rendered. We are continually expanding and upgrading the products and
services that we offer our customers, so that as their needs evolve, our
products and services evolve with them.
. A reliable, feature-rich communications package typically available only to
large corporations. In addition to offering a comprehensive package of
communications services, we provide our small and medium-sized business
customers features and performance levels that traditionally have been
available only to large corporations. We provide voice services using state-
of-the-art equipment from manufacturers such as Nortel Networks and Cisco
Systems, which enables us to offer our customers a variety of enhanced
services. We provide our customers affordable, high speed, dedicated Internet
access at transmission speeds up to 3.0 million bits of data per second. We
also have the ability to provide significantly greater speeds should our
customers require such capacity in the future. Unlike traditional networks,
our networks are designed to alleviate network congestion resulting in slow
transmission speeds, a common problem which occurs when many customers within
a multi-tenant commercial building attempt to use traditional limited
capacity networks. In addition, to ensure reliable performance, we utilize
multiple carriers, backup network components and emergency power supplies.
. Rapid installation and service expansion with minimal capital outlay by
customers. Because we own and operate our in-building networks, we are able
to deliver our comprehensive package of services to a new customer within a
few days of receiving an order. In addition, we are often able to provide
same day service for existing customers requesting new services or features,
such as increased Internet speeds or additional lines. Additionally, because
our customers typically rent their telephone systems and related premise
equipment from us, they avoid significant capital outlays and substantially
mitigate the risks of being constrained by network capacity or having their
phone system become technologically obsolete.
. On-site or near-site customer service and support. Upon contracting for
service, each of our customers is assigned a dedicated, experienced account
team. This team is either on-site or near-site and is available on a 24x7
basis to address customer inquiries. We believe that our high standard of
customer service will continue to enhance our ability to acquire and retain
customers.
Our Strategy
Our objective is to be a leading provider of integrated communications
services to small and medium-sized businesses. To achieve this objective, we
have developed a business strategy designed to achieve
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significant market penetration and deliver superior customer service while
maximizing operating margins. Key components of this strategy include the
following:
. Providing a broad range of communications services under long-term customer
contracts. We intend to continually add to and upgrade our service offerings
in order to attract new customers and further penetrate our existing customer
base. We sell our services under contracts which are typically three years in
length. We believe our ability to provide a "one-stop shopping" solution will
enable us to continue to enter into long-term contracts with our customers.
In addition, we believe that our broad product portfolio also contributes to
our low customer defection, or churn rates. In short, our goal is to ensure
that a customer or potential customer need never look beyond Cypress to
fulfill any communications need.
. Providing superior customer service. As part of our continuous effort to
attract and retain customers, we are dedicated to providing the highest
levels of customer service and satisfaction in the industry. We assign to
each customer a dedicated team of customer service personnel that is either
on-site or near-site. Consequently, we believe that the level of customer
service and technical support we offer in terms of responsiveness and
customer knowledge exceeds that offered by competitors who provide customer
support on a regional or national basis.
. Controlling the critical "last few feet." We own and manage the in-building
infrastructure over which we provide services to our customers, including the
actual physical connection between our customers and out-of-building
networks. We believe this affords us important and sustainable competitive
advantages and allows us to:
- strengthen our position as "gatekeeper" to our in-building
customers;
- provision services more quickly and efficiently; and
- better control service quality.
. Leveraging our experience and first mover advantage to secure license
agreements with building owners. As one of the first in-building providers of
integrated communications services in the United States, we will continue to
leverage our experience and first mover advantage to secure additional
license agreements with building owners. Before a building owner will enter
into a long-term contract with a communications provider, the building owner
must be confident that the provider is capable of offering superior service
to building tenants throughout the life of the license agreement and
thereafter. We believe our experience, industry reputation and referenceable
customer base give us a meaningful competitive advantage with respect to
instilling this confidence. In addition, while we target all types of
property owners and managers, we have developed significant expertise in
establishing strategic relationships with owners of individual buildings or
small groups of buildings. These owners represent one of the largest single
types of ownership of office space in the country. We believe that over the
long term this competitive advantage will be particularly important because
many of the larger multi-market building owners will eventually sign license
agreements with either ourselves or our competitors.
. Deploying cost effective, flexible networks. A substantial portion of our
network related capital expenditures are made only after we have entered into
a long-term license agreement with a property owner. The capital we deploy is
highly success-based and modest on a per-building basis. For example, our
initial capital expenditures in a typical building with approximately 335,000
rentable square feet are usually less than $90,000, which includes the
purchase and installation of our riser system and associated network
equipment. Furthermore,
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our networks are designed using an open standard architecture which enables
us to rapidly and cost effectively incorporate the latest technological
developments. In addition, in order to minimize operating costs while
maximizing transmission capacity and providing backup capacity, we deploy
networks using a combination of fiber-optic, copper, coaxial and wireless
transmission solutions.
. Opportunistically pursuing additional strategic acquisitions and
relationships. We opportunistically pursue acquisitions and other strategic
relationships which enable us to expand our customer base or geographic
presence or provide us with additional management, sales or technical
personnel. We intend to continue to seek such opportunities, both
domestically and abroad.
Our Communications Services
We use our state-of-the-art in-building networks to provide small and
medium-sized businesses with a full range of voice, data, video and other
enhanced communications services. We also provide paging and, in some markets,
wireless telephone services through agreements with various communications
carriers. Close contact with our customers by our direct sales force and
customer service personnel enables us to tailor our service offerings to meet
customers' needs and to creatively package our services to provide "one-stop
shopping" solutions for those customers. Services we offer are summarized as
follows:
Cypress Services Currently Available
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Voice Services Data Services Video/Wireless/Other
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Local Dialtone High Speed Internet Access Business Television
Long Distance Electronic Mail Wireless Voice
Voice Mail Web Hosting Paging
Telephone Equipment Domain Name Services Installation & Cabling
Audio Conferencing Firewall Services Move, Add & Change Services
Toll Free Services SmartWatch
Calling Cards SmartView
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Voice services. The majority of our voice services customers rent their
telephones from us. This ensures a compatible interface with our state-of-the-
art in-building communications equipment and provides customers with a number of
key benefits, including:
. access to an advanced, multi-function telephone system which few small
businesses could afford to buy and support on their own;
. a significant reduction in up-front capital costs; and
. reduced risk of technological obsolescence.
Our voice offerings include both traditional telephone services, such as
local and long distance services, as well as value-added services, such as
integrated voicemail, audio conferencing, calling cards and toll-free number
services. Additional enhanced features include call waiting, call forwarding,
dialback and caller ID.
Data services. One of our most popular services is high speed, dedicated
Internet access. We provide this service using our patent pending fiber-optic
infrastructure and network configuration. The key features of this service are:
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. Dedicated connectivity. Our service is always on, providing instantaneous
connections and the capability to receive or transmit information
continuously.
. Range of speed options. Customers currently subscribe to delivery speeds
between 64,000 bits of data per second and 3.0 million bits of data per
second, but we have the capacity to provide up to 100.0 million bits of data
per second in response to customer demand. In addition, using commercially
available equipment, we can increase the transmission speed of our
infrastructure to one billion bits of data per second.
. Flexibility. We can usually increase a customer's bandwidth speed within
minutes of receiving a request. We can also deliver different speeds of
service to specific computers or groups of computers within a customer's
office.
. Security. Because each customer's Internet service is provided over dedicated
fiber-optic strands, a customer's Internet traffic is secure from that of
other customers in the building.
In addition to our Internet access service, we offer other enhanced data
services such as web site hosting, e-mail, domain name registration and firewall
services. We also offer our customers SmartWatch services, in which we provide
24-hour monitoring of web and e-mail servers, and SmartView services, which
enables our customers to monitor their bandwidth usage via the Internet.
Video, wireless and other services. In many of our buildings, we offer our
customers a comprehensive package of business television services consisting of
news, business, sports and network programming. We deliver these services
directly to our customers over our in-building networks using a combination of
direct broadcast satellite programming and off-air local channels. Our customers
can elect to receive more or less programming depending on their needs. In
addition to voice, data and video services, we also offer our customers a
variety of other enhanced communications services, such as paging and, in some
markets, wireless telephones, which we are able to provide through agreements we
have with various communications carriers. We also provide on-site installation,
including installing telephone systems and configuring and connecting customer
computer equipment to our networks, as well as highly responsive move, add and
change services. We will continue to investigate, test and add, where
appropriate, complementary products and services to maintain our "one stop
shopping" strategy.
Network Architecture
We design, install, own and operate our networks inside buildings which we
serve under long-term license agreements with building owners or operators. Our
in-building networks typically consist of the following:
. a state-of-the-art riser system utilizing fiber-optic cable, broadband
coaxial cable and copper wire;
. communications equipment usually located in the building;
. high capacity leased facilities connecting our networks to the networks of
selected local, long distance and Internet service providers; and
. for our data services, high capacity leased facilities to move data traffic
to and from a central point that we establish in each market.
Riser systems inside buildings. Inside buildings, we design, install, own
and manage a vertical communications infrastructure, also known as the riser
system, that typically runs inside vertical utilities shafts from the building's
basement to the top floor. Our riser systems typically are comprised of high
capacity fiber-
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optic cable, broadband coaxial cable and copper wire. These systems are designed
to carry a full range of voice, data and video traffic. We believe our riser
systems have the capacity to accommodate all of our customers' current and
anticipated broadband needs.
Feeder systems inside buildings. Inside buildings, we also design,
install, own and manage a horizontal communications infrastructure, known as the
feeder system, that typically runs from our riser systems into our customers'
premises. Our feeder systems typically utilize high capacity fiber-optic cable,
broadband coaxial cable and copper wire. These systems are installed only upon
our signing a service contract with a customer
Communications equipment inside buildings. Inside almost all of the
buildings we serve, we have routing and distribution equipment that connect our
riser systems to the networks of select local, long distance and Internet
service providers. This equipment includes data switches, routers and voice
switches, which direct incoming and outgoing data and voice traffic, and other
video and communications equipment purchased from Nortel Networks, Cisco Systems
and other manufacturers. In the case of a multi-building real estate complex, we
are usually able to provide our services in all buildings within that complex by
deploying this communications equipment in one building and connecting the other
buildings to that equipment. This results in significant cost savings and
reduced capital expenditures.
Leased facilities outside buildings. We connect the communications
equipment in our buildings to leased network facilities of selected local, long
distance and Internet service providers that provide the out-of-building
transport necessary to provide full service to our customers. In some instances,
as in the case of a multi-building complex, we may interconnect a number of
buildings using leased facilities known as "private line" or "point-to-point"
connections.
In deploying our Internet services, we utilize a central market point of
presence, which allows us to aggregate and disseminate data traffic to and from
all of the buildings we serve in that market. We typically connect each building
to the central market point of presence using leased high capacity facilities,
on a carrier's fiber-optic network. These lines are leased from carriers that
have previously installed fiber in the local market. There are generally several
providers in each market who are able to provide us with connectivity for
traffic between buildings and the point of presence.
At our point of presence, we install the electronic equipment necessary to
provide our data services in the metropolitan area. This equipment includes
network servers, traffic routers and other related communications equipment. We
connect each point of presence to more than one Internet service provider to
provide diverse Internet connectivity to our network. Most points of presence
are connected to at least one other point of presence in a different market over
a dedicated leased facility to provide a backup means of transmitting data in
case any of our network connections to the Internet should fail.
Advantages of our Network Architecture. The architecture of our network
provides us with significant competitive advantages, including the ability to:
. rapidly connect customers without the need to arrange local phone lines and
circuits for each new line added;
. capitalize on advanced Internet-protocol-based technology to construct a more
efficient and lower cost network;
. provide low cost, high performance services;
. offer always-on, secure data connections to our network and the Internet; and
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. provide a flexible platform for bandwidth upgrades and new service offerings
as communications technology and applications continue to develop.
Network Management and Monitoring. We recently implemented a state-of-the-
art automated alarm and control system to further enhance our network monitoring
capabilities. Our trained system engineering personnel use our control system to
monitor and control our networks on a 24x7 basis. This system enables fault
alarm monitoring, system control, environmental monitoring, remote system
diagnostics, physical security monitoring, backup control and usage statistics.
This Internet-enabled system allows our technicians to access and control our
systems over Internet, Intranet or local or wide area network configurations, as
well as through a dial-up connection in the unlikely event of loss of Internet-
based communications. Service affecting events are automatically detected and
immediately reported to both technical personnel located in our network
operations center and market-based field support engineers who address network
issues either remotely or directly on-site. Field engineering personnel in our
markets are equipped with a full set of parts and spares necessary to support
their routine service calls and we also maintain complete spare systems in the
unlikely event of a disaster.
Our network operations center also supports a 24x7 hotline for help desk
support. We intend to supplement this center with a geographically diverse
backup network operations center to supplement day-to-day operations and act as
a disaster recovery site for the main network operations center.
Construction
We have developed and implemented a cost-efficient, team-based approach to
constructing and expanding our in-building networks. We have formulated
implementation procedures which incorporate standardized construction drawings
and equipment configurations that allow us to maintain high quality construction
standards. These procedures can be quickly and easily repeated for all of our
installations with minimal use of equipment space. As a result of the extensive
experience gained from having constructed over 150 in-building networks and our
standardized installation procedures, we can often begin serving customers
within 45 to 60 days from the date a property manager approves our network
design. As a result of our standardized construction process and our extensive
engineering capabilities, we are typically able to initially install our
networks for less than $90,000 per building. Thereafter, we are able to cost-
effectively deploy capital and expand our networks as needed to accommodate
customer demand.
Sales and Marketing
We directly market our services to the tenants in buildings where we have
secured long-term license agreements with property owners or managers. We
leverage our relationships with property owners and managers as a first and
primary means of creating tenant awareness of our services. Upon our entering a
building, property owners or managers will typically send a letter to tenants on
their letterhead introducing Cypress, describing the nature and benefits of our
service offerings and highlighting the complete package of business
communications products that we are able to offer. Shortly thereafter, we will
conduct a promotional in-building event, typically in the building lobby, where
we will demonstrate our voice, Internet and video services to generate sales
leads. After our initial service launch we continue to work closely with the
building owner, property management and leasing representatives. Our typical
license agreements enable us to display our signage and marketing materials
within the leasing office and other high traffic locations within a building.
Our agreements also contain provisions whereby our building owners, management
and leasing representatives agree to advise tenants of the availability of our
services. In most cases, property owners or managers will also notify us as new
tenants enter the building.
Our goal is to offer a comprehensive communications solution and in effect
to become our customers' outsourced communications department. As such, our
sales approach is highly consultative. In our initial sales meetings we work
closely with prospective customers to assess their particular communications
needs. We also carefully analyze the communication bills from their current
vendors to understand a potential customer's
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usage patterns and current cost. We then present the potential customer with a
highly customized, comprehensive proposal which is typically more cost
effective, feature-rich and easier to administer than their current
communications package.
We typically assign one dedicated account team for every five or six
buildings. The account team usually consists of one account executive, one
customer service representative and one on-site or near-site technician. Our
technicians and engineers provide our customers with customized technical
consulting regarding the use and availability of our services. This is generally
highly valued by small and medium-sized businesses that often have limited
information technology staffs and expertise. We believe that using dedicated
account teams enhances our ability to build and retain long-term customer
relationships and our ability to cross-sell and upgrade service offerings.
Our sales efforts are supported by our marketing department which, in
addition to creating various "point of sales" promotional materials, works with
outside advertising and public relations firms to develop a targeted, highly
cost-effective marketing approach to build Cypress brand awareness.
Real Estate Selection and Marketing
Property Selection
The criteria that our real estate professionals consider in targeting
buildings includes the buildings' location and size, the number of tenants, the
tenant mix, the proximity of the building to other buildings in which we hold
existing license agreements, and the expected time and cost involved in
installing our networks. In addition, we generally prefer buildings with some
tenant vacancy, or anticipated near-term tenant roll-over, because we believe
new tenants are particularly receptive to our single-source communications
solution. Once we have determined that a building or collection of buildings
meets our criteria, one of our real estate professionals contacts the property
owner or operator in an effort to negotiate a license agreement which will
provide us access to the buildings.
License Agreements and Arrangements with Property Owners and Operators
We believe we present a compelling value proposition to property owners and
operators. In our negotiation with these property owners and operators, we
emphasize the following value-added benefits of doing business with Cypress:
. we enhance the marketability of the building to prospective tenants by
providing a complete communications solution with advanced features that may
not be available in other buildings;
. we install our network architecture at no cost to the property owner; and
. we pay property owners a fixed rental fee and/or a modest percentage of the
revenue we receive from providing communications services to the tenants in
their buildings.
In the past, we have entered into license agreements with property owners
and operators on a per building basis in order to gain the right to install and
operate our networks in their buildings. Under these agreements, we pay the
property owners and operators either a base fee or a modest percentage of the
revenues we generated from their tenants, typically between 3% and 6%. The
typical term of these agreements is ten years.
In November and December 1999, we entered into master license agreements
with several owners and operators of multiple office buildings, including AEW,
Boston Properties, Brookfield, Colonnade (formerly known as Taylor Simpson),
Cornerstone, Cousins, Lend Lease, Shorenstein, Tower Realty, Transwestern,
TrizecHahn, Vornado and Westbrook. Each master license agreement sets forth a
list of buildings owned or
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managed by the owner or operator that is a party to that agreement. In
accordance with the terms of these agreements, we have begun to enter into
property-specific license agreements with respect to each listed building. In
some cases, the property owner or operator may need to obtain the consent from
third parties who may have an ownership interest in the building before we can
enter into a property-specific license agreement for that building. Under the
property-specific license agreements, we will be granted a license to install
and operate our networks in each such building in return for approximately 6% of
the revenues we receive from tenants in that building. The initial term of each
property-specific license agreement is generally five years, with an automatic
five year extension at the end of the initial term, absent any default under the
agreement. These master license agreements gave us the right to operate our
networks in more than 600 buildings representing more than 194 million rentable
square feet. Overall, as of December 31, 1999, we had license agreements giving
us the right to operate our networks in more than 730 buildings representing
more than 229 million rentable square feet.
In connection with the execution of the master license agreements, we also
entered into stock warrant agreements with the same property owners and
operators. Under the terms of these agreements, we issued these owners and
operators warrants to purchase up to an aggregate of 11,163,990 shares of our
common stock at an exercise price of $4.22 per share. The exact number of shares
of common stock underlying these warrants, which is based on the gross leasable
area of the buildings set forth in the master license agreements, will be
determined upon the completion of due diligence and the finalization of the
building schedules, which is expected to be completed in April 2000. These
warrants are exercisable for periods of five to ten years, but cannot be
exercised until August 15, 2000.
Generally, our license agreements are non-exclusive, which means the
property owners or operators may permit competitors to install their own in-
building networks in their buildings. Some competitors already have rights to
install networks in some of the buildings in which we have rights to install our
networks. While few in-building competitors are operating networks in buildings
in which we currently operate networks, this situation may change as we and our
competitors continue to expand operations.
We continue to pursue license agreements with property owners and operators
and, in particular, target owners and operators of multiple office buildings.
We are currently considering the possibility of issuing additional warrants to
acquire shares of our common stock to owners and operators of multiple office
buildings in order to induce them to enter into master license agreements
similar to the license agreements we entered into in November and December of
1999.
Customer Service and Technical Support
We believe that we maintain a higher standard of customer service than
other companies serving small and medium-sized businesses and that this is a key
factor in our low customer turnover rate. The key aspects of our service
include:
. Dedicated Support Teams for Timely Response. We typically designate on-site
or near-site teams of one account executive, one customer service
representative and one technician to a territory which usually includes five
or six buildings in close proximity to one another. These teams are closely
supported by Internet sales engineers and technicians certified in Nortel,
Cisco and Microsoft technologies. Customers benefit from this arrangement
because our dedicated account teams, in addition to being physically located
near our customers, are familiar with our customers' particular
communications packages and, accordingly, are able to more efficiently
respond to their needs. This dedicated team approach also further
personalizes our customer relationships.
. Dial "H-E-L-P" for Service. In Atlanta, Chicago, Dallas, Houston and Los
Angeles, a customer need only dial "H-E-L-P" (4357 on a telephone key pad)
from any telephone that is part of our network to be connected to our
customer service team. In most cases,
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our customer's name will appear on our customer service representatives
telephone display, allowing us to answer the calling party using their name,
further supporting the personalized relationship between Cypress and our
customers. If a customer is not near a telephone connected to our network, we
provide a regular ten digit contact number to reach our customer service
representatives. We are implementing this system in our other markets as
well.
. Remote System Monitoring and Service Modifications. Many elements of our
networks can be controlled and modified remotely from a customer service
office or our network operations center, allowing us to respond to customers
more rapidly and with minimal disruption. For example, we can increase a
customer's bandwidth allocation within minutes of being contacted or we can
add additional lines and voice mail boxes to a customer's existing services
without the need to make an on-site service call.
. Efficient On-Premises Service Modifications. Some move, add and change
services require a visit to our customers' premises. For example, when a
customer expands the number of employees in their office, we will send a
customer service representative to manage this expansion and a technician to
install additional cabling and telephones. Because our networks are modular
even at the customer premises level, we can typically add the necessary
services and equipment with minimal disruption to our customer's regular
operations.
. Continuous Training. Upon implementation of the Cypress solution for a new
customer, the members of the dedicated support team consult with the end-
users at the customer's premises and explain the functionality of the new
equipment and services for which the customer has contracted. We provide
further training when the customer expands its services or adds new
employees. We believe our emphasis on training reduces calls to our customer
service team and encourages quick adoption of and higher usage rates for
installed services. We believe this approach generates increased demand for
bandwidth upgrades and additional services.
Competition
The market for communications services for small and medium-sized
businesses is very competitive. We face competition from many communications
providers with significantly greater financial resources, well-established brand
names, larger customer bases and diverse strategic plans and technologies. Any
of these competitors may focus on our market strategy and subject us to intense
competition for our services or for access to the office buildings in our target
markets. We expect significant competition from traditional and new
communications companies, including the following:
Other in-building communications providers
Some competitors are attempting to gain access to office buildings in our
target markets. These companies include Advanced Radio Telecom, Allied Riser
Communications, Broadband Office, Intermedia, NEXTLINK, OnSite Access, RCN
Telecom Services, SiteLine, Teligent, Urban Media and Winstar. Some of these
competitors are seeking to develop exclusive relationships with building owners.
To the extent these competitors are successful, we may face difficulties in
building our networks and marketing our services within some of our target
buildings. Our agreements to use utility shaft space within buildings are
generally not exclusive. An owner of any of the buildings in which we do not
have exclusive rights to install a network could also give similar rights to one
of our competitors. Certain competitors already have rights to install networks
in some of the buildings in which we have rights to install our networks. It
will take a substantial amount of time to build networks in all the buildings in
which we intend to exercise our rights under our
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license agreements and master license agreements. Each building in which we do
not build a network is particularly vulnerable to competitors. It is not clear
whether it will be profitable for two or more different companies to operate
networks within the same building. Therefore, it is critical that we build our
networks in additional buildings quickly. Once we have done so, if a competitor
installs a network in the same building, there will likely be substantial price
competition.
Local telephone companies
Incumbent local telephone companies, including GTE and regional Bell
operating companies such as Bell Atlantic and BellSouth, have several
competitive strengths which may place us at a competitive disadvantage. These
competitive strengths include an established brand name and reputation and
significant capital to rapidly deploy or leverage existing communications
equipment and broadband networks. Competitive local telephone companies often
market their services to tenants of buildings within our target markets and
selectively construct in-building facilities. Additionally, the regional Bell
operating companies are now permitted to provide long distance services in
territories where they are not the dominant provider of local services. These
companies may also provide long distance services in the territories where they
are the dominant provider of local services if they satisfy a regulatory
checklist established by the Federal Communications Commission. In December
1999, the FCC ruled that Bell Atlantic has met these requirements in New York
and may provide long distance services in New York. If other regional Bell
operating companies are permitted to provide long distance services in
territories where we operate, we could face greater price competition.
Long distance companies
Many of the leading long distance companies, such as AT&T, MCI WorldCom and
Sprint, could begin to build their own in-building voice and data networks. The
newer national long distance carriers, such as Level 3, Qwest and Williams
Communications, are building and managing high speed fiber-based national voice
and data networks, partnering with Internet service providers, and may extend
their networks by installing in-building facilities and equipment.
Fixed wireless service providers
Fixed wireless service providers, such as Advanced Radio Telecom, MCI
WorldCom, NEXTLINK, Sprint, Teligent and Winstar, provide high speed
communications services to customers using microwave or other facilities or
satellite earth stations on building rooftops.
Internet service providers
Internet service providers, such as Concentric Networks, EarthLink, GTE
Internetworking, Prodigy, PSINet, Sprint, the UUNET subsidiary of MCI WorldCom,
and Verio, provide traditional and high speed Internet access to residential and
business customers, generally using the existing communications infrastructure.
Providers, such as America Online, Microsoft Network, Prodigy and WebTV,
generally target the residential market and provide Internet connectivity, ease-
of-use and a stable environment for modem connections.
Digital subscriber line companies
Digital subscriber line companies and/or their Internet service provider
customers, such as Covad, Network Access Solutions, Northpoint and Rhythms
NetConnections, provide high capacity Internet access using digital subscriber
line technology, which enables data traffic to be transmitted over standard
copper telephone lines at much higher speeds than these lines would normally
allow.
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Cable-based service providers
Cable-based service providers, such as Excite@Home and its @Work
subsidiary, High Speed Access, RCN Telecom Services and Road Runner, use cable
television distribution systems to provide high capacity Internet access.
Suppliers
We must connect our in-building networks to local, long distance and
Internet service providers in order to serve our customers. In most of our
markets, to connect our networks to local, long-distance and Internet providers,
we connect our networks to and lease facilities from the local telephone
company, which is usually one of the regional Bell operating companies such as
BellSouth, Bell Atlantic, SBC-Ameritech and Pac Bell. Typically, we are able to
secure connections for local calling service within 30 days of requesting such
service, although additional delays of 15 to 30 days are not uncommon.
We purchase long-distance transmission capacity from several long-distance
communications companies, such as ITC DeltaCom, Qwest and MCI WorldCom, on terms
customary for the industry. While we have entered into several long-distance
contracts with minimum purchase commitments, we believe that none of these
contracts are material and that in most cities in which we operate there are a
number of long distance carriers with whom we could arrange long-distance
services. Typically, we are able to secure connections for long-distance service
within 30 days of requesting such service.
To provide Internet services to our customers, we purchase data
transmission capacity from Internet service providers such as MCI WorldCom,
Sprint, Verio and Savvis. We believe that our agreements for data transmission
capacity are on customary terms for the industry and that in most cities in
which we operate there are a number of data transmission capacity providers with
whom we could arrange data transmission services. Typically, we are able to
secure connections for data transmission capacity within 45 days of requesting
such service.
Our in-building networks contain equipment such as data switches, routers,
voice switches, and other communications and video equipment that we purchase
from Nortel Networks, Cisco Systems and other manufacturers. We do not have any
minimum purchase commitments with any of our manufacturers and believe that
there are alternative vendors available to us for all the types of equipment
which we purchase.
Regulation
Our provision of basic communications services is subject to regulation at
the federal, state and local level. Often, regulations do not specifically
address our operations and the application of these regulations is subject to
interpretation. Regulators may successfully assert that additional regulations
apply to our operations. Additionally, regulation of the communications industry
is evolving rapidly. The regulations that apply to us are subject to ongoing
administrative proceedings, litigation and legislation. The outcome of these
various proceedings, as well as any other regulatory initiatives, cannot be
predicted. Future regulatory changes may have a material adverse affect on our
business and operations.
Local Voice Services
In the states where we currently provide local voice services, we believe
that we qualify as what most states refer to as a "shared tenant service
provider." Laws in these states vary as to the terms and conditions with which
we must comply to be classified as a shared tenant service provider. Some of
these terms and conditions include:
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. We must maintain a switching system, or private branch exchange, in each
building or set of contiguous buildings that we serve which allows calls to
be routed directly to the individual instead of through a central number.
. The local telephone company must be permitted by the building owner to
provide service to any tenant in the buildings in which we operate.
. In California, we may not charge our customers a higher rate for local voice
services than we are charged by the local telephone company for those
services.
. In Illinois, we must permit local telephone companies, upon payment of a fee,
to use the communication equipment in our buildings.
. In some states, we must register as a shared tenant service provider and file
reports. Registering as a shared tenant services provider usually involves
filing the required application and, in some instances, may also involve the
payment of a small fee.
. In some states, we must pay regulatory fees and universal service fees.
Universal service fees are payments to funds established to, among other
things, help subsidize the incumbent local telephone company's provision of
telephone service to certain rural and other hard-to-reach areas.
A jurisdiction's regulations or guidelines governing shared tenant service
providers may not specifically address our operations. While we believe that we
qualify as a shared tenant service provider in all the jurisdictions where we
currently provide local voice services, a regulator may successfully challenge
our position and conclude that we need to qualify as a competitive local
telephone company. Additionally, jurisdictions may modify their regulations to
reduce or eliminate their shared tenant service provider classification,
requiring us to comply with the regulation of competitive local telephone
companies. In fact, in some states in which we intend to provide local voice
services, we will have to qualify as a competitive local telephone company
because the regulations in such states effectively require us to do so in order
to perform our operations in the manner we propose.
Competitive local telephone companies are typically subject to more
stringent state regulation than shared tenant service providers. Our cost of
regulatory compliance would increase if we were subject to regulation as a
competitive local telephone company, but not in such a way that would have a
material adverse effect on our business. Most states require that competitive
local telephone companies receive approval from the public service commission to
operate. Competitive local telephone companies generally must also file tariffs
setting forth the terms, conditions and prices for intrastate voice services. In
many states, competitive local telephone companies must also, among other
things, file accident reports, notifications of complaints and service
interruptions, and contribute to universal service support. In addition, under
federal law, including the Telecommunications Act of 1996, competitive local
telephone companies are subject to certain rights and obligations with respect
to their agreements with incumbent local telephone companies, including the duty
to interconnect with other carriers, to provide other carriers access to their
poles, ducts, conduits and rights-of-way, and to make their agreements with the
incumbent local telephone company available to other carriers on a non-
discriminatory basis. As a result of the Telecommunications Act, which removed
most of the significant legal barriers to entry into communications service,
including local telephone company service, there has been increased competition
in our target markets for the provisioning of local telephone services.
While we are generally subject to less regulation as a shared tenant
services provider than we would be as a competitive local telephone company, we
have the added regulatory uncertainty that arises from the fact that many states
have little, if any, written regulations regarding shared tenant services. The
regulations that do exist are often unclear. In addition, some states rely on
the tariffs of the local telephone companies to determine what constitutes
permissible shared tenant services, and there are no assurances that such
tariffs will
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not change in a manner that materially affects our ability to provide services
as a shared tenant services provider. In addition, as a shared tenant services
provider we have less flexibility with respect to the use of our switching
systems than competitive local telephone companies because we must maintain a
switching system, or private branch exchange, in each building or set of
contiguous buildings that we serve.
Long Distance Voice Services
While the law on this issue is unclear, we believe that given the highly
customized interstate and international long distance services that we provide,
we are not required to make any material filing with, or seek the approval of,
the Federal Communications Commission. As with our local voice services, our
long distance services may be considered to be a common carrier service by the
Federal Communications Commission. If that occurs, we will be subject to common
carrier regulation under federal law and will need to file domestic and
international tariffs and seek FCC authorization to provide international
service. Our cost of regulatory compliance would increase if we were subject to
regulation as a common carrier. On the other hand, if we are deemed to be a
common carrier, we may find it easier to market our services to prospective
customers because we could simplify our agreements with them since many of the
protections we believe we need, such as limitation of liability, could be set
forth in the tariffs.
Additionally, as a result of the Telecommunications Act of 1996, the
regional Bell operating companies are now permitted to provide long distance
services in territories where they are not the dominant provider of local
services. These companies may also provide long distance services in the
territories where they are the dominant provider of local services if they
satisfy a regulatory checklist established by the Federal Communications
Commission. In December 1999, the FCC ruled that Bell Atlantic has met these
requirements in New York and may provide long distance services in New York. If
other regional Bell operating companies are permitted to provide long distance
services in territories where we operate, we could face greater price
competition.
Data Services
The Internet and data services that we provide generally are not subject to
federal, state or local regulation. Congress and some state legislatures have
considered imposing taxes and other burdens on Internet service providers and
regulating content provided over the Internet. Additionally, we may be affected
by statutes, regulations and court cases relating to the liability of Internet
service providers and other on-line service providers for information carried
on or through their services or equipment, including in the areas of copyright,
indecency/obscenity, defamation and fraud. Future regulation may have a negative
impact on our ability to offer Internet services at competitive and profitable
rates.
Video and Wireless Services
Our provision of video services is subject to some federal, state and/or
local regulations. We are, for example, required to obtain consent from local
broadcasters, and pay certain copyright fees, in order to provide their
programming, and we must also pay copyright fees to provide certain other
programming. We also are subject to some technical requirements with regard to
our provision of video services, such as requirements to ensure that our system
will not cause harmful interference with certain other communications systems.
Further, to the extent that we provide programming using wireless transmission,
we must obtain and maintain federal licenses.
Our video services are regulated to a far lesser extent than the video
services of franchised cable operators, which are those video services providers
who have received franchises from the municipalities they serve and whose
facilities typically cross public streets and rights of way. For example, we are
not subject to any rate regulation, and we are not subject to the "must carry"
obligations placed upon franchised cable operators, which require those
operators to carry certain programming.
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Recent rulings of the Federal Communications Commission may impact our
video services. For example, the FCC recently ruled that owners of multiple unit
premises generally cannot forbid their tenants from installing some
communication devices, such as satellite dishes, on the tenant's balconies and
other areas controlled by the tenant.
We do not have any cellular or similar types of licenses. Rather, we rent
or sell pagers and wireless phones and resell the services of wireless
providers. Consequently, while we do pay some regulatory fees, we generally are
not subject to federal regulation with respect to these services.
Mandatory Access Laws
There have been proposals to require that commercial office buildings give
access to competitive providers of communications services, and some states,
such as California and Texas, already have mandatory access laws. These laws
generally prohibit a property owner from providing exclusive access to one
provider or from restricting another provider's access to the property. In
addition, the Federal Communications Commission is considering, among other
things, whether building owners offering access to any communications provider
should be required to make comparable access available to all such providers on
a nondiscriminatory basis. We do not know whether, or in what form, these
proposals will be adopted. If the FCC or many other states in which we operate
or intend to operate require commercial property owners to provide access to all
communications providers, such laws will facilitate our competitors' access to
buildings we serve. Such laws may, however, also enable us to obtain access to
buildings in which we otherwise may have been denied access.
Intellectual Property
We regard certain aspects of our products, services and technology as
proprietary and attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our products, services or technology without authorization, or to
develop similar technology independently.
We currently have a patent application pending for our fiber-optic
infrastructure and network configuration. This patent may not be issued to us,
and if issued, it may not protect our intellectual property from competition
which could seek to design around or invalidate this product.
Employees
As of March 15, 2000, we had 307 full-time employees. We are not party to
any collective bargaining agreements covering any of our employees, have never
experienced any material labor disruption and are unaware of any current efforts
or plans to organize our employees. We consider our relationships with our
employees to be good.
Item 2. Properties.
Our headquarters are located in facilities consisting of approximately
30,000 square feet in Atlanta, Georgia, which we occupy under leases which
expire in 2005 and 2007. We also occupy approximately 3,000 square feet of
temporary space in Atlanta of leases of less than one year. In addition, our
engineering personnel, network operating facilities and warehousing and
distribution functions, were relocated in February 2000 to a new facility
consisting of approximately 32,000 square feet in Norcross, Georgia under a
lease which expires in November 2006. We also occupy offices in major U.S.
markets under leases of various terms. As we expand into new markets we will
continue to add office space as needed.
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Item 3. Legal Proceedings.
We are not currently involved in any pending legal proceedings that are
expected to have a material adverse effect on our business.
Item 4. Submission of Matters to a Vote of Security Holders
Note: In addition to the 4.5-for-1 stock split, all information in this Item 4
- ---- regarding common shares has been retroactively adjusted to reflect the
conversion of all outstanding preferred stock into common stock on
February 15, 2000.
On October 8, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 16,586,931 shares of common stock outstanding, and stockholders
holding 16,586,931 shares of common stock executed such consent, representing
100% of the then outstanding shares of common stock.
. In connection with the issuance and sale of series C preferred stock, the
stockholders approved (i) the entering into of the Series C Preferred Stock
Purchase Agreement and the Third Amended and Restated Stockholders Agreement
and (ii) the filing of the Second Certificate of Amendment to the Amended and
Restated Certificate of Incorporation.
. The stockholders approved (i) the reservation of 9,000,000 shares of common
stock for issuance pursuant to the 1997 Management Option Plan and (ii) the
reservation of 5,400,000 shares of common stock for issuance pursuant to
warrants to be granted in connection with our licensing agreements.
. The stockholders approved an amendment to our bylaws increasing the maximum
number of directors to nine (9).
On November 23, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 29,276,331 shares of common stock outstanding, and stockholders
holding 27,660,648 shares of common stock executed such consent, representing in
excess of 94.4% of the then outstanding shares of common stock.
. In connection with the issuance and sale of additional series C preferred
stock, the stockholders approved the filing of the Third Certificate of
Amendment to the Amended and Restated Certificate of Incorporation.
On November 23, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 29,276,331 shares of common stock outstanding, and stockholders
holding 27,581,023 shares of common stock executed such consent, representing in
excess of 94.2% of the then outstanding shares of common stock.
. The stockholders ratified the continued election of R. Stanley Allen, Ward C.
Bourdeaux, Jr., Jeffrey H. Schutz, William P. Egan and John C. Halsted as
directors, and elected Laurence S. Grafstein and Randall A. Hack as
directors.
On December 1, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 31,379,488 shares of common stock outstanding, and stockholders
holding 30,390,013 shares of common stock executed such consent, representing in
excess of 96.8% of the then outstanding shares of common stock.
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. The stockholders approved (i) the reservation of 11,700,000 shares of common
stock for issuance pursuant to the 1997 Management Option Plan, (ii) the
reservation of 11,250,000 shares of common stock for issuance pursuant to
warrants to be granted in connection with our licensing agreements and (iii)
the filing of the Fourth Certificate of Amendment to the Amended and Restated
Certificate of Incorporation.
On December 23, 1999, our stockholders approved the matters set forth below
by written consent in lieu of a special meeting. On the date of such consent
there were 35,438,701 shares of common stock outstanding, and stockholders
holding 35,279,802 shares of common stock executed such consent, representing in
excess of 99.6% of the then outstanding shares of common stock.
. The stockholders elected P. Eric Yopes as a director.
. In connection with our initial public offering, the stockholders approved (i)
the filing of the Fifth Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, (ii) the adoption of the Amended and Restated
By-laws, (iii) the filing of the Second Amended and Restated Certificate of
Incorporation and (iv) the declaration of a stock dividend in order to
effectuate a stock split of the common stock.
. In connection with the adoption of a shareholder rights plan, the
stockholders approved the declaration of a rights dividend on the common and
preferred stock.
. The stockholders approved (i) the adoption of the 2000 Stock Option and
Incentive Plan and the reservation of up to an aggregate of 11,700,000 shares
of common stock for issuance pursuant to the 2000 Stock Option and Incentive
Plan and the 1997 Management Option Plan and (ii) the adoption of the
Employee Stock Purchase Plan and the reservation of up to 900,000 shares of
common stock for issuance pursuant to the Employee Stock Purchase Plan.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.
Price Range of Common Stock
Our common stock has traded on the Nasdaq National Market under the symbol
"CYCO" since our initial public offering on February 10, 2000. Prior to this
date, there was no market for our common stock. On March 2, 2000, the last
reported sales price of our common stock as reported on the Nasdaq National
Market was $21.34. As of March 2, 2000, there were 87 holders of record of our
common stock. We believe that the number of beneficial owners of our common
stock at that date was substantially greater. The high and low sales prices for
our common stock as reported on the Nasdaq National Market for the period since
our initial public offering is set forth below.
<TABLE>
<CAPTION>
Period High Low
------ ------------ ------------
<S> <C> <C>
First Quarter (from February 10, 2000 through March 2, 2000) $23.50 $20.38
</TABLE>
Dividend Policy
We have not declared any cash dividends on our common stock since our
inception in 1997. We currently intend to retain our earnings for future growth
and, therefore, do not anticipate paying cash dividends in the foreseeable
future. Under Delaware law, we are permitted to pay dividends only out of our
surplus, or,
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if there is no surplus, out of our net profits. We currently have no debt
obligations whose covenants restrict the payment of dividends. However, we may
in the future enter into debt obligations that would restrict our ability to pay
cash dividends.
Recent Sales of Unregistered Securities
Set forth below in chronological order is information regarding equity
securities which we sold or issued during the period covered by this annual
report that were not registered under the Securities Act of 1933, as amended
(the "Securities Act"). No underwriters were used in connection with these sales
and issuances.
(1) On February 1, 1999, we issued an aggregate of 6,375 shares of series
B preferred stock to Barry L. Boniface and George J. Cisler for an
aggregate consideration of $51,000. The sale and issuance of these
securities was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, on the basis that the transaction
did not involve a public offering.
(2) On October 8, 1999, we issued an aggregate of 2,819,868 shares of
series C preferred stock to The Centennial Funds, Alta Communications,
Beacon Capital Partners, Nassau Capital, Gramercy Communications
Partners, Latona Cycom, AEW Partners, Vornado, R. Stanley Allen, Ward
C. Bourdeaux, Jr., Mark A. Graves, Barry L. Boniface, Michael Moh and
John L. Thompson for an aggregate consideration of $53,577,492. The
sale and issuance of these securities was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof, on the
basis that the transaction did not involve a public offering.
(3) On November 23, 1999, we issued an aggregate of 1,157,895 shares of
series C preferred stock to Brookfield International, Boston
Properties, Shorenstein and Cornerstone Properties for an aggregate
consideration of $22,000,000. The sale and issuance of these
securities was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, on the basis that the transaction
did not involve a public offering.
(4) On December 2, 1999, we issued 184,211 shares of series C preferred
stock to Vornado for consideration of $3,500,000. The sale and
issuance of these securities was exempt from registration under the
Securities Act pursuant to Section 4(2) thereof, on the basis that the
transaction did not involve a public offering.
(5) From January 1, 1999 to October 7, 1999, we issued stock options to
purchase an aggregate of 1,620,000 shares of common stock to employees
with an exercise price of $1.07 per share pursuant to stock option
plans. The sales and issuances of these securities were exempt from
registration under the Securities Act pursuant to Rule 701 promulgated
thereunder, on the basis that these options were offered and sold
pursuant to a written compensatory benefit plan.
(6) From October 11, 1999 to December 1, 1999, we issued stock options to
purchase an aggregate of 1,811,030 shares of common stock to employees
with an exercise price of $2.53 per share pursuant to stock option
plans. The sales and issuances of these securities were exempt from
registration under the Securities Act pursuant to Rule 701 promulgated
thereunder, on the basis that these options were offered and sold
pursuant to a written compensatory benefit plan.
(7) From December 6, 1999 to December 31, 1999, we issued stock options to
purchase an aggregate of 90,000 shares of common stock to employees
with an exercise price of $17.00 per share pursuant to stock option
plans. The sales and issuances of these securities were
20
<PAGE>
exempt from registration under the Securities Act pursuant to Rule 701
promulgated thereunder, on the basis that these options were offered
and sold pursuant to a written compensatory benefit plan.
(8) On November 23, 1999, we issued warrants to purchase up to an
aggregate of 2,745,321 shares of common stock to Aetna Life Insurance
Company, AEW Partners III, L.P., Alaska State Pension Investment
Board, Brookfield Properties, Inc., McCord Development, Inc., The
Milwaukee Employees' Retirement System, Principal Office Investors,
LLC, Tower Realty Management Corporation and Westbrook Fund III
Acquisitions, L.L.C. with an exercise price of $4.22 per share
pursuant to stock warrant agreements. The sale and issuance of these
securities was exempt from registration under the Securities Act
pursuant to Section 4(2) thereof, on the basis that the transaction
did not involve a public offering.
(9) On November 30, 1999, we issued warrants to purchase up to an
aggregate of 1,033,229 shares of common stock to Mezzanine Investors
Partners, SJ Plaza, LLC, Transwestern Investment Company LLC,
TrizecHahn Office Properties, Inc. and 101 Park, LLC with an exercise
price of $4.22 per share pursuant to stock warrant agreements. The
sale and issuance of these securities was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof, on the
basis that the transaction did not involve a public offering.
(10) On December 1, 1999, we issued warrants to purchase up to an aggregate
of 4,074,576 shares of common stock to Lend Lease Real Estate
Investments, Inc. and Vornado Communications, L.L.C. with an exercise
price of $4.22 per share pursuant to stock warrant agreements. The
sale and issuance of these securities was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof, on the
basis that the transaction did not involve a public offering.
(11) On December 2, 1999, we issued warrants to purchase up to an aggregate
of 3,310,868 shares of common stock to Boston Properties Limited
Partnership, Cornerstone Properties Limited Partnership, Cousins
Properties Incorporated and Shorenstein Company, L.P. with an exercise
price of $4.22 per share pursuant to stock warrant agreements. The
sale and issuance of these securities was exempt from registration
under the Securities Act pursuant to Section 4(2) thereof, on the
basis that the transaction did not involve a public offering.
Use of Proceeds
We completed our initial public offering in February 2000. The initial
public offering was made pursuant to a Registration Statement on Form S-1,
originally filed with the Securities and Exchange Commission on December 3,
1999, as amended (Commission File No. 333-92011), which was declared effective
on February 9, 2000. The initial public offering commenced on February 10, 2000
and terminated shortly thereafter, after the sale into the public market of all
of the registered shares of common stock.
The shares of common stock sold in the initial public offering were offered
for sale by a syndicate of underwriters represented by Bear, Stearns & Co. Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation and J.C. Bradford & Co.
We registered an aggregate of 11,500,000 shares of common stock (including
1,500,000 shares which were issued upon the exercise of the underwriters'
overallotment option) for sale in the initial public offering at a per share
price of $17.00, for an aggregate offering price of approximately $195.5
million.
21
<PAGE>
We incurred the following expenses in connection with the initial public
offering:
<TABLE>
<S> <C>
Underwriting discounts and commissions of approximately: $13,685,000
Other expenses of approximately: $ 2,415,000
---------------------
Total expenses of approximately: $16,100,000
=====================
</TABLE>
No payments were made to (i) any of our directors, officers, general
partners or associates, (ii) any person(s) owning 10% or more of our common
stock, or (iii) any of our affiliates.
After deducting the expenses set forth above, we received approximately
$179.4 million in net proceeds from the initial public offering. We have not
yet used any of the net proceeds from the initial public offering. The net
proceeds have been invested in cash, cash equivalents and short-term
investments. Consistent with the description of the use of proceeds set forth
in the prospectus contained in the Registration Statement, we intend to use the
proceeds from the offering for working capital and general corporate purposes,
the construction of in-building networks and the purchase of communications
equipment.
22
<PAGE>
Item 6. Selected Financial Data
The following selected financial data as of December 31, 1996, 1997, 1998,
and 1999 and for the years then ended have been derived from our audited
financial statements and the related notes. The selected financial data as of
December 31, 1995 and for the period from August 16, 1995 (date of inception) to
December 31, 1995 have been derived from our unaudited financial statements.
The following financial information should be read in conjunction with
"Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Item 1. Business" and our financial statements and the
related notes, all of which appear elsewhere in this report.
<TABLE>
<CAPTION>
Period from
Inception
(August 16, 1995) Year Ended December 31,
to ------------------------------------------------------------
December 31, 1995 1996 1997 1998 1999
------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(unaudited)
Statement of Operations
Data:
Revenue............................. $ -- $ 83,556 $ 709,402 $ 2,417,816 $ 7,437,496
Operating expenses:
Cost of services................. -- 131,771 603,114 1,539,846 4,966,851
Sales and marketing (1).......... -- 12,189 448,916 1,489,355 4,007,094
General and administrative (2)... 117,086 640,704 900,595 2,534,566 11,232,045
Depreciation and amortization.... 694 53,808 196,415 576,659 2,197,831
------------------------------------------------------------------------------------
Total operating expenses......... 117,780 838,472 2,149,040 6,140,426 22,403,821
------------------------------------------------------------------------------------
Operating loss...................... (117,780) (754,916) (1,439,638) (3,722,610) (14,966,385)
Interest income, net................ -- 13,939 113,922 232,279 810,045
------------------------------------------------------------------------------------
Loss before income taxes............ (117,780) (740,977) (1,325,716) (3,490,331) (14,156,280)
Income tax benefit.................. -- -- -- -- --
------------------------------------------------------------------------------------
Net loss............................ (117,780) (740,977) (1,325,716) (3,490,331) (14,156,280)
Beneficial conversion feature of
preferred stock.................... -- -- -- -- (79,077,500)
------------------------------------------------------------------------------------
Net loss available to common
stockholders...................... $(117,780) $ (740,977) $(1,325,716) $(3,490,331) $(93,233,780)
====================================================================================
Net loss per share of common stock:
Basic and diluted.................. $ (.13) $ (0.29) $ (0.41) $ (1.32) $ (35.22)
====================================================================================
Weighted average shares of common
stock outstanding:
Basic and diluted.................. 900,000 2,523,032 3,266,237 2,636,906 2,647,274
====================================================================================
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
As of December 31
-------------------------------------------------------------------------------------------------
1995 1996 1997 1998 1999
---------------- ----------------- ----------------- ----------------- ------------------
<S> <C> <C> <C> <C> <C>
(unaudited)
Balance Sheet Data:
Cash and cash equivalents......... $ 3,096 $ 447,726 $3,671,065 $11,057,696 $ 69,475,288
Property and equipment, net....... 5,630 597,716 1,609,791 6,291,413 27,028,102
Total assets...................... 14,227 1,211,968 5,648,447 19,407,105 122,854,601
Total liabilities................. 37,607 183,212 612,578 2,404,191 15,869,191
Convertible redeemable preferred -- -- 5,977,480 21,317,263 100,277,750
stock............................
Stockholders' (deficit) equity.... (23,380) 1,028,756 (941,611) (4,314,349) 6,707,660
</TABLE>
(1) Sales and marketing includes non-cash compensation expense of $0, $0,
$0, $19,248, and $321,492 in 1995, 1996, 1997, 1998 and 1999, respectively.
(2) General and administrative includes non-cash compensation expense of
$0, $0, $0, $98,345, and $1,403,796 in 1995, 1996, 1997, 1998 and 1999,
respectively.
As used in the table below, adjusted EBITDA consists of net loss excluding
net interest, income taxes, depreciation and amortization, and non-cash
compensation expense. We believe that because adjusted EBITDA is a measure of
financial performance it is useful to investors and analysts as an indicator of
a company's ability to fund its operations and to service or incur debt.
However, adjusted EBITDA is not a measure calculated under generally accepted
accounting principles. Other companies may calculate EBITDA, adjusted EBITDA or
other similarly titled measures in a manner different from us; consequently, our
calculation of adjusted EBITDA may not be comparable to other companies'
calculations of EBITDA, adjusted EBITDA or other similarly titled measures.
Adjusted EBITDA is not an alternative to operating income as an indicator of
operating performance or an alternative to cash flows from operating activities
as a measure of liquidity, and investors should consider these measures as well.
The table below provides selected key operational data:
<TABLE>
<CAPTION>
Period
from Inception
(August 16, 1995) Year Ended December 31,
to December 31, -----------------------------------------------------------
1995 1996 1997 1998 1999
-------------------------------------------------------------------------------------
(unaudited)
Other Operating Data:
<S> <C> <C> <C> <C> <C>
Net cash used in $ (84,980) $ (638,707) $ (891,519) $(2,914,905) $ (9,900,647)
operating activities.....
Net cash used in
investing activities..... (6,324) (638,638) (1,190,723) (4,991,641) (10,145,722)
Net cash provided by
(used in) financing
activities............... 94,400 1,721,975 5,305,581 15,293,177 78,463,961
Adjusted EBITDA........... (117,068) (701,108) (1,243,223) (3,028,358) (11,043,206)
Capital expenditures...... (6,324) (518,638) (1,190,723) (2,887,243) (10,365,122)
Markets served............ -- 1 2 4 12
Buildings served.......... -- 15 19 39 116
Rentable square feet in
buildings served......... -- 2.4 million 3.6 million 11.0 million 30.0 million
</TABLE>
24
<PAGE>
Item 7. Management's Discussion And Analysis Of Financial Condition And
Results Of Operations
Overview
We provide a full range of broadband communications services to small and
medium-sized businesses located in multi-tenant office buildings in major
metropolitan markets in the United States. This comprehensive bundle of
services currently includes high speed dedicated Internet access, local and long
distance voice services, digital telephone systems, business television,
voicemail, e-mail, web hosting and other advanced services. Since the inception
of our predecessor company in August 1995, our principal activities have
included securing license agreements with building owners and real estate
managers that enable us to install our in-building fiber-optic, digital and
broadband networks, marketing our communications services to tenants and hiring
qualified personnel to support our rapid growth. We began operating in-building
networks in June 1996 and as of December 31, 1999, we were providing services in
116 buildings representing approximately 30 million rentable square feet. As of
December 31, 1999, we had secured agreements giving us the right to operate our
networks in over 730 buildings representing more than 229 million rentable
square feet.
Building and expanding our business will continue to require us to incur
significant capital expenditures. These expenditures will consist primarily of
purchases of communication equipment and construction costs associated with
building our in-building networks. We attempt to maximize the benefit of
deployed capital by investing in network assets only after entering into a long-
term license agreement with a property owner. In addition, capital is not
expended on a customer until we have a signed contract with that customer. As a
result, a large portion of our capital expenditures is success-based. In a
typical 335,000 square foot building, up-front capital investment is usually
less than $90,000 which includes the purchase and installation of our in-
building vertical communications infrastructure, commonly known as a riser
system, and associated network equipment. As we begin to successfully penetrate
a building, in order to provide additional network capacity and equipment for
our customers, capital deployment in that building may grow to over $335,000.
We have experienced operating losses and generated negative adjusted
EBITDA, as defined in "Selected Financial Data," and expect to continue to
generate losses and negative adjusted EBITDA for the foreseeable future while we
continue to construct in-building networks, expand our customer base and build
our internal infrastructure. As a result of our limited operating history,
prospective investors have limited operating and financial data upon which to
evaluate our performance.
Factors Affecting Future Operations
Revenue. We generate revenue from selling data, voice and other services
and from the rental of telephone systems and other equipment to tenants in the
buildings in which we own and operate networks. The majority of our revenue is
generated on a monthly recurring basis. The remainder of our revenue is derived
from non-recurring charges for installations and other one-time services. Our
customer contracts typically range between one and seven years in length and are
usually designed to coincide with our customers' office space leases. The
typical length of our customer contracts is three years.
We believe that our ability to generate revenue in the future will be
affected primarily by the following factors, some of which we cannot control:
. our ability to enter into license agreements with building owners and install
our in-building networks;
. our ability to obtain customers before our competitors do;
25
<PAGE>
. the level of competition we face from other communications providers,
including price competition, which has resulted in a trend of declining
prices and margins for communications services over time;
. the demand for our services; and
. possible regulatory changes, including regulations requiring building owners
to give access to competitive providers of communications services.
Cost of services. Cost of services consists primarily of leased transport
charges, which are lease payments to communications providers for the
transmission facilities used to connect our in-building networks to incumbent
local telephone companies' and other competitive local and long distance
carriers' networks. Other costs include per minute charges paid to long distance
providers for use of their networks, monthly fees paid to Internet providers,
equipment maintenance expenses, and labor costs associated with installing
equipment and changing customers' services. We expect these costs to increase in
aggregate dollar amount as we continue to grow our business but to decline as a
percentage of revenue due to economies of scale, expected improvements in
technology and price competition from an increased number of vendors from which
we can lease voice and data transport. However, in markets where there is only a
single carrier, or only a limited number of carriers, available to provide
sufficient transmission capacity, the cost of services may actually increase.
Sales and marketing expenses. Sales and marketing expenses include
applicable employee salaries and commission payments and marketing, advertising
and promotional expenses. Sales and marketing expenses also include the
amortization of deferred compensation which is a result of our granting stock
options to sales and marketing employees with exercise prices per share treated
for accounting purposes as below the fair value of our common stock at the dates
of grant. We are amortizing the deferred compensation over the vesting period of
the applicable option, which is generally five years. We recognized amortization
of deferred compensation expense related to sales and marketing employees of
$19,248 and $321,492 for the years ended December 31, 1998 and 1999,
respectively (See Note 4 to our financial statements). Sales and marketing
expenses also include payments to building owners and operators under license
agreements, as described below.
In November and December 1999, we entered into master license agreements
with several owners and operators of office buildings. Each master license
agreement sets forth a list of buildings owned or managed by the property owner
or operator that is a party to that agreement. In accordance with the terms of
these agreements, we have begun to enter into property-specific license
agreements with respect to each listed building. In some cases, the property
owner or operator may need to obtain consent from third parties who may have an
ownership interest in the building before we can enter into a property-specific
license agreement for that building. Under the property-specific license
agreements, the property owner or operator will grant us a license to install
and operate our networks in each building in return for approximately 6% of the
revenue we receive from tenants in that building. The initial term of each
property-specific license agreement is generally five years, with an automatic
five year extension at the end of the initial term, absent any default under the
agreement. These master license agreements gave us the right to operate our
networks in more than 600 buildings representing more than 194 million rentable
square feet.
In addition to the master license agreements, we also have license
agreements with a number of other property owners and operators which were
previously executed on a per building basis. Under these agreements, we have
agreed to pay property owners either a base fee or a percentage fee of between
3% and 6% of our revenue in the building. As of December 31, 1999, our
aggregate minimum obligation under these agreements was approximately $130,000
per year for the next seven years.
We expect to incur significant sales and marketing expenses as we continue
to grow our business and build our brand.
26
<PAGE>
General and administrative expenses. General and administrative expenses
include costs associated with the recruiting and compensation of corporate
administration, customer care and technical services personnel as well as costs
of travel and entertainment, back office systems, and legal, accounting and
other professional services. These costs are expected to increase significantly
as we expand our operations, but decline over time as a percentage of revenue
due to economies of scale. General and administrative expenses also include the
amortization of deferred compensation which is a result of our granting stock
options to general and administrative employees with exercise prices per share
treated for accounting purposes as below the fair value of our common stock at
the dates of grant. We are amortizing the deferred compensation over the
vesting period of the applicable option, which is generally five years. We
recognized amortization of deferred compensation expense related to general and
administrative employees of $98,345 and $1,403,796 for the years ended December
31, 1998 and 1999, respectively (See Note 4 to our financial statements).
Depreciation and amortization. Depreciation and amortization expenses
include depreciation of network related equipment, information systems,
furniture, fixtures, leasehold improvements and the amortization of goodwill and
acquired tenant contracts.
In connection with the execution of master license agreements in November
and December 1999, we also entered into stock warrant agreements with the same
property owners and operators. Under the terms of these agreements, we issued
these owners and operators warrants to purchase an aggregate of 11,163,990
shares of our common stock at an exercise price of $4.22 per share. The exact
number of shares of common stock underlying the warrants, which is based on the
gross leasable area of the buildings set forth in the master license agreements,
will be determined upon the completion of due diligence and the finalization of
the building construction schedules, which is expected to be completed in April
2000. The measurement date for valuing the warrants will be the date(s) on
which the property owners or managers effectively complete their performance
requirements (see Note 4 to our financial statements).
Based upon the current structure of the agreements governing the warrants,
we expect that the fair value of the warrants will approximate $170 million and
will be capitalized as license inducement expense and amortized over the
applicable terms of the license agreements with property owners and operators.
Such license terms are generally 10 years. Depending on the prevailing fair
market value of the warrants at the measurement date, the amount of license
inducement and related amortization may change and such change could be
material. In addition, we could incur additional cash or non-cash charges as
license inducements to current or future property owners, and such amounts may
be material.
We expect depreciation and amortization expenses to increase significantly
as we enter into additional property license agreements and install our networks
in more buildings.
Acquisition strategy. We intend to opportunistically pursue acquisitions
or other strategic relationships to expand our customer base or geographic
presence. These activities could significantly impact our results of operations
and require us to raise additional capital earlier than expected.
In November 1999 we entered into a binding letter of intent to acquire
approximately 18% of the common stock of SiteConnect, a Seattle-based in-
building communications service provider, in exchange for 281,250 shares of our
common stock. The agreement gives us a one-year option to purchase the remaining
outstanding shares of common stock of SiteConnect for approximately $5.0 million
of our common stock, valued at the initial public offering price, which would be
294,118 shares based on the initial public offering price of $17.00 per share.
Currently, SiteConnect provides data communications services to customers in ten
commercial office buildings in Seattle.
27
<PAGE>
Results of Operations
Year Ended December 31, 1999 Compared to the Year Ended December 31, 1998
Revenues. Revenues for the year ended December 31, 1999 increased 208% to
$7.4 million from $2.4 million for the same period in the prior year. $3.2
million of the increase in revenues relates to the addition of new customers and
providing additional services to existing customers. $1.8 million of the
increase relates to the acquisition of the assets and customers of MTS
Communications Company in December 1998 (see Note 9 to our financial
statements).
Cost of services. Cost of services for the year ended December 31, 1999
increased 223% to $5.0 million from $1.5 million for the same period in the
prior year. The increase in cost of services was due to an increase in the
number of leased facilities connecting our licensed buildings to local, long
distance and Internet providers and the greater volume of voice and data
traffic. As of December 31, 1999, we had networks installed in 116 buildings
versus 39 buildings installed at December 31, 1998.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 1999 increased 169% to $4.0 million from $1.5 million for the
same period in the prior year. $1.8 million of this increase in expenses was due
to an increase in the number of sales and marketing personnel and their related
compensation and expenses; $0.3 million of this increase was due to non-cash
compensation related to the issuance of stock options at exercise prices lower
than fair market value on their dates of grant (see Note 4 to our financial
statements); $0.2 million of this increase was due to increased revenue sharing
payments made to property owners with whom we have license agreements; and $0.2
million of this increase was due to increased promotion of our services via
direct marketing and advertising in our licensed buildings. The decrease in
sales and marketing expenses as a percentage of revenue related primarily to the
additional revenue attributable to the acquisition of the assets of MTS
Communications without a comparable increase in sales and marketing expenses.
We expect sales and marketing expenses to continue to grow as we hire additional
personnel and incur additional expenses to market our services to potential
customers.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 1999 increased 343% to $11.2 million from $2.5
million for the same period in the prior year. The increase in general and
administrative expenses was due primarily to a $4.5 million increase in
salaries, benefits and recruiting expenses related to the hiring of additional
personnel, a $1.3 million increase in non-cash compensation related to the
issuance of stock options at exercise prices lower than fair value on their
dates of grant (see Note 4 to our financial statements), a $0.5 million increase
in travel and entertainment expenses primarily related to marketing to property
owners and operators and expenses associated with personnel traveling to oversee
and conduct the installation of our networks in additional buildings, a $0.6
million increase in accounting, consulting, legal and billing outsourcing fees,
and a $1.8 million increase in office space rent and other growth-driven
operating expenses. We expect general and administrative expenses to continue
to grow as we hire additional personnel and incur additional expenses to support
the growth of our operations.
Depreciation and amortization. Depreciation and amortization for year
ended December 31, 1999 increased 281% to $2.2 million from $0.6 million for the
same period in the prior year. $1.0 million of this increase was due to
increased capital expenditures related to deploying our in-building networks and
related equipment; $0.4 million of this increase was attributable to the
acquisition of the assets of MTS Communications (see Note 9 to our financial
statements); $0.1 million of this increase was due to depreciation of computers
and other back-office equipment; and $0.1 million of this increase was due to
amortization of goodwill and tenant contracts related to the acquisition of MTS
Communications (see Note 9 to our financial statements).
Interest income, net. Interest income, net for the year ended December 31,
1999 increased to $810,045 from $232,279 for the same period in the prior year.
The increase in interest income, net was due to
28
<PAGE>
increased investments in short-term interest bearing investments as a result of
investing the proceeds raised from our Series B preferred stock offering in
September 1998 and our Series C preferred stock offering in the third quarter of
1999 (see Note 5 to our financial statements). Interest expense was nominal in
both periods.
Year Ended December 31, 1998 compared to the Year Ended December 31, 1997
Revenues. Revenues for the year ended December 31, 1998 increased 241% to
$2.4 million from $0.7 million for the same period in the prior year. $1.6
million of the increase was the result of the addition of new customers and the
provision of additional services to existing customers. $89,805 of the increase
was attributable to the acquisition of the assets and customers of MTS
Communications in December 1998 (see Note 9 to our financial statements).
Cost of services. Cost of services for the year ended December 31, 1998
increased 155% to $1.5 million from $0.6 million for the same period in the
prior year. The growth in cost of services was the result of providing services
to an increased number of customers and an increase in the number of leased
facilities connecting our licensed buildings to local, long distance and
Internet providers. As of December 31, 1998, we had networks installed in 39
buildings versus 19 buildings at December 31, 1997.
Sales and marketing expenses. Sales and marketing expenses for the year
ended December 31, 1998 increased 232% to $1.5 million from $448,916 for the
same period in the prior year. $0.9 million of this increase in expenses was due
to an increase in the number of sales and marketing personnel and their related
compensation and expenses; $80,429 of this increase was due to increased revenue
sharing payments made to property owners with whom we have license agreements;
and $40,720 of this increase was due to increased promotion of our services via
direct marketing and advertising in our licensed buildings. We expect sales and
marketing expenses to continue to grow as we hire additional personnel and incur
additional expenses to market our services to potential customers.
General and administrative expenses. General and administrative expenses
for the year ended December 31, 1998 increased 181% to $2.5 million from $.9
million for the same period in the prior year. The increase in general and
administrative expenses was due primarily to a $1.0 million increase in
salaries, benefits and recruiting expenses related to the hiring of additional
personnel, a $0.1 million increase in non-cash compensation related to the
issuance of stock options at exercise prices lower than fair value on their
dates of grant (see Note 4 to our financial statements), a $0.1 million increase
in accounting, consulting, legal and billing outsourcing fees, and a $0.4
million increase in office space rent, travel and other growth-driven operating
expenses. We expect general and administrative expenses to continue to grow as
we hire additional personnel and incur additional expenses to support the growth
of our operations.
Depreciation and amortization. Depreciation and amortization for the year
ended December 31, 1998 increased 194% to $576,659 from $196,415 for the same
period in the prior year. $285,645 of this increase was due to increased capital
expenditures related to deploying our in-building networks and related
equipment; $32,766 of this increase was attributable to the acquisition of the
assets of MTS Communications (see Note 9 to our financial statements); $49,181
of this increase was due to depreciation of computers and other back-office
equipment; and $12,652 of this increase was due to amortization of goodwill and
tenant contracts related to the acquisition of MTS Communications (see Note 9 to
our financial statements).
Interest income, net. Interest income, net for the year ended December 31,
1998 increased 104% to $232,279 from $113,922 for the same period in the prior
year. The increase in interest income, net was due to increased investments in
short-term interest bearing investments as a result of investing the proceeds
raised from our series A preferred stock offering in July 1997 and our series B
preferred stock offering in September 1998 (see Note 5 to our financial
statements). Interest expense was nominal in both periods.
29
<PAGE>
Liquidity and Capital Resources
The results of our operations have generated a net cash outflow due to the
rate at which we have grown. Cash flow from operations totaled $(891,519), $(2.9
million), and $(9.9 million) for the years ended, December 31, 1997, 1998, and
1999, respectively. The expansion of our operating and administrative personnel,
office space costs, and other operating expenses were the principal contributors
to the increases in the net cash outflow between the periods. As we continue to
expand our operations, these increases in period-over-period operating cash
outflows will continue.
Cash used in investing activities was ($1.2 million), $(5.0 million), and
$(10.1 million) for the years ended December 31, 1997, 1998, and 1999,
respectively. Cash used in investing activities has primarily been used to
build-out our in-building networks. In 1998 we used $1.9 million to purchase the
assets of MTS Communications. As of December 31, 1999, we had made capital
expenditures of $15.0 million since inception. We expect that capital
expenditures will increase substantially in future periods as we construct our
networks and purchase more communications equipment. We will continue to seek
access to additional buildings. If we are successful in gaining access to
additional buildings, we will have substantial needs for additional capital for
an indefinite period. We also expect to have substantial and increasing negative
adjusted EBITDA and net losses.
Cash provided by financing activities was $5.3 million, $15.3 million and
$78.5 million for the years ended December 31, 1997, 1998, and 1999,
respectively. Financing has primarily been obtained through the issuance of
convertible preferred stock to private investors (See Note 10 to our financial
statements). The proceeds from these equity issuances have been and will
continue to be used to fund cash outflows for operating and investing
activities.
On December 8, 1998, we acquired certain assets of MTS Communications, a
provider of communications services in California, for total consideration of
$2,574,848 consisting of $1,904,398 in cash and the assumption of certain
capital lease obligations with a fair value of $670,450. In November 1999, we
signed a binding letter of intent to acquire 254,125 shares of common stock,
representing less than 20% common stock ownership, of SiteConnect, Inc., a
Seattle-based provider of communication services, for consideration of 281,250
shares of our common stock. The agreement contains an option to purchase the
remaining outstanding common stock of SiteConnect for approximately $5.0 million
of our common stock valued at the initial public offering price, which would be
294,118 shares based on the initial public offering price of $17.00 per share.
In November and December 1999, we issued warrants to purchase an aggregate
of 11,163,990 shares of our common stock at an exercise price of $4.22 per share
to several property owners and operators who executed master license agreements.
The exact number of shares of common stock underlying the warrants, which is
based on the gross leasable area of the buildings set forth in the master
license agreements, will be determined upon the completion of due diligence and
the finalization of the building schedules, which is expected to be completed in
April 2000. These master license agreements gave us the right to operate our
networks in more than 600 buildings representing more than 194 million rentable
square feet. As noted above, on a typical 335,000 square foot building, the up
front capital investment is usually less than $90,000. As we begin to
successfully penetrate a building, our capital deployment may grow to over
$335,000.
As of December 31, 1999, we had minimum payment obligations under existing
license agreements of approximately $130,000 per year for the next seven years.
As of December 31, 1999, we had $577,677 in capital lease obligations
outstanding (including interest and taxes associated therewith). The majority of
these capital lease obligations were assumed through the acquisition of the
assets of MTS Communications. Our capital lease obligations contain no
provisions that would limit its future borrowing ability.
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We currently have contracts with several communications providers under
which we have minimum purchase obligations for leased transport. As of December
31, 1999, these minimum purchase obligations totaled approximately $1.6 million
through 2001. We will have to pay those providers even if these services are
not utilized.
On February 15, 2000, we completed our initial public offering of common
stock, raising net proceeds of approximately $179 million. We intend to use
approximately $100.0 million of the net proceeds from this offering for
construction of in-building networks and the purchase of communications
equipment and approximately $10.0 million for implementation and modification of
information support systems; however, we currently have no material purchase
commitments with respect to these planned expenditures. The remainder of the net
proceeds will be available for working capital and general corporate purposes.
We may also use a portion of the net proceeds to acquire or invest in
complementary businesses, technologies, services or products. However, we
currently have no material commitments or agreements with respect to any of
these types of transactions.
We are currently operational in 17 markets, and plan to expand our presence
to approximately 27 markets by the end of 2000 and approximately 40 markets by
the end of 2001. We estimate that this expansion will require capital
expenditures of approximately $50.0 million in 2000 and approximately $90.0
million in 2001.
We estimate that the net proceeds of this offering in addition to cash on
hand will be sufficient to fund operations and the projected deployment of our
network through mid-2001. We do, however, expect to continue our growth,
expansion and the further development of our network and services beyond that
point. Accordingly, we expect that we will eventually need to arrange for
additional sources of capital through the issuance of debt or equity or bank
borrowings. There are no commitments for any such additional financing, and we
cannot be sure that we will be able to obtain any such additional financing at
the times required and on acceptable terms and conditions. In such event, our
growth could slow and operations could be adversely affected.
The actual amount and timing of our future capital requirements may differ
materially from our estimates as a result of many factors, some of which we
cannot control. These factors include:
. the timing of execution of license agreements;
. the ability to meet or exceed construction schedules;
. obtaining favorable prices for purchases of equipment;
. our ability to develop, acquire and integrate the necessary operational
support systems;
. the cost of network development in each of our markets;
. demand for our services;
. the nature and penetration of new services that may be offered by the us;
. the timing and extent of future acquisitions or investments, if any, and our
ability to integrate these acquisitions or investments;
. regulatory changes; and
. changes in technology and competitive developments beyond our control.
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Recent Accounting Pronouncements
The Securities and Exchange Commission has released SAB No. 101, "Revenue
Recognition in Financial Statements." We are reviewing our policies with
respect to SAB No. 101 and do not anticipate the impact of adoption to be
material.
Year 2000 Compliance
The Year 2000 issue is the result of computer-controlled systems using two
digits rather than four to define the applicable year. For example, certain
computer programs that have time-sensitive software may recognize a date ending
in "00" as the year 1900 rather than the year 2000. This could result in system
failure or miscalculations causing disruptions of operations including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
As of March 30, 2000, we have not experienced any material problems as a
result of the Year 2000 issue. Costs to ensure that our systems and networks are
Year 2000 compliant have not been, and are not expected to be, material.
RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
We expect our losses to continue to increase for the foreseeable future
Since our formation we have generated increasing negative adjusted EBITDA,
as defined in "Selected Financial Data," and larger net losses each quarter. We
have not achieved profitability and expect to continue to incur increasing
negative adjusted EBITDA and larger net losses for the foreseeable future. For
1998, we had adjusted EBITDA of $(3,028,358) and a net loss of $(3,490,331) on
revenues of $2,417,816. For 1999, we had adjusted EBITDA of $(11,043,206) and a
net loss of $(14,156,280) (excluding a non-recurring charge related to the
beneficial conversion feature of the preferred stock) on revenues of $7,437,496.
In addition, we expect to continue to incur significant costs as we deploy
additional in-building networks and, as a result, we will need to generate
significant revenue to achieve profitability, which may not occur.
Our business has grown rapidly and our business model is still evolving, which
makes it difficult to evaluate our prospects
We have grown our business rapidly and have experienced significant losses
in our efforts to penetrate our market. We will continue to make substantial
capital expenditures in deploying our networks before we know whether our
business plan can be successfully executed. As a result, there is a risk that
our business will fail. Additionally, our limited operating history makes it
difficult to evaluate the execution of our business model thus far. Furthermore,
because the market for services of in-building communications providers is not
well established, it is difficult for you to compare our company with our
competitors.
We are an early-stage company in an unproven industry and if we do not grow
rapidly or obtain additional capital we will not succeed
We began operating our first in-building network in June 1996 and were
operating 116 in-building networks as of December 31, 1999. We must, however,
continue to grow rapidly in order to succeed. Because the communications
industry is capital intensive, rapidly evolving and subject to significant
economies of scale, as a relatively small organization we are at a competitive
disadvantage. The growth we must achieve to reduce that disadvantage will put a
significant strain on all of our resources. Our current capital resources,
including our cash on hand, will be sufficient to fund our operations and the
projected deployment of additional in-building networks only through mid-2001.
We will require substantial additional capital beyond
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then to finance our future operations according to our current business plan. If
we fail to grow rapidly or obtain additional capital, we may not be able to
compete with larger, more well-established companies.
Additionally, we are unaware of any industry studies which have
specifically addressed the market for services of in-building communications
providers. The demand for bundled services from in-building communications
providers is unproven and may grow less than the demand for communications
services generally, or not at all. Furthermore, our own growth rate may not
match the growth rate of the in-building communications market as a whole.
Our business plan cannot succeed unless we continue to obtain license agreements
with building owners and managers
Our business depends upon our ability to install in-building networks. The
failure of building owners or managers to grant or renew access rights on
acceptable terms, or any deterioration in our existing relationships with
building owners or managers, could harm our marketing efforts and could
substantially reduce our potential customer base. Current federal and state
regulations do not require building owners to make space available to us, or to
do so on terms that are reasonable or nondiscriminatory. Building owners or
managers may decide not to permit us to install our networks in their buildings
or may elect not to renew our license agreements. Non-renewal of these
agreements would reduce our revenues and we might not recover all of our
infrastructure costs.
We must place our network infrastructures in additional buildings before our
competitors do or we will face a substantial competitive disadvantage
Our success will depend upon our ability to quickly obtain license
agreements and install our in-building networks in many more buildings. This is
crucial in order to establish a first-mover advantage. We may not be able to
accomplish this. Each building in which we do not build a network is
particularly vulnerable to competitors. In addition, future expansions and
adaptations of our network infrastructures may be necessary to respond to growth
in the number of customers served, increased capacity demands and changes to our
services; otherwise other companies could be encouraged to compete in buildings
where we have installed networks.
In addition, future expansion will require us to outsource a significant
portion of the installation of our in-building networks. Any delays in
obtaining, or interruption in, the services of these third party installers
could delay our plans to install in-building networks, impair our ability to
acquire or retain customers and harm our business generally.
We may not be able to efficiently manage our growth, which could harm our
business
Future expansion will place significant additional strains on our
personnel, financial and other resources. The failure to efficiently manage our
growth could adversely affect the quality of our services, our business and our
financial condition. Our ability to manage our growth will be particularly
dependent on our ability to develop and retain an effective sales force and
qualified technical and managerial personnel. The competition for qualified
sales, technical and managerial personnel in the communications industry is
intense, and we may not be able to hire and retain sufficient qualified
personnel. In this regard, we note that we do not have employment contracts with
our key personnel. In addition, we may not be able to maintain the quality of
our operations, to control our costs, to maintain compliance with all applicable
regulations, and to expand our internal management, technical, information and
accounting systems in order to support our desired growth.
Our business will be harmed if our information support systems are not further
developed
Sophisticated information processing systems, including billing, are vital
to our growth and our ability to achieve operating efficiencies. A failure of
these systems could substantially impair our ability to provide
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services, send invoices and monitor our operations. Among the systems we have
identified as being presently inadequate to meet the increased demands of our
anticipated growth are work-flow and customer priority management, human
resources, sales and customer support and fixed asset management, and there may
be other systems we have not identified that are in need of improvement. We
estimate that modifying or replacing these systems will cost approximately $10
million in fiscal year 2000. Our plans for the development and implementation of
these systems rely largely upon acquiring products and services offered by
third-party vendors and integrating those products and services. We may be
unable to implement these systems on a timely basis or at all, and these systems
may not perform as expected. We may also be unable to maintain and upgrade our
operational support systems as necessary.
We operate in a highly competitive market, and we may not be able to compete
effectively against established competitors with greater financial resources and
diverse strategic plans
We face competition from many communications providers with significantly
greater financial resources, well-established brand names, larger customer bases
and diverse strategic plans and technologies. Intense competition has led to
declining prices and margins for many communications services. We expect this
trend to continue as competition intensifies in the future. We expect
significant competition from traditional and new communications companies,
including local, long distance, cable modem, Internet, digital subscriber line,
fixed and mobile wireless and satellite data service providers, some of which
are described in more detail below. If these potential competitors successfully
focus on our market, we may face intense competition which could harm our
business. In addition, we may also face severe price competition for building
access rights, which could result in higher sales and marketing expenses and
lower profit margins.
We face competition from other in-building communications providers
Some competitors, such as Allied Riser Communications, Broadband Office and
OnSite Access, are attempting to gain access to office buildings in our target
markets. To the extent these competitors are successful, we may face
difficulties in building our networks and marketing our services within some of
our target buildings. Because our agreements to use utility shaft space within
buildings are generally not exclusive, owners of such buildings could also give
similar rights to our competitors. Certain competitors already have rights to
install networks in some of the buildings in which we have rights to install our
networks. It is not clear whether it will be profitable for two or more
different companies to operate networks within the same building. Therefore, it
is critical that we build our networks in our target buildings quickly, before
our competitors do so. If a competitor installs a network in a building in which
we operate, there will likely be substantial price competition.
We face competition from local telephone companies
Incumbent local telephone companies, including GTE and regional Bell
operating companies such as Bell Atlantic and BellSouth, have several
competitive advantages over us, including established brand names and
reputations and significant capital to rapidly deploy or leverage existing
communications equipment and broadband networks. They often market their
services to tenants of buildings within our target markets and selectively
construct in-building facilities. Additionally, the regional Bell operating
companies are now permitted to provide long distance services in territories
where they are not the dominant provider of local services. These companies may
also provide long distance services in the territories where they are the
dominant provider of local services if they satisfy a regulatory checklist
established by the Federal Communications Commission. In December 1999, the FCC
ruled that Bell Atlantic has met these requirements in New York and may provide
long distance services in New York. If other regional Bell operating companies
are permitted to provide long distance services in territories where we operate,
we could face greater price competition.
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We face competition from long distance companies
We will face strong competition from long distance companies. Many of the
leading long distance carriers, including AT&T, MCI WorldCom and Sprint, could
begin to build their own in-building voice and data networks. The newer national
long distance carriers, such as Level 3, Qwest and Williams Communications, are
building and managing high speed fiber-based national voice and data networks,
partnering with Internet service providers, and may extend their networks by
installing in-building facilities and equipment.
We face competition from fixed wireless service providers
We may lose potential customers to fixed wireless service providers. Fixed
wireless service providers are communications companies who can provide high
speed communications services to customers using microwave or other facilities
or satellite earth stations on building rooftops. Some of these providers have
targeted small and medium-sized business customers and have a business strategy
that is similar to ours. These providers include Advanced Radio Telecom,
NEXTLINK and Winstar.
We face competition from Internet service providers, digital subscriber
line companies and cable-based service providers
The services provided by Internet service providers, digital subscriber
line companies and cable-based service providers could be used by our potential
customers instead of our services. Internet service providers, such as
Concentric Networks, EarthLink and PSINet, provide Internet access to
residential and business customers, generally using the existing communications
infrastructure. Digital subscriber line companies and/or their Internet service
provider customers, such as Covad, NorthPoint and Rhythms NetConnections,
typically provide broadband Internet access using digital subscriber line
technology, which enables data traffic to be transmitted over standard copper
telephone lines at much higher speeds than these lines would normally allow.
Cable-based service providers, such as Excite@Home and its @Work subsidiary, RCN
Telecom Services and Road Runner, also provide broadband Internet access. These
various providers may also offer traditional or Internet-based voice services to
compete with us.
Competitors might use new or alternative technologies to offer better or less
expensive services than we can offer
In addition to the fiber-optic technology that our networks employ, there
are other technologies that provide greater bandwidth than traditional copper
wire transmission technology and may be used instead of our voice and data
services. Furthermore, these technologies may be improved and other new
technologies may develop that provide greater bandwidth than the fiber-optic
based technology we utilize. Existing alternative technologies include:
. Digital Subscriber Line Technology. Digital subscriber line technology was
developed to produce higher data transfer rates over the existing copper-
based telephone network. The data transfer rates for digital subscriber lines
are reported to range between 144,000 bits of data per second and six million
bits of data per second.
. Cable Modems. Cable modems can allow users to send and receive data using
cable television distribution systems. According to industry sources, cable
modem users typically experience download speeds of 1.5 million bits of data
per second.
. Wireless Technologies. Wireless technologies, such as satellite and microwave
communications systems, can provide high speed data communications. Satellite
systems, such as DirecPC, can offer high download speeds that are advertised
at 400,000 bits of data per second or higher.
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. Integrated Services Digital Networks. Integrated services digital networks
have been offered by the incumbent local telephone companies over the
existing copper-based telephone network for some time. These services offer
data transfer speeds of 128,000 bits of data per second.
. Internet Telephony. Several competitors have deployed, and others are
developing, Internet telephony, whereby voice calls may be made over the
Internet. The sound quality of these services has improved since their
introduction.
The development of new technologies or the significant penetration of
alternative technologies into our target market may reduce the demand for our
services and harm our business.
Legislation and government regulation could adversely affect us
Many of our services are subject to federal, state and/or local regulation.
As we continue to expand our operations geographically, we will become subject
to the regulation of additional jurisdictions. If we fail to comply with all
applicable regulations or experience delays in obtaining required approvals, our
business could be harmed. For example, we must make regular filings in some of
the states in which we operate and could be fined if we do not timely make these
filings. Additionally, compliance with these regulatory requirements may be
costly. Regulations governing communications services also change from time to
time in ways that are difficult to predict. Such changes may harm our business
by increasing competition, decreasing revenue, increasing costs or impairing our
ability to offer services. For example, the FCC could mandate that building
owners give access to competitive providers of communications services.
If our interpretation of regulations applicable to our operations is incorrect,
we may incur additional expenses or become subject to more stringent regulation
Some of the jurisdictions where we provide services have little, if any,
written regulations regarding our operations. In addition, the written
regulations and guidelines that do exist in a jurisdiction may not specifically
address our operations. If our interpretations of these regulations and
guidelines is incorrect, we may incur additional expenses to comply with
additional regulations applicable to our operations.
Regulation of access to office buildings could negatively affect our business
There have been proposals to require that commercial office buildings give
access to competitive providers of communications services, and some states,
such as California and Texas, already have similar laws. Regulatory or legal
requirements that mandate access rights to our target buildings or our networks
would facilitate our competitors' entry into buildings where we have access
rights. Our competitors' access to buildings in which we operate could diminish
the value of our access rights to that property and adversely affect our
competitive position. Increased access would be particularly detrimental in
buildings in which we currently have exclusive or semi-exclusive access rights.
Recently, the FCC initiated a regulatory proceeding relating to utility shaft
access in multiple tenant buildings, and a bill was introduced in Congress
regarding the same topic. Some of the issues being considered in these
developments include requiring building owners to provide utility shaft access
to communications carriers, and requiring some communications providers to
provide access to their wiring to other communications providers. We do not know
whether or in what form these proposals will be adopted.
We must purchase voice and data transmission capacity from third parties who may
be unable or unwilling to meet our requirements
We rely upon other communications carriers, such as local telephone
companies, long distance companies and Internet service providers, to provide
transmission capacity from the buildings we serve. Our failure to obtain
adequate connections from other carriers on a timely basis could delay or impede
our ability to
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provide services and generate revenue. We have experienced, and expect to
continue to experience, delays in obtaining transmission capacity. In addition,
in some of our target markets there is only one established carrier available to
provide the necessary connection. This increases our cost and makes it extremely
difficult, if not impossible, to obtain sufficient backup, or redundant,
connections. Sufficient capacity or redundant capacity may not be readily
available from third parties at commercially reasonable rates, if at all. Our
failure to obtain sufficient redundant connectivity could result in an inability
to provide service in certain buildings and service interruptions, which could
in time lead to loss of customers and damage to our reputation. Additionally,
many of the communications carriers we rely on for transmission capacity are
also our direct competitors. See "--We operate in a highly competitive market,
and we may not be able to compete effectively against established competitors
with greater financial resources and diverse strategic plans."
We rely on local telephone companies for transmission capacity
As noted above, we rely on local telephone companies for transmission
capacity. The rates we pay to the local telephone companies are generally
approved by the regulatory agency with jurisdiction over that carrier. Local
telephone companies may try to modify the terms under which they provide us
services to make it more difficult or more costly for us to provide services to
our tenants. Changes to the rates that local telephone companies charge us may
prevent us from providing services to our tenants at rates that are competitive
and profitable. Further, local telephone companies may not provide us access to
their network facilities in a prompt and efficient manner.
We rely on long distance providers for transmission capacity
We also rely on long distance providers for transmission capacity. The
rates that we pay these providers have generally been decreasing over time.
These rates may, however, rise in the future as a result of changes in
regulation or otherwise. Further, the rates we pay some long distance providers
are contingent upon our meeting minimum volume commitments. If we fail to meet
these volume requirements, our rates may rise. Increases in the rates we pay for
long distance service may make it more costly for us to provide these services
to our tenants. Further, long distance providers may not provide us with access
to their network facilities in a prompt and efficient manner.
We rely on Internet service providers for transmission capacity
With respect to Internet connectivity, we obtain the Internet access we
provide to our tenants from Internet service providers at negotiated rates. In
some instances, we must meet minimum volume commitments to receive the
negotiated rates. If we fail to meet the minimum volume commitments, our rates
and costs may rise. Further, Internet service providers may not provide us with
access to their network facilities in a prompt and efficient manner.
We have commitments to pay third parties for transmission capacity,
regardless of whether we use their services
As of December 31, 1999, we have committed to pay approximately $1.6
million for services from other communications carriers through 2001. We will
have to pay those carriers even if we do not use their services.
Our business could suffer from a reduction or interruption from our equipment
suppliers
We purchase our equipment from various vendors. Any reduction in or
interruption of deliveries from our major equipment suppliers, such as Nortel
Networks or Cisco Systems, could delay our plans to install in-building
networks, impair our ability to acquire or retain customers and harm our
business generally. In addition, the price of the equipment we purchase may
substantially increase over time, increasing the costs we
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pay in the future. It could take a significant period of time to establish
relationships with alternative suppliers for each of our technologies and
substitute their technologies into our networks.
We must make capital expenditures before generating revenues, which may prove
insufficient to justify those expenditures
We typically install an in-building network before we have any customers in
that building. Since we generally do not solicit customers within a building
until our network is in place we may not be able to recoup all of our
expenditures within any building. Prior to generating revenues in a building, we
must incur initial capital expenditures that are usually less than $90,000 on a
typical 335,000 square foot building. In November and December 1999, we entered
into a number of master license agreements, the aggregate effect of which is
likely to increase the average size of the buildings we serve and therefore
increase our average initial capital expenditures for network installation. Our
expenditures will also vary depending on the size of the building and whether we
encounter any construction-related difficulties. After initial installation of
our network, our capital expenditures continue to grow based on the extent to
which we add customers within a building.
Any acquisitions or investments we make could disrupt our business and be
dilutive to our existing stockholders
We intend to consider acquisitions of, or investments in, complementary
businesses, technologies, services or products. Acquisitions and investments
involve numerous risks, including:
. the diversion of management attention;
. difficulties in assimilating the acquired business;
. potential loss of key employees, particularly those of the acquired business;
. difficulties in transitioning key customer relationships;
. risks associated with entering markets in which we have no or limited prior
experience; and
. unanticipated costs.
In addition, these acquisitions or investments may result in:
. dilutive issuances of equity securities;
. the incurrence of debt;
. the assumption of liabilities;
. large one-time expenses; and
. the creation of goodwill or other intangible assets that result in
significant amortization expense.
Any of these factors could materially harm our business or our operating
results.
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Our networks may be vulnerable to unauthorized access which could interfere with
the provision of our services
Our networks may be vulnerable to unauthorized access, computer viruses and
other disruptive problems. Remediating the effects of computer viruses and
alleviating other security problems may require interruptions, incurrence of
costs and delays or cessation of service to our customers. Unauthorized access
could jeopardize the security of confidential information stored in our computer
systems or those of our customers, for which we could possibly be held liable.
As an Internet access provider, we may incur liability for information
disseminated through our network
The law relating to the liability of Internet access providers and on-line
services companies for information carried on or disseminated through their
networks is unsettled. As the law in this area develops, the potential
imposition of liability upon us for information carried on and disseminated
through our network could require us to implement measures to reduce our
exposure to such liability, which may require the expenditure of substantial
resources or the discontinuation of certain products or service offerings. Any
costs that are incurred as a result of such measures or the imposition of
liability could harm our business.
Year 2000 problems could disrupt our business
During this calendar year, many software programs may not recognize
calendar dates beginning in the Year 2000. This problem could cause computers or
machines that utilize date dependent software to either shut down or provide
incorrect information. If we, or any of our key suppliers, customers or service
providers, fail to mitigate internal and external Year 2000 risks, we may
temporarily be unable to provide services or engage in any other business
activities, including customer billing, which could harm our business.
Our affiliates own approximately 58.6% of the outstanding common stock, and thus
control all matters requiring a stockholder vote and, as a result, could prevent
or delay a change of control
Our existing directors, executive officers and greater-than-five-percent
stockholders and their affiliates beneficially own, in the aggregate,
approximately 58.6% of the outstanding shares of common stock. If all of these
stockholders were to vote together as a group, they would have the ability to
exert significant influence over our board of directors and its policies. For
instance, these stockholders would be able to control the outcome of all
stockholders' votes, including votes concerning director elections, charter and
by-law amendments and possible mergers, corporate control contests and other
significant corporate transactions. This concentration of stock ownership could
have the effect of preventing or delaying a change of control or otherwise
discouraging a potential acquirer from attempting to obtain control of us, which
in turn could harm the market price of our common stock or prevent our
stockholders from realizing a takeover premium over the market price for their
shares of common stock.
Provisions in our certificate of incorporation and bylaws may discourage
takeover attempts
Provisions in our certificate of incorporation and bylaws may have the
effect of preventing or delaying a change of control or changes in our
management. These provisions include:
. the right of the board of directors, without stockholder approval, to issue
shares of preferred stock and to establish the voting rights, preferences,
and other terms of any preferred stock;
. the right of the board of directors to elect a director to fill a vacancy
created by the expansion of the board of directors;
. the ability of the board of directors to alter our bylaws without prior
stockholder approval;
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. the election of three classes of directors to each serve three year staggered
terms;
. the elimination of stockholder voting by consent;
. the removal of directors only for cause;
. the vesting of exclusive authority in the board of directors and specified
officers (except as otherwise required by law) to call special meetings of
stockholders; and
. advance notice requirements for stockholder proposals and nominations for
election to the board of directors.
These provisions may have the effect of preventing or delaying a change of
control or impeding a merger, consolidation, takeover or other business
combination, which in turn could preclude our stockholders from recognizing a
premium over the prevailing market price of the common stock.
We have a shareholder rights plan that entitles our stockholders to rights
to acquire additional shares of our common stock when a third party acquires 15%
of our common stock or commences or announces its intent to commence a tender
offer for at least 15% of our common stock. This plan could delay, deter or
prevent a change of control.
Future sales and issuances of our common stock could adversely affect our stock
price
Substantial sales of our common stock in the public market, or the
perception by the market that such sales could occur, could lower our stock
price or make it difficult for us to raise additional equity capital in the
future. As of March 2, 2000, we had 47,302,202 shares of common stock
outstanding. Of these shares, 11,511,100 are freely tradeable. Substantially all
of the remaining 35,791,102 shares are subject to 180-day lock-up agreements. Of
these shares, up to 17,004,632 shares may be available for sale in the public
market on August 15, 2000, subject to compliance with Rule 144, and the balance
will be available for sale at various times thereafter, also subject to
compliance with Rule 144. In addition, we have also registered 11,577,100 shares
of common stock for issuance under our stock option plans and 900,000 shares of
common stock under our employee stock purchase plan. As of December 31, 1999,
options to purchase 5,820,975 shares of common stock were issued and
outstanding, of which options to purchase 1,049,091 shares have vested.
Additionally, up to 11,163,990 common shares are issuable upon the exercise of
warrants that were issued to several property owners and operators pursuant to
stock warrant agreements and master license agreements executed in November and
December 1999. These warrants are exercisable for periods of five to ten years,
but cannot be exercised until August 15, 2000. We cannot predict if future sales
or issuances of our common stock, or the availability of our common stock for
sale, will harm the market price for our common stock or our ability to raise
capital by offering equity securities.
Members of our board serve on the boards of our potential competitors, which may
create conflicts of interest
Some members of our board of directors may serve as directors of other
communications or Internet services companies which might compete with us. To
the extent that any of these companies presently offer, or at some future point
begin to offer, integrated communications services similar to the services that
we provide, there may be conflicts of interest between the fiduciary duties owed
by these individuals to us and the duties owed to these other companies. We have
not adopted specific policy guidelines to address these potential conflicts of
interest, and if these conflicts of interest arise they may be resolved on terms
that are not in the best interests of all of our stockholders.
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<PAGE>
Impairment of our intellectual property rights could harm our business
We regard certain aspects of our products, services and technology as
proprietary and attempt to protect them with patents, copyrights, trademarks,
trade secret laws, restrictions on disclosure and other methods. Despite these
precautions, it may be possible for a third party to copy or otherwise obtain
and use our products, services or technology without authorization, or to
develop similar technology independently.
We currently have a patent application pending for our fiber-optic
infrastructure and network configuration. This patent may not be issued to us,
and if issued, it may not protect our intellectual property from competition
which could seek to design around or invalidate this patent.
We are aware of several other companies in our and other industries which
use the word "Cypress" in their corporate names. We are in the process of
attempting to secure a trademark for the name "Cypress Communications." Even if
we are able to secure this trademark, other companies could challenge our use of
the word "Cypress." If such a challenge were successful, we could be required
to change our name and lose the goodwill associated with the Cypress
Communications name in our markets.
We may have a contingent liability arising out of a possible violation of
Section 5 of the Securities Act of 1933 in connection with the previous
existence of a hyperlink on our website
On or about December 20, 1999, one of our employees established an
unauthorized hyperlink on our website to an audio announcement regarding our
initial public offering contained on an independent, unaffiliated website. The
audio announcement consisted solely of a person orally announcing limited
factual information regarding Cypress and the offering. This hyperlink was on
our website for approximately 17 days, and was removed on January 6, 2000. This
announcement may have constituted a prospectus that did not meet the
requirements of the Securities Act, in which case the existence of the hyperlink
may have caused us to violate Section 5 of the Securities Act.
If the existence of this hyperlink caused a violation of Section 5 of the
Securities Act, we believe that only purchasers in the offering who heard this
announcement through the hyperlink would have the right, for a period of one
year from the date of their purchase of the common stock, to bring an action for
rescission or for damages resulting from their purchase of common stock. We
cannot assure you, however, that if such a violation occurred this right would
be limited to those purchasers. We do not believe that the existence of this
hyperlink caused a violation of Section 5, and if any such claim were asserted,
we would contest the matter vigorously. Accordingly, we do not believe that our
exposure, if any, resulting from the existence of this hyperlink would be
material to our results of operations or financial condition.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
Our exposure to financial market risk, including changes in interest rates
and marketable equity security prices, relates primarily to our investment
portfolio. We typically do not attempt to reduce or hedge the market exposure on
our investment securities because a substantial majority of our investments are
in fixed-rate, short-term securities. We do not have any derivative instruments.
The fair value of our investment portfolio or related income would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due mainly to the fixed-rate, short-term nature of the
substantial majority of our investment portfolio. As of December 31, 1999, we
had no debt outstanding, other than capital leases.
Item 8. Financial Statements and Supplementary Data.
The financial statements and supplementary data are listed under Item 14(a)
and have been filed as part of this report on the pages indicated.
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Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The following table sets forth the names and ages of our executive
officers, key employees and directors, as of December 31, 1999.
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
R. Stanley Allen.................. 42 Chief Executive Officer and Director
Ward C. Bourdeaux, Jr............. 41 Executive Vice President and Director
Mark A. Graves.................... 40 President, Chief Operating Officer and Secretary
Barry L. Boniface................. 37 Chief Financial Officer, Vice President and Treasurer
C. Timothy Allaway................ 41 Vice President of Customer Service
Eugene H. Kreeft.................. 50 Vice President of Engineering
Robert W. McCarthy................ 37 Vice President, General Counsel and Assistant Secretary
James W. McClintock............... 44 Vice President of International
Raymond F. Potts.................. 36 Vice President of Marketing and Sales
Claire S. Schenk.................. 50 Vice President of Human Resources
Alistair Sloan.................... 35 Vice President of Internet Services
William P. Egan................... 54 Director
Laurence S. Grafstein ............ 39 Director
Randall A. Hack................... 52 Director
John C. Halsted................... 35 Director
Jeffrey H. Schutz................. 48 Director
P. Eric Yopes .................... 47 Director
</TABLE>
R. Stanley Allen is a co-founder of the Company and has served as our Chief
Executive Officer and a director since August 1995. From August 1995 until
September 1998, he also served as our President. From March 1994 to May 1996,
Mr. Allen was President and Chief Executive Officer of Applied Video
Technologies, Inc., a wireless cable and communications investment and
development company. From 1991 to 1994, Mr. Allen was President of American
Quality Cable Corporation, a wireless cable television operator. Mr. Allen has
also held positions as Manager-Real Estate Consulting for Coopers & Lybrand and
Analyst for Wellington Real Estate, an affiliate of Boston-based Wellington
Management Company. Mr. Allen was a Director for Wireless Cable of Atlanta
before its acquisition by BellSouth in 1997 and was also a Director for the
Wireless Cable Association. Mr. Allen received a Bachelor of Arts degree in
Economics and a Master of Business Administration degree from the University of
Virginia.
Ward C. Bourdeaux, Jr. is a co-founder of the Company and has served as our
Executive Vice President and a director since August 1995. From January 1993 to
April 1995, Mr. Bourdeaux served as Director of Development for RealCom Office
Communications, where he was responsible for identifying new building and market
opportunities and entering into new license agreements on a national basis, and
for the renewal of existing agreements nationally. Prior to that, he spent over
nine years in the commercial real estate industry with Cushman & Wakefield and
Carter & Associates. Mr. Bourdeaux received a Bachelor of Arts degree in
Communications from the University of Alabama.
Mark A. Graves has served as our President since September 1998 and our
Chief Operating Officer and Secretary since September 1997. From September 1997
until September 1998, he also served as our Chief
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<PAGE>
Financial Officer. From March 1994 to September 1997, Mr. Graves was Executive
Director of Corporate Development for BellSouth Corporation, where he was
involved in mergers, acquisitions and other strategic transactions. Mr. Graves'
activities principally involved BellSouth Corporation's telephone services,
Internet services unit and wireless data partnerships. From May 1989 to February
1994, Mr. Graves was a Principal at Sterling Payot Company, a private investment
firm in San Francisco, where he provided advisory services in strategy and
finance predominantly to media and telecommunications companies, including
Pacific Telesis in its spin-off of PacTel Corp., which was renamed AirTouch
Communications. Prior to joining Sterling Payot Company, Mr. Graves held
positions at The First Boston Corporation and United Technologies Corporation.
Mr. Graves received a Bachelor of Arts degree in Economics and a Master of
Business Administration degree from Harvard University.
Barry L. Boniface has served as our Chief Financial Officer since October
1998. From September 1994 to October 1998, Mr. Boniface was Executive Director
of Corporate Development for BellSouth Corporation, where he was responsible for
domestic and international mergers, acquisitions, divestitures and other
strategic transactions. Mr. Boniface's activities principally involved
BellSouth's domestic and international wireless telephone services and
competitive local telephone activities. Prior to that, Mr. Boniface was a
principal in Berkshire Partners, Inc., a merchant banking firm based in Dallas,
Texas. He has also held the positions of Chief Operating Officer for Global
Business Acceleration, Inc., an early stage software development company, and
Vice President in the Corporate Finance Department at Principal Financial
Securities, Inc., an investment banking firm. Mr. Boniface received a Bachelor
of Business Administration degree in Management Information Systems from
Southern Methodist University and a Master of Business Administration degree
from the Goizueta Business School at Emory University.
C. Timothy Allaway has served as our Vice President of Customer Service
since December 1999. From June 1996 to December 1999, Mr. Allaway was Director,
Customer Services for IBM, North America supporting the full line of hardware
and software offerings. From September 1994 to June 1996, Mr. Allaway was
Director, Small Business Sales and Partnerships for MCI. From 1986 to September
1994, Mr. Allaway held various sales and service management positions for MCI.
Prior to that, Mr. Allaway spent five years with Xerox Corporation. Mr. Allaway
received a Bachelor of Science degree in Management from Jacksonville State
University and a Master of Business Administration degree from Auburn
University.
Eugene H. Kreeft has served as our Vice President of Engineering since
February 1999. From 1991 until February 1999, Mr. Kreeft was an Executive Vice
President of Preferred Networks Inc., an outsourcing services provider to the
wireless industry which he founded in 1991. From 1989 to 1991, Mr. Kreeft served
as Director of Technical Support, U.S. Operations, for Glenayre Technologies, a
developer and provider of personal telecommunications systems. Prior to that,
Mr. Kreeft was employed by BBL Industries, Inc., a paging equipment
manufacturer, where he served as both Vice President of Engineering and
Manufacturing and Vice President of Applications/New Product Development. Mr.
Kreeft has also held management and engineering positions with Motorola, RAM
Broadcasting, AT&T, Western Union Microwave Systems, Highland Telephone Company
and Delaware Telephone Company.
Robert W. McCarthy has served as our Vice President, General Counsel and
Assistant Secretary since December 1999. From August 1996 until December 1999,
Mr. McCarthy was a General Attorney at BellSouth Corporation, where he
specialized in domestic and international mergers and acquisitions and joint
venture transactions. Prior to that, he was a partner in the Atlanta offices of
Hunton & Williams, where he specialized in mergers and acquisitions, joint
ventures and venture capital transactions. Mr. McCarthy received a Bachelor of
Arts degree in Political Science and a Juris Doctor degree from the University
of North Carolina at Chapel Hill.
James W. McClintock has served as our Vice President of International since
December 1999. From March 1999 until December 1999, Mr. McClintock was Vice
President of Data Services for BellSouth International (BSI), where he led the
development of BSI's Internet and data strategy and associated business
development activities, focusing principally on Latin America and Europe. Prior
to that, Mr. McClintock was
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<PAGE>
Executive Director of Corporate Development for BellSouth Corporation, where he
worked primarily with BellSouth Entertainment and BellSouth.net, managing a
number of significant merger, acquisition and alliance activities involving
these two business units. Prior to joining BellSouth in 1993, Mr. McClintock had
fourteen years of experience managing, investing in and financing
entrepreneurial ventures of all types and scale, including positions in banking
with Citicorp and in venture capital with Equity Group Investments. Mr.
McClintock received a Bachelor of Arts degree in Economics from Washington and
Lee University and a Master of Business Administration degree in Finance from
the University of North Carolina.
Raymond F. Potts has served as our Vice President of Marketing and Sales
since October 1999. From September 1997 to October 1999, Mr. Potts was Regional
Vice President for Sales, Operations and Marketing for the midwest territory of
Teligent, Inc., a wireless telecommunications company. From 1996 to September
1997, Mr. Potts served as Vice President of Sales for the midwest region of
Cable & Wireless, Inc., a wireless telecommunications company. Prior to that,
Mr. Potts spent in excess of ten years in various senior-level sales and service
management positions for Midcom Communications, Sprint, LCI and TFN
Communications. Mr. Potts received a Bachelor of Business Administration degree
from St. Joseph's College in Rensselaer, Indiana.
Claire S. Schenk has served as our Director of Human Resources since June
1999. From June 1996 until May 1999, Ms. Schenk was Vice President for Human
Resources for Trism, Inc., a national specialized transportation company
headquartered in Atlanta. From December 1989 until June 1996, Ms. Schenk was
Vice President, Senior Business Partner for two national mortgage companies. Ms.
Schenk also has ten years of human resources management experience with Sheraton
Corporation and Six Flags Corporation. Ms. Schenk received a Bachelor of Arts
degree in Psychology from Emory University.
Alistair Sloan has served as our Vice President of Internet Services since
September 1999. From January 1998 until September 1999, Mr. Sloan was our
Manager of Internet Services. Prior to joining Cypress, Mr. Sloan was Project
Manager at Systems Atlanta, where he consulted with clients on Internet and Wide
Area Networking design and security. Prior to that, Mr. Sloan was a manager of
Internet Connect, a division of Systems Atlanta specializing in dedicated
business Internet connectivity. Mr. Sloan has also held positions with Ingram
Micro, Inc. and has been an independent consultant in the field of local area
networking. Mr. Sloan received a Bachelor of Arts degree in Political Science
from the University of Bridgeport.
William P. Egan has served as a director since February 1997 and a member
of the Compensation Committee of the Board of Directors since November 1999. Mr.
Egan is a founding partner of Burr, Egan, Deleage & Co. and Alta Communications,
an affiliated firm. For over twenty years, Mr. Egan has invested in a wide
variety of companies in the information technology, life sciences and
communications industries. He is a past President and Chairman of the National
Venture Capital Association. Mr. Egan received a Bachelor of Arts degree from
Fairfield University and a Master of Business Administration degree from the
University of Pennsylvania. He serves as a director of Cephalon, Inc.
Laurence S. Grafstein has served as a director and a member of the Audit
Committee of the Board of Directors since November 1999. Mr. Grafstein is
Managing Director and co-founder of Gramercy Communications Partners, Inc., a
private equity firm specializing in telecommunications investments. From
February 1996 to May 1999, Mr. Grafstein was a Managing Director and head of the
global telecommunications investment banking practice at Credit Suisse First
Boston, a global investment bank. From February 1994 to February 1996, Mr.
Grafstein was a Managing Director of Wasserstein Perella & Co., a global
investment bank. Mr. Grafstein received a Bachelor of Arts degree from Harvard
University, a Master of Philosophy degree from Balliol College of Oxford
University, where he was a Rhodes Scholar and president of the Oxford Union
Society, and an LLB from the University of Toronto Law School. Mr. Grafstein is
a director of Z-Tel Technologies, Inc.
Randall A. Hack has served as a director and a member of the Audit
Committee of the Board of Directors since November 1999. He is a Senior Managing
Director of Nassau Capital. From 1990 to 1994, Mr. Hack served as President and
Chief Executive Officer of the Princeton University Investment Company, where
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he had overall management responsibility for Princeton's multi billion-dollar
endowment of publicly traded securities and private investments. From 1979 to
1988, he was President and Chief Executive Officer of Matrix Development Group,
a commercial and industrial real estate development firm, which he founded. Mr.
Hack received a Bachelor of Arts degree from Princeton University and a Master
of Business Administration degree from Harvard University. He serves as a
director of OmniCell.com, Inc., Cornerstone Properties, Acacia Capital Corp.,
KMC Telecom, Inc. and Crown Castle International Corp.
John C. Halsted has served as a director since October 1998 and as a member
of the Compensation Committee and Audit Committee of the Board of Directors
since November 1999. Mr. Halsted serves as Senior Vice President of Beacon
Capital Partners, Inc. and Chief Investment Officer of Beacon Venture Partners,
Beacon Capital's venture capital subsidiary. From 1993 to 1997, Mr. Halsted was
Vice President at Harvard Private Capital Group. From 1991 to 1993, Mr. Halsted
was an Associate with Simmons & Company, an investment banking firm in Houston,
Texas. Mr. Halsted received a Master of Business Administration degree from The
Harvard Business School and a Bachelor of Arts degree in Economics from The
University of California at Berkeley.
Jeffrey H. Schutz has served as a director since November 1996 and as a
member of the Compensation Committee of the Board of Directors since November
1999. Mr. Schutz is a general partner of The Centennial Funds, a venture capital
firm based in Denver, Colorado that focuses on electronic communications
companies. Since 1981, Centennial has invested more than $700 million in
pioneering entrepreneurial ventures in communications networks, services and
technologies. Mr. Schutz received an AB in Economics from Middlebury College and
a Master of Business Administration degree from the Colgate Darden Graduate
School of Business Administration at the University of Virginia. Mr. Schutz is a
director of Crown Castle International Corp., Enhance Media, Inc. and Point-To-
Point, Inc.
P. Eric Yopes has served as a director since December 1999. Mr. Yopes is
the Vice Chairman-Investments of Shorenstein Management, Inc. Mr. Yopes joined
Shorenstein in 1984 and his responsibilities have encompassed all aspects of
real estate investment, development, acquisitions/sales, finance, operations and
leasing. He has served as Senior Operating Executive and Chief Financial Officer
of Shorenstein. His current responsibilities include strategy and investment
management, portfolio management, and investor and lender relations. Mr. Yopes
received a Bachelor of Arts degree from Yale University and a Juris Doctor
degree from the University of Chicago.
Board Composition
In connection with the sale of our series C preferred stock, all of our
then existing stockholders entered into a stockholders agreement. This agreement
provided for, among other things, the nomination of and voting for a total of
nine directors of Cypress, as follows:
. two management representatives designated by the founding stockholders - -
these representatives are Messrs. Allen and Bourdeaux;
. one representative designated by The Centennial Funds -- this representative
is Mr. Schutz;
. one representative designated by Alta Communications -- this representative
is Mr. Egan;
. one representative designated by Beacon Capital Partners -- this
representative is Mr. Halsted;
. one representative designated by Nassau Capital -- this representative is Mr.
Hack;
. one representative designated by Gramercy Communications Partners -- this
representative is Mr. Grafstein;
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. one representative designated by Boston Properties, Cornerstone and
Shorenstein, voting together as a group -- this representative is Mr. Yopes;
and
. one outside representative designated jointly by: (1) The Centennial Funds,
Alta Communications, Beacon Capital Partners, Nassau Capital and Gramercy
Communications Partners, voting together as a class; and (2) R. Stanley Allen,
Ward C. Bourdeaux, Jr., Mark A. Graves, Barry L. Boniface and George J.
Cisler, voting together as a class. This last directorship was never filled.
The provisions of the stockholders agreement regarding the nomination and
election of directors terminated upon the closing of our initial public
offering.
The Board of Directors is divided into three classes, each of whose
members serve for a staggered three-year term. Messrs. Bourdeaux, Egan and
Schutz serve as Class I directors whose terms expire at the annual meeting of
stockholders to be held in 2000. Messrs. Grafstein, Hack and Yopes serve as
Class II directors whose terms expire at the annual meeting of stockholders to
be held in 2001. Messrs Allen and Halsted serve as Class III directors whose
terms expire at the annual meeting of stockholders to be held in 2002.
Committees of the Board of Directors
Audit Committee. The Audit Committee is responsible for recommending to
the Board of Directors the engagement of our outside auditors and reviewing our
accounting controls and the results and scope of audits and other services
provided by our auditors. The members of the Audit Committee are Messrs. Hack,
Halsted and Grafstein.
Compensation Committee. The Compensation Committee is responsible for
reviewing and approving the amount and type of consideration to be paid to
senior management. The members of the Compensation Committee are Messrs. Egan,
Halsted and Schutz.
Other Committees. The Board of Directors may establish from time to time,
other committees to facilitate the management of our business.
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<PAGE>
Item 11. Executive Compensation.
The following table sets forth in summary form the compensation that was
paid to our Chief Executive Officer and the other most highly compensated
executive officers whose aggregate compensation exceeded $100,000 in the year
ended December 31, 1999.
Summary Compensation Table
<TABLE>
<CAPTION>
Annual Long-term
Compensation Compensation
-------------------------- --------------
Securities
Underlying
Name and Principal Position Salary Bonus Options
- ------------------------------------------------------------------------- ---------- --------- ------------
<S> <C> <C> <C>
R. Stanley Allen ........................................................ $165,000 $ 88,500 243,000
Chief Executive Officer
Mark A. Graves ......................................................... 155,000 82,969 306,000
President, Chief Operating Officer and Secretary
Ward C. Bourdeaux, Jr. .................................................. 135,000 195,954 369,000
Executive Vice President
Barry L. Boniface ....................................................... 145,000 105,000 297,000
Vice President, Chief Financial Officer and Treasurer
</TABLE>
Option Grants in Last Fiscal Year
The following table sets forth information related to stock options granted
to our named executive officers during the year ended December 31, 1999.
Option Grants in Last Fiscal Year(1)
<TABLE>
<CAPTION>
Individual Grants
----------------------------------------------------------- ------------------------
Percent of Potential Realizable
Number of Total Value at Assumed
Securities Options Annual Rates of Stock
underlying Granted to Exercise Price Appreciation For
Options Employees Price Public Option Terms(2)
Grant in Fiscal Per Offering Expiration -----------------------
Name (#) Year(%) Share Price Date 5% 10%
- --------------------------------- ----------- ------------ --------- --------- ---------- --------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
R. Stanley Allen ................ 180,000 5.14% $1.07 $17.00 04/07/09 $ 983,136 $1,679,563
63,000 1.80 2.53 17.00 11/29/09 1,379,915 2,291,697
Mark A. Graves .................. 180,000 5.14 1.07 17.00 04/07/09 983,136 1,679,563
126,000 3.60 2.53 17.00 11/29/09 2,759,831 4,583,393
Ward C. Bourdeaux, Jr............ 180,000 5.14 1.07 17.00 04/07/09 983,136 1,679,563
189,000 5.40 2.53 17.00 11/29/09 4,139,746 6,875,090
Barry L. Boniface................ 45,000 1.29 1.07 17.00 04/07/09 245,784 419,891
252,000 7.20 2.53 17.00 11/29/09 5,519,662 9,166,786
</TABLE>
_____________
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<PAGE>
(1) The number of options granted in the year ended December 31, 1999 was
3,526,655. The options expire ten years after the date of the grant and
vest 20% upon the first anniversary of the date of grant and 5% each
subsequent quarter measured from the first anniversary of the date of
grant. The options fully vest upon a change of control. The exercise price
of the options is adjusted appropriately in the event of a subdivision or
combination of the outstanding common stock or in the event of a payment of
a stock dividend in shares of common stock to the holders of common stock.
In the event of a merger, consolidation or other reorganization, the
Compensation Committee may make any adjustments to the option that it deems
necessary.
(2) Potential realizable value is based on the assumption that our common stock
appreciates at the annual rate shown, compounded annually, from the date of
grant until expiration of the ten-year term. These numbers are calculated
based on SEC requirements and do not reflect our projection or estimate of
future stock price growth. Potential realizable values are computed by
multiplying the number of shares of common stock subject to a given option
by the fair market value of the common stock on the date of grant,
determined to be $4.01 as of April 7, 1999 and $15.00 as of November 29,
1999, and assuming that the aggregate stock value derived from that
calculation compounds at the annual 5% or 10% rate shown in the table for
the entire ten-year term of the option and subtracting from that result the
aggregate option exercise price. Actual realizable value, if any, will be
dependent on the future price of the common stock on the actual date of
exercise, which may be earlier than the stated expiration date.
Fiscal Year-End Option Values
The following table sets forth the number of shares covered by both
exercisable and unexercisable options as of December 31, 1999 and the year-end
value of exercisable and unexercisable options as of December 31, 1999 for the
named executive officers.
<TABLE>
<CAPTION>
Number of Securities Underlying Value of Unexercised In-the-Money
Unexercised Options at Options at
December 31, 1999 December 31, 1999(1)
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---------------------------------------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C>
R. Stanley Allen ................ 248,452 491,663 $4,058,045 $7,840,900
Mark A. Graves .................. 214,702 588,413 3,502,295 9,290,050
Ward C. Bourdeaux, Jr. .......... 248,452 617,663 4,058,045 9,663,700
Barry L. Boniface................ 51,075 501,300 813,795 7,617,780
</TABLE>
_____________
(1) The value of the unexercised in-the-money options at December 31, 1999 was
calculated using an initial public offering price of $17.00 per share as
the estimated fair value per common share at that date.
Stock Plans
1997 Management Option Plan
Our 1997 management option plan was initially adopted by our Board of
Directors and approved by our stockholders on July 15, 1997. The 1997 option
plan is administered by our Compensation Committee. We established this plan to
provide officers, directors, key employees and consultants the ability to
acquire an ownership interest in Cypress. The options generally vest 20% per
year and expire ten years after issuance. As of March 2, 2000, there were
options to purchase a total of 6,209,732 shares of common stock outstanding
under this plan, of which options to purchase 895,360 shares had vested.
Although no further options will be granted under this plan, the unvested
options will continue to vest in accordance with this plan.
2000 Stock Option and Incentive Plan
Our 2000 stock option plan was adopted by our Board of Directors on
December 21, 1999 and was subsequently approved by our stockholders on December
23, 1999. The 2000 stock option plan permits us to make grants of:
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<PAGE>
. incentive stock options;
. non-qualified stock options;
. restricted stock;
. deferred stock awards;
. unrestricted stock; and
. performance share awards.
Under the 2000 stock option plan, the aggregate number of shares available
for grants of awards is 5,367,368 shares of common stock, subject to adjustment
in the event of a stock split, stock dividend or other change in capitalization.
Any shares forfeited from awards under the 2000 stock option plan or the 1997
management option plan will also be available for future awards under the 2000
stock option plan. At March 2, 2000, there were options to purchase a total of
33,500 shares of common stock granted under this plan, of which no options are
vested. The options generally vest 25% per year and expire 10 years after
issuance.
2000 Stock Option Plan Administration. The 2000 stock option plan provides
for administration by either the Board of Directors or the Compensation
Committee, which consists of non-employee directors. The Committee has full
power to select, from among the individuals eligible for awards, the
participants to whom awards will be granted, to make any combination of awards
to participants, and to determine the specific terms and conditions of each
award, subject to the provisions of the 2000 stock option plan.
Eligibility and Limitations on Grants. All officers, employees, directors
and key persons (including consultants and prospective employees) are eligible
to participate in the 2000 stock option plan, subject to the discretion of the
Committee. From and after the date awards made under the 2000 stock option plan
become subject to Section 162(m) of the Internal Revenue Code, no participant
may receive options to purchase more than 1,500,000 shares of common stock
(subject to adjustment for stock splits, stock dividends and other change in
capitalization) during any one calendar year period, as stated above.
Option Terms. The Committee has authority to determine the terms of
options granted under the 2000 stock option plan. However, incentive stock
options will have an exercise price that is not less than 100% of the fair
market value of the shares of common stock on the date of the option grant and
non-qualified stock options, other than those granted in lieu of a participant's
cash compensation at the participant's election with the consent of the
Committee, will have an exercise price that is not less than 85% of the fair
market value of the shares of common stock on the date of the option grant.
At the discretion of the Committee, stock options granted under the 2000
stock option plan may include a "re-load" feature pursuant to which an optionee
exercising an option by the delivery of shares of common stock would
automatically be granted an additional stock option (with an exercise price
equal to the fair market value of the common stock on the date the additional
stock option is granted) to purchase that number of shares of common stock equal
to the number delivered to exercise the original stock option. The purpose of
this feature is to enable participants to maintain their equity interest without
dilution.
Acceleration Upon a Merger, Sale or Change of Control of Cypress. Upon the
occurrence of any of the following events, unless otherwise provided in the
award agreements, all outstanding awards granted pursuant to the 2000 stock
option plan shall become fully exercisable or fully vested and nonforfeitable:
. the dissolution or liquidation of Cypress;
. the sale of all or substantially all of the assets of Cypress;
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<PAGE>
. a merger, reorganization or consolidation of Cypress;
. the sale of all of the stock of Cypress; or
. a change of control of Cypress.
In the event of certain transactions, such as a merger, consolidation,
dissolution or liquidation, the committee in its discretion may provide for
appropriate substitutions or adjustments of outstanding stock options;
alternatively, outstanding stock options will terminate and the holder will
receive a cash payment equal to the excess of the fair market value per share
over the applicable exercise price, multiplied by the number of shares of common
stock covered by the stock option.
Amendments and Termination. The Board of Directors may at any time amend
or discontinue the 2000 stock option plan and the Committee may at any time
amend or cancel any outstanding award for the purpose of satisfying changes in
law or for any other lawful purpose, but no such action shall adversely affect
the rights under any outstanding awards without the holder's consent. To the
extent required by the Internal Revenue Code to ensure that options granted
under the 2000 stock option plan qualify as incentive stock options, plan
amendments shall be subject to approval by our stockholders.
Employee Stock Purchase Plan
Our employee stock purchase plan was adopted by our Board of Directors on
December 21, 1999 and was subsequently approved by our stockholders on December
23, 1999. Up to 900,000 shares of common stock may be issued under the employee
stock purchase plan.
The first offering under the employee stock purchase plan began on February
10, 2000, the effective date of our initial public offering, and ends on October
31, 2000. Subsequent offerings will commence on each November 1 and May 1
thereafter and will have a duration of six months. Generally, all employees who
are customarily employed for more than 20 hours per week as of the first day of
the applicable offering period will be eligible to participate in the employee
stock purchase plan. An employee who owns or is deemed to own shares of stock
representing in excess of 5% of the combined voting power of all classes of our
stock will not be able to participate in the employee stock purchase plan.
During each offering, an employee may purchase shares under the employee
stock purchase plan by authorizing payroll deductions of up to 10% of his or her
cash compensation during the offering period. The maximum number of shares that
may be purchased by any participating employee during any six-month offering
period is limited to the number of whole shares which is less than or equal to
$12,500 divided by the closing price per share on the first day of the
applicable offering period. Unless the employee has previously withdrawn from
the offering, his or her accumulated payroll deductions will be used to purchase
common stock on the last business day of the period at a price equal to 85% of
the fair market value of the common stock on the first or last day of the
offering period, whichever is lower. For purposes of the initial offering
period, the fair market value of common stock on the first day of the offering
period was $17 per share, the offering price to the public pursuant to our
initial public offering. Under applicable tax rules, an employee may purchase no
more than $25,000 worth of common stock in any calendar year. No common stock
has been issued to date under the employee stock purchase plan.
Directors Compensation
Directors who are employees receive no additional compensation for their
services as directors. Non-employee directors are compensated as follows:
$5,000 annual fee, $1,000 for each board meeting attended in person and $500 for
each committee meeting and for each board meeting attended by telephone. Non-
employee directors are also eligible to participate in our 2000 stock option
plan at the discretion of the full Board of Directors.
50
<PAGE>
Severance Plan
We intend to adopt a severance plan which will cover Messrs. Allen,
Bourdeaux, Graves and Boniface. This plan will provide severance benefits to
these executive officers if they are terminated without "cause" or they
terminate with "good reason" within a one-year period following a change of
control of Cypress. Upon a qualifying termination, the executive officer will
be entitled to a lump sum payment equal to one and one-half times his base
annual salary.
Compensation Committee Interlocks and Inside Participation
The members of the Compensation Committee are Messrs. Egan, Halsted and
Schutz. Mr. Egan is a general partner of Alta Communications, which purchased
263,158 shares of Series C preferred stock from Cypress on October 8, 1999 for
$5.0 million. These shares were automatically converted into 1,184,210 shares
of our common stock in connection with our initial public offering in February
2000. Mr. Halsted is an executive officer of Beacon Capital Partners, which
purchased 342,105 shares of Series C preferred stock from Cypress on October 8,
1999 for $6.5 million. These shares were automatically converted into 1,539,473
shares of our common stock in connection with our initial public offering. Mr.
Schutz is a general partner of The Centennial Funds, which purchased 263,158
shares of Series C preferred stock from Cypress on October 8, 1999 for $5.0
million. These shares were automatically converted into 1,184,210 shares of our
common stock in connection with our initial public offering. Prior to 1999,
these same investors purchased additional shares of our convertible preferred
stock. See "Certain Relationships and Related Transactions" under Item 13.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth information regarding beneficial ownership
of our common stock as of March 2, 2000. The percentage of beneficial ownership
is based on 47,302,202 shares of our common stock outstanding as of such date.
The table sets forth such information with respect to:
. each stockholder who is known by us to beneficially own 5% or more of the
common stock;
. each of our directors;
. each of the executive officers named in the "Summary Compensation Table"
under Item 11; and
. all of our executive officers and directors as a group.
Unless otherwise indicated, each of the stockholders has sole voting and
investment power with respect to the shares of common stock beneficially owned
by such stockholder.
The number of shares beneficially owned by each stockholder is determined
under rules issued by the Securities and Exchange Commission. The information is
not necessarily indicative of beneficial ownership for any other purpose. Under
these rules, beneficial ownership includes any shares as to which the individual
or entity has sole or shared voting power or investment power and any shares as
to which the individual or entity has the right to acquire beneficial ownership
within 60 days after March 2, 2000, through the exercise of any stock option or
other right.
51
<PAGE>
<TABLE>
<CAPTION>
Number of
Shares Beneficially Percent Beneficially
Name of Beneficial Owner(1) Owned Owned
- --------------------------------------------------------- ------------------------------- ---------------------------
<S> <C> <C>
Centennial Holdings V, L.P.(2)........................... 8,240,153 17.4%
Alta Communications, Inc.(3)............................. 6,118,697 12.9
Beacon Capital Partners, Inc.(4)......................... 4,351,972 9.2
Nassau Capital L.L.C.(5)................................. 2,960,525 6.3
Gramercy Communications Partners, Inc.(6)................ 2,960,526 6.3
R. Stanley Allen(7)...................................... 1,022,740 2.2
Ward C. Bourdeaux, Jr.(8)................................ 740,082 1.6
Jeffrey H. Schutz(2)..................................... 8,240,153 17.4
William P. Egan(3)....................................... 6,118,697 12.9
John C. Halsted(4)....................................... 4,351,972 9.2
Randall A. Hack(5)....................................... 2,960,525 6.3
Laurence S. Grafstein(6)................................. 2,960,526 6.3
P. Eric Yopes(9)......................................... 828,947 1.8
Mark A. Graves(10)....................................... 347,246 *
Barry L. Boniface(11).................................... 110,599 *
All directors and executive officers as a group
(12 persons)(12)........................................ 27,730,837 58.6%
</TABLE>
_______________
* Represents less than 1% of the outstanding shares of common stock.
(1) The address of Centennial Holdings V, L.P. and Mr. Schutz is 1428 15th
Street, Denver, CO 80202. The address of Alta Communications, Inc. and Mr.
Egan is One Post Office Square, Suite 3800, Boston, MA 02109. The address
of Beacon Capital Partners, Inc. and Mr. Halsted is One Federal Street,
26th Floor, Boston, MA 02110. The address of Nassau Capital L.L.C. and Mr.
Hack is 22 Chambers Street, Princeton, NJ 08542. The address of Gramercy
Communications Partners, Inc. and Mr. Grafstein is 712 Fifth Avenue, 43rd
Floor, New York, NY 10019. The address of P. Eric Yopes is c/o Shorenstein
Management, Inc., 555 California Street, 49th Floor, San Francisco, CA
94104. The address of all other listed stockholders is c/o Cypress
Communications, Inc., Fifteen Piedmont Center, Suite 710, Atlanta, GA
30305.
(2) Represents shares of common stock beneficially owned by investment funds
affiliated with Centennial Holdings V, L.P., of which Mr. Schutz is a
general partner, including 8,028,428 shares of common stock beneficially
owned by Centennial Fund V, L.P. and 211,725 shares of common stock
beneficially owned by Centennial Entrepreneurs Fund V, L.P. Mr. Schutz
disclaims beneficial ownership of the shares of common stock held by these
funds, except to the extent of his proportionate pecuniary interest in such
funds.
(3) Represents shares of common stock beneficially owned by investment funds
affiliated with Alta Communications, Inc., of which Mr. Egan is a general
partner, including 5,981,903 shares of common stock beneficially owned by
Alta Communications VI, L.P. and 136,794 shares of common stock
beneficially owned by Alta Comm S by S, LLC. Mr. Egan disclaims beneficial
ownership of the shares of common stock held by these funds, except to the
extent of his proportionate pecuniary interest in such funds.
(4) Represents shares of common stock beneficially owned by entities affiliated
with Beacon Capital Partners, Inc., of which Mr. Halsted is an executive
officer, including 204,241 shares of common stock beneficially owned by
Tenant Communications, Inc., 4,029,310 shares of common stock beneficially
owned by Building Communications, LLC and 118,421 shares of common stock
beneficially owned by Investor Communications LLC. Mr. Halsted disclaims
beneficial ownership of the shares of common stock held by these funds,
except to the extent of his proportionate pecuniary
52
<PAGE>
interest in such funds. On January 3, 2000, the shares of common stock
owned by Tenant Communications, Inc. and Building Communications, LLC were
transferred to an affiliated voting trust.
(5) Represents shares of common stock beneficially owned by investment funds
affiliated with Nassau Capital L.L.C., of which Mr. Hack is a member,
including 2,914,145 shares of common stock beneficially owned by Nassau
Capital Partners III L.P. and 46,380 shares of common stock beneficially
owned by NAS Capital Partners I L.L.C. Mr. Hack disclaims beneficial
ownership of the shares of common stock held by these funds, except to the
extent of his proportionate pecuniary interest in such funds.
(6) Represents shares of common stock beneficially owned by Gramercy Cypress
LLC, an investment fund affiliated with Gramercy Communications Partners,
Inc., of which Mr. Grafstein is a Managing Director. Mr. Grafstein
disclaims beneficial ownership of the shares of common stock held by this
fund, except to the extent of his proportionate pecuniary interest in such
fund.
(7) Includes 313,913 shares of common stock held by Mr. Allen subject to
options exercisable as of March 2, 2000 or within 60 days thereafter.
(8) Includes 313,913 shares of common stock held by Mr. Bourdeaux subject to
options exercisable as of March 2, 2000 or within 60 days thereafter.
(9) Represents shares of common stock beneficially owned by DWS Capital LLC, an
investment fund affiliated with Shorenstein Management, Inc., of which Mr.
Yopes is an executive officer. Mr. Yopes disclaims beneficial ownership of
the shares of common stock held by this fund, except to the extent of his
proportionate pecuniary interest in such fund.
(10) Includes 174,308 shares of common stock held by Mr. Graves subject to
options exercisable as of March 2, 2000 or within 60 days thereafter.
(11) Includes 34,538 shares of common stock held by Mr. Boniface subject to
options exercisable as of March 2, 2000 or within 60 days thereafter.
(12) Includes 878,522 shares of common stock held by all directors and executive
officers as a group subject to options exercisable as of March 2, 2000 or
within 60 days thereafter.
Item 13. Certain Relationships and Related Transactions.
We were formed as a limited liability company under the laws of Georgia on
August 16, 1995 as Cypress Communications, L.L.C. We completed a reorganization
on July 15, 1997 in which the operations of the predecessor company were merged
into Cypress Communications, Inc., a Delaware corporation.
In connection with our reorganization on July 15, 1997, we issued an
aggregate of 2,636,906 shares of our common stock to nine persons, including
Messrs. Allen and Bourdeaux, Centennial Holdings V, L.P. and Alta
Communications, in exchange for membership interests in our predecessor company.
On that date, we also issued an aggregate of 1,200,140 shares of our series A
preferred stock for $5 per share to eight investors, including Messrs. Allen,
Bourdeaux and Graves, Centennial Holdings V, L.P. and Alta Communications. On
March 9, 1998, we issued 11,000 shares of our series A preferred stock to Mr.
Graves for $5 per share.
On September 30, 1998, we issued an aggregate of 1,333,200 shares of our
series B preferred stock to investors, including Messrs. Allen, Bourdeaux and
Graves, Centennial Holdings V, L.P., Alta Communications and Beacon Capital
Partners for $8 per share. On that same date, we also issued 579,613 shares of
our series B-1 preferred stock to Beacon Capital Partners for $8 per share. On
February 1, 1999 we issued an aggregate of 6,375 shares of our series B
preferred stock to Mr. Boniface and another employee for $8 per share.
In the fourth quarter of 1999, we issued an aggregate of 4,161,974 shares
of our series C preferred stock to investors, including Messrs. Allen,
Bourdeaux, Graves and Boniface, Centennial Holdings V, L.P.,
53
<PAGE>
Alta Communications, Beacon Capital Partners, Nassau Capital and Gramercy
Communications Partners for $19 per share.
Under the conversion rate set forth in the terms of the preferred stock,
the preferred stock was originally convertible into common stock on a one-for-
one basis. However, as a result of the 4.5-for-1 stock split which occurred on
February 8, 2000, the conversion rate automatically adjusted such that each
share of preferred stock was convertible into 4.5 shares of common stock. The
preferred stock automatically converted into common stock upon the completion of
our initial public offering on February 15, 2000.
Certain of our directors are affiliated with certain of our principal
stockholders. Mr. Schutz is a general partner of Centennial Holdings V, L.P. Mr.
Egan is a general partner of Alta Communications. Mr. Halsted is an executive
officer of Beacon Capital Partners. Mr. Hack is a member of Nassau Capital. Mr.
Grafstein is a Managing Director of Gramercy Communications Partners.
One of our directors, Mr. Yopes, is an executive officer of Shorenstein
Management, Inc. In December 1999, we issued 184,211 shares of our series C
preferred stock to an investment fund affiliated with Shorenstein for $19 per
share. In addition, as part of our November/December master license agreement
program, we entered into a master license agreement with Shorenstein under which
we have obtained the right to install and operate our networks in up to 21
buildings representing more than 15 million rentable square feet. Upon the
execution of property-specific license agreements with respect to these
buildings, we will be required to pay Shorenstein, or the appropriate property
owner, approximately 6% of the revenues generated from tenants in those
buildings. In connection with the execution of this master license agreement, we
also issued Shorenstein warrants to acquire up to 815,108 shares of our common
stock at an exercise price of $4.22 per share. The exact number of shares of
common stock underlying the warrants, which is based on the gross leasable area
of the buildings set forth in the master license agreement, will not be
determined until the completion of due diligence and the finalization of the
building schedules, which is currently in process. The warrants are exercisable
for a period of ten years, but cannot be exercised until six months following
the completion of this offering.
During 1999, we entered into a consulting arrangement with William Zierden,
an investor in The Centennial Funds. In accordance with this arrangement, Mr.
Zierden provided consulting services to us and had received fees totaling
approximately $92,868 in fiscal 1999. In addition, in December 1999 we issued
options to purchase 3,947 shares of common stock to Mr. Zierden in connection
with this arrangement.
We believe that each of the transactions described above was entered into
on terms no less favorable to Cypress than could be obtained with non-affiliated
parties. For all future transactions, we have adopted a conflict of interest
policy whereby our Audit Committee will review the fairness of all material
transactions between Cypress and our officers, directors and other affiliates
and will make recommendations after such review to the entire Board of
Directors.
Third Amended and Restated Stockholders Agreement
In connection with the sale of our series C preferred stock, all of our
then existing stockholders entered into a stockholders agreement. Except for
the registration rights provisions described below, all other provisions of the
stockholders agreement terminated upon the completion of our initial public
offering in February 2000.
The provisions of the stockholders agreement relating to the registration
rights provide that groups of stockholders may require us to register all or any
portion of their shares by filing one registration statement utilizing a Form S-
1 and multiple registration statements utilizing a Form S-3. The parties will
also be entitled to unlimited piggyback registration rights in connection with
any registration by us of securities for our own account or the account of other
stockholders. The registration rights available under these provisions of the
stockholders agreement generally will terminate when all shares owned by the
parties to the agreement may be
54
<PAGE>
immediately sold under Rule 144 and our stock is listed on a national securities
market or traded in the Nasdaq Stock Market.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) 1. Financial Statements
Our financial statements listed below have been filed as part of this
report on the pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants.......................................... 58
Balance Sheets as of December 31, 1998 and December 31, 1999...................... 59
Statements of Operations for the years ended December 31, 1997, 1998 and 1999..... 60
Statements of Members' or Stockholders' Deficit for the years ended December 31,
1997, 1998 and 1999............................................................... 61
Statements of Cash Flows for the years ended December 31, 1997, 1998 and 1999..... 62
Notes to Financial Statements..................................................... 63
</TABLE>
(a) 2. Financial Statement Schedules
Our schedules listed below have been filed as part of this report on the
pages indicated:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Public Accountants as to Schedules.......................... 74
Schedules......................................................................... 75
</TABLE>
(a) 3. Exhibits
The following exhibits either (i) are filed with this report or (ii) have
previously been filed with the Securities and Exchange Commission and are
incorporated in Item 14 by reference to the filing in the corresponding numbered
footnote.
<TABLE>
<CAPTION>
No. Description
- ---------- ----------------
<C> <S>
3.1 * Second Amended and Restated Certificate of Incorporation.
3.2 * Amended and Restated Bylaws.
4.1 Specimen certificate of shares of common stock, $.001 par value per share. (1)
4.2 * Shareholder Rights Agreement.
10.1 1997 Management Option Plan. (1)
10.2 * 2000 Stock Option and Incentive Plan.
10.3 * Employee Stock Purchase Plan.
10.4 Third Amended and Restated Stockholders Agreement. (1)
10.5 First Amendment to the Third Amended and Restated Stockholders Agreement. (1)
10.6 Second Amendment to the Third Amended and Restated Stockholders Agreement. (1)
10.7 Form of Master Communications License Transaction Agreement entered into in November and December
1999. (1)
10.8 Form of Stock Warrant Agreement entered into in November and December 1999. (1)
10.9 Series A Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and the
purchasers thereto, dated as of July 15, 1997. (1)
</TABLE>
55
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.10 Series B and B-1 Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and
the purchasers thereto, dated as of September 30, 1998. (1)
10.11 Series C and C-1 Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and
the purchasers thereto, dated as of October 8, 1999. (1)
10.12 Series C Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and the
purchasers thereto, dated as of November 23, 1999. (1)
10.13 Series C Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and
purchasers thereto, dated as of December 1, 1999. (1)
10.14 Series C Preferred Stock Purchase Agreement, by and among Cypress Communications, Inc. and the
purchasers thereto, dated as of December 2, 1999. (1)
10.15 Binding Summary of Terms of Stock Purchase Agreement dated November 23, 1999, by and among Cypress
Communications, Inc., SiteConnect, Inc. and the shareholders of SiteConnect, Inc., and the
amendments thereto. (1)
10.16 Form of Indemnification Agreement for Directors and Executive Officers. (1)
10.17 Form of Executive Officer Severance Plan. (1)
23.1 * Consent of Arthur Andersen LLP.
27.1 * Financial Data Schedule.
</TABLE>
_______________
* Filed herewith.
(1) Incorporated by reference to Cypress Communications, Inc.'s Registration
Statement on Form S-1 (Commission File No. 333-92011), as amended.
(b) Reports on Form 8-K
Not applicable.
(c) See Item 14(a)(3) above.
(d) See Item 14(a)(2) above.
56
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, on March 30, 2000.
CYPRESS COMMUNICATIONS, INC.
By: /s/ R. Stanley Allen
----------------------
R. Stanley Allen
Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities indicated on March 30, 2000.
<TABLE>
<CAPTION>
Signature Title
- ----------------------------------------------------- -----------------------------------------
<S> <C>
/s/ R. Stanley Allen Chief Executive Officer and Director
- -----------------------------------------------------
R. Stanley Allen
/s/ Ward C. Bourdeaux, Jr. Executive Vice President and Director
- -----------------------------------------------------
Ward C. Bourdeaux, Jr.
/s/ Mark A. Graves President, Chief Operating Officer and
- ----------------------------------------------------- Secretary
Mark A. Graves
/s/ Barry L. Boniface Vice President, Chief Financial Officer
- ----------------------------------------------------- and Treasurer
Barry L. Boniface
/s/ William P. Egan Director
- -----------------------------------------------------
William P. Egan
/s/ Laurence S. Grafstein Director
- -----------------------------------------------------
Laurence S. Grafstein
/s/ Randall A. Hack Director
- -----------------------------------------------------
Randall A. Hack
/s/ John C. Halsted Director
- -----------------------------------------------------
John C. Halsted
/s/ Jeffrey H. Schutz Director
- -----------------------------------------------------
Jeffrey H. Schutz
/s/ P. Eric Yopes Director
- -----------------------------------------------------
P. Eric Yopes
</TABLE>
57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Cypress Communications, Inc.:
We have audited the accompanying balance sheets of CYPRESS COMMUNICATIONS,
INC. (a Delaware corporation and successor to Cypress Communications, L.L.C.) as
of December 31, 1998 and 1999 and the related statements of operations, changes
in members' or stockholders' deficit, and cash flows for the three years ending
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 auditing standards generally
accepted in the United States. 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 financial statements referred to above present fairly,
in all material respects, the financial position of Cypress Communications, Inc.
as of December 31, 1998 and 1999 and the results of its operations and its cash
flows for the three years ending December 31, 1999 in conformity with accounting
principles generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 2000
58
<PAGE>
CYPRESS COMMUNICATIONS, INC.
BALANCE SHEETS
DECEMBER 31, 1998 AND 1999
ASSETS
<TABLE>
<CAPTION>
1998 1999
------------------- ---------------------
CURRENT ASSETS:
<S> <C> <C>
Cash and cash equivalents $11,057,696 $ 69,475,288
Accounts receivable, net of allowance for doubtful
accounts of $79,520, and $367,805
in 1998 and 1999, respectively 1,119,784 1,665,203
Note receivable 200,000 0
Prepaid expenses and other 26,238 320,516
------------------- ---------------------
Total current assets 12,403,718 71,461,007
------------------- ---------------------
PROPERTY AND EQUIPMENT, net 6,291,413 27,028,102
------------------- ---------------------
OTHER ASSETS:
Cost in excess of net assets acquired, net of
accumulated amortization of $7,071 and 84,141 75,656
$15,556 in 1998 and 1999, respectively
Tenant contracts, net of accumulated amortization
of $119,444 and $262,778 in 1998 418,056 274,722
and 1999, respectively
License agreements 0 23,398,094
Other 209,777 617,020
------------------- ---------------------
Total other assets 711,974 24,365,492
------------------- ---------------------
Total assets $19,407,105 $122,854,601
=================== =====================
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
CURRENT LIABILITIES:
Accounts payable $ 381,032 $ 12,672,121
Accrued expenses 1,307,941 2,696,133
Current portion of capital lease obligations 192,635 217,468
---------------- ---------------------
Total current liabilities 1,881,608 15,585,722
LONG-TERM PORTION OF CAPITAL LEASE OBLIGATIONS 522,583 283,469
---------------- ---------------------
Total liabilities 2,404,191 15,869,191
CONVERTIBLE REDEEMABLE PREFERRED STOCK (Note 5):
$.001 par value; 1,211,140 shares designated Series A
in 1998 and 1999; 1,211,140, shares issued and outstanding in 1998 and 1999,
entitled to redemption value of $5 per share 6,036,670 6,040,856
$.001 par value; 1,912,813 and 1,919,188 shares designated Series B in 1998 and
1999, respectively; 1,333,200 and 1,339,575 shares issued and outstanding in 1998
and 1999, respectively, entitled to redemption value of $8 per share 10,650,328 10,705,636
$.001 par value; 579,613 shares designated Series B-1 in 1998 and 1999; 579,613
shares issued and outstanding in 1998 and 1999, entitled to redemption value of $8
per share 4,630,265 4,632,137
$.001 par value; 0 and 4,210,526 shares designated Series C in 1998 and 1999,
respectively; 0 and 4,161,974 shares issued and outstanding in 1998 and 1999,
respectively, entitled to redemption value of $19 per share 0 78,899,121
---------------- ---------------------
Total preferred stock 21,317,263 100,277,750
---------------- ---------------------
COMMITMENTS AND CONTINGENCIES (Note 7)
STOCKHOLDERS' (DEFICIT) EQUITY:
Common stock, $.001 par value; 20,594,088 and 58,620,758 shares authorized in 1998
and 1999, respectively; 2,636,906 and 2,759,806 shares issued and outstanding in
1998 and 1999, respectively 2,637 2,760
Additional paid-in capital 3,536,863 109,339,640
Warrants outstanding 0 23,398,094
Deferred compensation (2,179,045) (27,124,250)
Accumulated deficit (5,674,804) (98,908,584)
---------------- ---------------------
Total stockholders' (deficit) equity (4,314,349) 6,707,660
---------------- ---------------------
Total liabilities and stockholders' deficit $19,407,105 $122,854,601
================ =====================
</TABLE>
The accompanying notes are an integral part of these balance sheets.
59
<PAGE>
CYPRESS COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
For the years ended December 31, 1997, 1998, and 1999
<TABLE>
<CAPTION>
1997 1998 1999
------------------ ------------------ ------------------
<S> <C> <C> <C>
REVENUES $ 709,402 $ 2,417,816 $ 7,437,496
------------------ ------------------ ------------------
OPERATING EXPENSES:
Cost of services 603,114 1,539,846 4,966,851
Sales and marketing, including noncash compensation 448,916 1,489,355 4,007,094
expense of $0, $19,248, and $321,492 in 1997, 1998,
and 1999, respectively
General and administrative, including noncash 900,595 2,534,566 11,232,045
compensation expense of $0, $98,345, and $1,403,796 in
1997, 1998, and 1999, respectively
Depreciation and amortization 196,415 576,659 2,197,831
------------------ ------------------ ------------------
Total operating expenses 2,149,040 6,140,426 22,403,821
------------------ ------------------ ------------------
OPERATING LOSS (1,439,638) (3,722,610) (14,966,325)
INTEREST INCOME, net 113,922 232,279 810,045
------------------ ------------------ ------------------
LOSS BEFORE INCOME TAXES (1,325,716) (3,490,331) (14,156,280)
INCOME TAX BENEFIT 0 0 0
------------------ ------------------ ------------------
NET LOSS (1,325,716) (3,490,331) (14,156,280)
BENEFICIAL CONVERSION FEATURE OF PREFERRED STOCK (Note 5) 0 0 (79,077,500)
------------------ ------------------ ------------------
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS $(1,325,716) $(3,490,331) $(93,233,780)
NET LOSS PER COMMON SHARE:
Basic and diluted $ (0.41) $ (1.32) $ (35.22)
================== ================== ==================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING:
Basic and diluted 3,266,237 2,636,906 2,647,274
================== ================== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
60
<PAGE>
CYPRESS COMMUNICATIONS, INC.
STATEMENTS OF MEMBERS' OR STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
Members' Shares
or Common Stock Contributed or
-------------------- Additional Deferred Warrants Accumulated
Shares Amount Paid-In Capital Compensation Outstanding Deficit Total
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 400,431 $ 0 $ 1,887,513 $ 0 $ 0 $ (858,757) $ 1,028,756
Issuance of member shares 41,667 0 250,000 0 0 0 250,000
Repurchase of member shares (149,109) 0 (894,651) 0 0 0 (894,651)
Conversion to a C corporation 2,343,917 2,637 (2,637) 0 0 0 0
Net loss 0 0 0 0 0 (1,325,716) (1,325,716)
BALANCE, December 31, 1997 2,636,906 2,637 1,240,225 0 0 (2,184,473) (941,611)
Deferred compensation 0 0 2,296,638 (2,296,638) 0 0 0
Amortization of
deferred compensation 0 0 0 117,593 0 0 117,593
Net loss 0 0 0 0 0 (3,490,331) (3,490,331)
BALANCE, December 31, 1998 2,636,906 2,637 3,536,863 (2,179,045) 0 (5,674,804) (4,314,349)
Issuance of common stock 122,900 123 395,127 0 0 0 395,250
Deferred compensation 0 0 26,330,150 (26,330,150) 0 0 0
Amortization of
deferred compensation 0 0 0 1,384,945 0 0 1,384,945
Issuance of warrants 0 0 0 0 23,398,094 0 23,398,094
Beneficial conversion feature of 0 0 79,077,500 0 0 (79,077,500) 0
preferred stock
(Note 5)
Net loss 0 0 0 0 0 (14,156,280) (14,156,280)
BALANCE, December 31, 1999 2,759,806 $2,760 $109,339,640 $(27,124,250) $23,398,094 $(98,908,584) $ 6,707,660
=================================================================================================
The accompanying notes are an integral part of these statements
</TABLE>
61
<PAGE>
CYPRESS COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1998, AND 1999
<TABLE>
<CAPTION>
1997 1998 1999
----------- ---------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(1,325,716) $(3,490,331) $(14,156,280)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization 196,415 576,659 2,197,831
Amortization of deferred compensation 0 117,593 1,384,945
Other 1,920 5,737 14,544
Noncash consulting expense 0 0 340,343
Changes in operating assets and liabilities:
Accounts receivable, net (168,919) (916,616) (545,419)
Prepaid expenses and other current assets (32,146) 18,185 (294,278)
Other assets 0 (89,777) (196,286)
Accounts payable and accrued expenses 436,927 863,645 1,353,953
----------------------------------------------------
Net cash used in operating activities (891,519) (2,914,905) (9,900,647)
----------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,190,723) (2,887,243) (10,365,122)
Purchase of assets of MTS Communications 0 (1,904,398) 0
(Advance to) repayment from MTS Communications 0 (200,000) 200,000
Other 0 0 19,400
----------------------------------------------------
Net cash used in investing activities (1,190,723) (4,991,641) (10,145,722)
----------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of Series A preferred stock, net of offering 5,975,560 55,000 0
expenses
Proceeds from issuance of Series B and B-1 preferred stock, net of 0 15,279,046 51,000
offering expenses
Proceeds from issuance of Series C preferred stock, net of offering 0 0 78,894,943
expenses
Proceeds from sale of member shares 250,000 0 0
Proceeds from exercise of stock options 0 0 54,907
Principal payments on capital lease obligations (25,328) (40,869) (214,281)
Borrowings under line of credit 0 500,000 0
Repayments of line of credit 0 (500,000) 0
Acquisition of member interest (894,651) 0 0
Payment of offering costs 0 0 (322,608)
----------------------------------------------------
Net cash provided by financing activities 5,305,581 15,293,177 78,463,961
----------------------------------------------------
INCREASE IN CASH AND CASH EQUIVALENTS 3,223,339 7,386,631 58,417,592
CASH AND CASH EQUIVALENTS, beginning of year 447,726 3,671,065 11,057,696
----------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $ 3,671,065 $11,057,696 $69,475,288
====================================================
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 2,031 $ 12,563 $ 13,151
====================================================
Assets acquired under capital leases $ 0 $ 670,450 $ 0
====================================================
</TABLE>
The accompanying notes are an integral part of these statements.
62
<PAGE>
CYPRESS COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1998, and 1999
1. Organization And Nature Of Business
Cypress Communications, Inc. (the "Company") was incorporated July 15, 1997
under the laws of Delaware. The Company was formed to effect the conversion of
Cypress Communications, L.L.C. (the "Predecessor Company") to a C corporation.
To effect this change in legal entity status, on July 15, 1997, the Predecessor
Company was acquired by the Company and ceased to exist as a legal entity. The
accompanying financial statements reflect this as a reorganization (the
"Reorganization").
The Predecessor Company was incorporated August 16, 1995 as a limited
liability company under the laws of Georgia. All references to the Company
refer to both the Company and the Predecessor Company unless otherwise noted.
The Company provides a full range of communications services to small- and
medium-sized businesses located in multi-tenant office buildings in major
metropolitan markets in the United States. Since the inception of our
Predecessor Company in August 1995, our principal activities have included
securing license agreements with building owners and real estate managers that
enable us to install our in-building fiber-optic, digital, and broadband
networks, marketing our services to tenants, and hiring qualified personnel to
support our rapid growth.
The Company has experienced operating losses since its inception. The
Company expects to continue to focus on increasing its customer base and
expanding its operations. Accordingly, the Company expects that its operating
expenses and capital expenditures will continue to increase significantly, which
will have a negative impact on short-term operating results and will require
significant capital. Accordingly, the Company may be required to raise
additional funds through public or private financing or other arrangements, or
it may have to slow its rate of expansion. There can be no assurance that any
required additional funding, if needed, will be available on terms attractive to
the Company or at all, which could have a material adverse effect on the
Company's business, financial condition, cash flows, and results of operations.
Other Risk Factors
The Company faces certain other risk factors including the following:
growth and expansion may strain the Company's resources, dependence on key
personnel, dependence on third-party suppliers of equipment and communications
services, dependence on relationships with certain property owners or operators,
competition from other providers of communications services, and potential
disruption of services due to system failures.
2. Summary Of Significant Accounting Policies
Basis of Presentation
The accompanying financial statements are presented on the accrual basis of
accounting using accounting principals generally accepted in the United States.
63
<PAGE>
Accounting Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual amounts could differ from these estimates and such
differences could be material.
Revenue Recognition
The Company's revenues include recurring charges for local access, long-
distance, equipment rental, Internet, voicemail, inbound 800 charges, and other
enhanced voice and data services as well as nonrecurring revenues for
installations and moves, adds, and changes charges, all of which are recognized
as services are provided. To date, nonrecurring revenues have not exceeded the
related direct costs of installation in any significant amounts. All expenses
related to services provided are recognized as incurred.
The Securities and Exchange Commission has released Staff Accounting
Bulletin ("SAB") No. 101, "Revenue Recognition in Financial Statements." The
Company is reviewing its policies with respect to SAB No. 101 and does not
expect the impact of adoption to be material.
Cash and Cash Equivalents
The Company considers all highly liquid instruments with an original
maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets
(generally three to seven years). Leasehold improvements are depreciated over
the lesser of the average lease term (or the term of the related license
agreement) or the assets' useful lives. Depreciation expense was $112,431,
$546,521, and $1,953,761 for the years ended December 31, 1997, 1998, and 1999,
respectively. Maintenance and repairs are charged to expense as incurred.
Gains or losses on disposal of property and equipment are recognized in
operations in the year of disposition. There were no significant gains or
losses in any periods presented.
Income Taxes
The Predecessor Company was a limited liability company for federal and
state income tax purposes. The Internal Revenue Code and applicable state
statutes provide that income and expenses are not separately taxable to the
limited liability company but rather accrue directly to the members. Subsequent
to the Reorganization, income taxes have been provided for using the liability
method in accordance with Statement of Financial Accounting Standards ("SFAS")
No. 109, "Accounting for Income Taxes," (Note 8).
Intangibles
The cost over the fair values of net assets acquired was recorded in
connection with the Company's purchase of substantially all of the assets of MTS
Communications Company, Inc. ("MTS Communications") (Note 9). These costs are
being amortized using the straight-line method over ten years. Tenant contracts
were acquired in the MTS Communications acquisition and are being amortized
using the straight-line method over three years.
64
<PAGE>
Impairment of Long-Lived Assets
The Company reviews its long-lived assets, including property and equipment
and intangibles, for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset should be assessed. An impairment
will be recognized when the undiscounted future net cash flows estimated to be
generated by the asset are insufficient to recover the current carrying value of
the asset. Estimates of future cash flows are based on many factors, including
current operating results, expected market trends, and competitive influences.
Management believes that the long-lived assets in the accompanying financial
statements are appropriately valued.
Fair Value of Financial Instruments
The carrying amounts reported in the balance sheets approximate the fair
values for cash and capital lease obligations.
In accordance with SFAS No. 107, "Disclosures about Fair Values of
Financial Instruments," the Company has estimated the fair value of the Series
A preferred stock as approximately $5.8 million and $81.8 million at December
31, 1998 and 1999, respectively. The Company has estimated the fair value of
the Series B and Series B-1 preferred stock as $6.4 million and $2.8 million,
respectively, at December 31, 1998 and approximately $90.4 million and $39.1
million, respectively, at December 31, 1999. The Series C preferred stock has
an estimated fair value of approximately $281 million at December 31, 1999. The
fair value of the preferred stock is based on the estimated fair value of the
Company's common stock and the number of shares of common stock upon conversion.
Segment Reporting
The Company reports one segment, communication services, and provides an
integrated package of communication products to small- and medium-sized
businesses.
Accrued Expenses
Accrued expenses relate to the following at December 31:
<TABLE>
<CAPTION>
1998 1999
------------------ -------------------
<S> <C> <C>
Property and equipment additions $ 280,900 $ 16,969
Compensation 257,838 1,116,873
Taxes 171,118 453,578
Network costs 221,912 422,366
Other 376,173 686,347
------------------ -------------------
$1,307,941 $2,696,133
================== ===================
</TABLE>
Net Loss Per Common Share
Basic and diluted net loss per share is computed using the weighted average
number of shares of common stock outstanding during the year. Potential common
stock equivalents are excluded from the calculation of diluted net loss per
share, as their effect is antidilutive. Convertible redeemable preferred stock
was outstanding at December 31, 1997, 1998, and 1999. These securities were not
considered in the computation of net loss per share as the conversion is
dependent upon a qualifying public offering, as defined in the preferred stock
sale agreements (Note 10).
65
<PAGE>
3. Property And Equipment
Property and equipment consist of the following at December 31:
<TABLE>
<CAPTION>
1998 1999
---------------- -----------------
<S> <C> <C>
System infrastructure $4,771,675 $10,714,590
System equipment 1,583,018 4,136,654
Computer and office equipment 495,737 2,087,051
Leasehold improvements 220,655 989,075
Assets under construction 0 11,834,175
---------------- -----------------
7,071,085 29,761,545
Less accumulated depreciation and amortization (779,672) (2,733,443)
---------------- -----------------
$6,291,413 $27,028,102
================ =================
</TABLE>
4. Capital Transactions
Stock Option Plans
In February 1996, the Predecessor Company adopted the 1996 Share Incentive
Plan (the "Predecessor Plan"). The Predecessor Plan was intended to provide
incentives to officers and key employees of the Predecessor Company.
In July 1997, the 1997 Management Option Plan (the "1997 Option Plan") was
adopted by the Company. The 1997 Option Plan provides for the granting of
either incentive stock options or nonqualified stock options to purchase shares
of the Company's common stock to officers, directors, and key employees
responsible for the direction and management of the Company. The options expire
ten years after the date of grant and vest 20% upon the first anniversary of the
date of grant and 5% each subsequent quarter measured from the first anniversary
of the date of grant.
On December 21, 1999, the Company's board of directors adopted the 2000
Stock Option Plan (the "2000 Plan") which was approved subsequently by the
stockholders on December 23, 1999. All officers, directors, and key persons are
eligible to participate in the plan, subject to the discretion of a committee
appointed by the board of directors. The board of directors reserved a combined
11.7 million shares for issuance under the 1997 Option Plan and the 2000 Plan.
66
<PAGE>
Statement of Financial Accounting Standards No. 123
A summary of the activity related to the option plans is as follows:
<TABLE>
<CAPTION>
Weighted Average
Weighted Average Shares Exercise Price
----------------------- ---------------
<S> <C> <C>
Balance at December 31, 1996 225,000 $0.60
Forfeited (45,000) 0.56
Granted 1,536,345 0.67
-------------------
Balance at December 31, 1997 1,716,345 0.66
Granted 1,087,875 1.00
Forfeited (76,500) 1.07
-------------------
Balance at December 31, 1998 2,727,720 0.78
Granted 3,526,655 2.29
Forfeited (310,500) 1.15
Exercised (122,900) 0.94
-------------------
Balance at December 31, 1999 5,820,975 1.64
===================
</TABLE>
In December 1999, the Company granted 25,655 options to purchase common
stock, with an exercise price of $2.53 per share, to consultants for prior
services. The options vested immediately and the consultants exercised these
options prior to December 31, 1999. The Company recorded an expense of
approximately $340,000 related to this grant.
The following table summarizes information about the stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
Number of Options Weighted Average Exercisable as
Outstanding at Remaining Weighted Average of December
Exercise Price December 31, 1999 Contractual Life Exercise Price 1999
-------------- ------------------ ----------------- ---------------- -------------
<S> <C> <C> <C> <C>
$ 0.67 1,808,100 7.66 $ 0.67 876,132
$ 1.07 2,149,875 9.20 1.07 172,959
$ 2.53 1,773,000 9.90 2.53 0
$17.00 90,000 9.95 17.00 0
------------------ -----------------
$0.67-$17.00 5,820,975 8.95 1.64 1,049,091
================== =================
</TABLE>
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its option plans. The Company recorded
deferred compensation of approximately $2.3 million in 1998 and $26.3 million in
1999 which represents the difference between the exercise price per option and
the fair value of the Company's common stock at the dates of grant. Deferred
compensation is amortized over the vesting period of the stock options which is
generally five years.
Had compensation cost for the Company's stock-based compensation plans been
determined consistent with SFAS No. 123, the Company's net loss would have been
the pro forma amounts indicated below. The pro forma net loss is calculated
using the Black-Scholes option pricing model, with the following assumptions:
risk-free interest rates from 5.82% to 6.19% for 1997, 5.28% for 1998, and 6.05%
for 1999, expected life of 6 years for 1997 and 1998, and 3 1/2 years for 1999,
dividend yield of 0%, and expected volatility of 0% for all periods prior to the
Company's filing for an initial public offering and 65% for
67
<PAGE>
December 4, 1999 through December 31, 1999. The weighted average fair value of
options granted during the years ended December 31, 1997, 1998, and 1999 was
$.18, $3.22, and $40.80 per option, respectively.
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------------------------------
1997 1998 1999
------------------ ------------------ --------------------
<S> <C> <C> <C>
Net loss, as reported $(1,325,716) $(3,490,331) $(93,233,780)
Net loss, pro forma (1,375,439) (3,538,833) (93,354,915)
Net loss per common share, as reported $ (0.41) $ (1.32) $ (35.22)
Net loss per common share, pro forma (0.42) (1.34) (35.26)
</TABLE>
Shareholder Rights Plan
In December 1999, the Company approved a stockholder rights plan. This
plan entitles the stockholders to rights to acquire additional shares of the
Company's common stock when a third party acquires 15% of the Company's common
stock or commences or announces its intent to commence a tender offer for at
least 15% of the Company's common stock. This plan could delay, deter, or
prevent a change of control.
Employee Stock Purchase Plan
In December 1999, the board of directors and stockholders approved an
employee stock purchase plan. Up to 900,000 shares of common stock may be
issued under this plan.
Amendment to Certificate of Incorporation
In September 1998, the Company amended and restated its certificate of
incorporation (the "Certificate") to, among other things, increase the total
number of authorized common stock and preferred stock to 20,594,088 and
3,703,566, respectively. Additionally, the Certificate amended the terms of the
existing Series A preferred stock and increased the number of shares of
preferred stock designated as Series A to 1,211,140.
In October 1999, the Company increased the authorized number of shares of
its common stock and preferred stock to 49,023,324 and 7,687,704, respectively.
In October 1999, the Company designated an additional 6,375 shares as Series B
preferred stock and designated 3,977,763 shares as Series C preferred stock. In
December 1999, the Company increased the authorized number of its common stock
and preferred stock to 58,620,758 and 7,920,467, respectively, and designated an
additional 232,763 shares as Series C preferred stock.
Stock Split
In May 1998, the Company's board of directors and the majority stockholders
approved a 2-for-1 stock split (the "Split") with respect to each outstanding
share of common stock and Series A preferred stock. The Split was effected in
the form of a stock dividend that was paid in September 1998. All references to
common stock and Series A share amounts have been restated to reflect the Split
on a retroactive basis. See Note 10 regarding a stock split in February 2000.
Warrants
In November and December 1999, the Company entered into master license
agreements and stock warrant agreements with several property owners and
operators. Under the terms of these agreements, the Company issued warrants to
purchase up to an aggregate of approximately 11 million shares of the Company's
common stock at an exercise price of $4.22 per share. These warrants are
exercisable for periods of five to ten
68
<PAGE>
years. The exact number of shares of common stock underlying the warrants, which
is based on the gross leaseable area of the building set forth in the master
license agreements, will be determined upon the completion of a due diligence
period and the finalization of the building schedules, which is expected to be
complete in April 2000. The measurement date for valuing the warrants will be
the date(s) upon which the property owners or operators effectively complete
their performance requirements. Such amounts will be recorded as deferred
license inducement expense, and will be amortized over the terms of the related
license agreements, which are expected to be ten years.
5. Convertible Redeemable Preferred Stock
Sales of Preferred Stock
On July 15, 1997, the Company issued 1,200,140 shares of its Series A
preferred stock for $5 per share. On September 30, 1998, the Company issued
1,333,200 and 579,613 shares of its Series B and Series B-1 preferred stock,
respectively, for $8 per share. In October 1999, in connection with the second
amended and restated stockholders' agreement, certain terms of the Series A,
Series B, and Series B-1 preferred stock were changed.
In February 1999, the Company issued 6,375 shares of its Series B preferred
stock to two employees of the Company for $8 per share for total proceeds of
$51,000.
In October 1999, the Company issued 2,819,868 shares of its Series C
preferred stock to existing and new third-party investors for $19 per share for
total proceeds of approximately $53.6 million.
In November 1999 and December 1999, the Company issued 1,157,895 and
184,211 shares, respectively, of its Series C preferred stock to certain
property owners and operators for $19 per share for total proceeds of $25.5
million.
Terms of Preferred Stock
The Series A, Series B and B-1, and Series C preferred stock (the
"Preferred Stock") have a redemption price of $5, $8, and $19 per share,
respectively, together with accrued and unpaid dividends thereon. Redemption is
mandatory beginning October 8, 2005, at which time up to one-third of the
outstanding shares may be redeemed on October 8, 2005, October 8, 2006, and
October 8, 2007. In the event of any liquidation, dissolution, or winding up of
the affairs of the Company, holders of Series C preferred stock shall be paid
the redemption price, plus all accrued dividends, before any payment to other
stockholders. Holders of Series B and Series B-1 preferred stock shall be paid
the redemption price, plus all accrued dividends, before any payment to other
stockholders, exclusive of any payments to be made to the holders of the Series
C preferred stock. Holders of Series A preferred stock shall be paid the
redemption price, plus all accrued dividends, before any payment to other
stockholders, exclusive of any payments to be made to holders of Series B and
Series B-1 and Series C preferred stock. The Preferred Stock is convertible
into common stock at the discretion of the holder and automatically converts
into common stock upon the completion of an initial public offering of the
Company's common stock with proceeds in excess of $50,000,000 and an adjusted
per share price of at least $8.44. These shares are entitled to 4.5 votes per
share on all matters upon which common stockholders are entitled to vote, except
for the Series B-1 shares which do not have any voting rights. Under these
conversion terms, the Preferred Stock converts 4.5 for 1 into common stock. The
holders of the Preferred Stock are entitled to receive dividends, out of the
unreserved and unrestricted surplus or net profits of the Company, as declared
by the board of directors. No such dividends have been declared as of December
31, 1999 (Note 10) for discussion of the conversion of the outstanding preferred
stock subsequent to year-end.
The Company is accreting the issuance costs of the Preferred Stock, which
is the difference between the redemption price and the face value of the shares,
over the period from the date of sale to the initial
69
<PAGE>
redemption date. Such amount was $1,920, $5,737, and $14,544 for the years ended
December 31, 1997, 1998, and 1999, respectively, and is included in interest
income in the accompanying statements of operations.
Beneficial Conversion Charge
In accordance with EITF 98-5, the Company recorded a charge in the quarter
ending December 31, 1999 of approximately $79.1 million to reflect the
beneficial conversion feature related to the shares of its Series C preferred
stock.
6. Related-Party Transactions
A portion of the proceeds from the Predecessor Company's sale of member
shares was received from officers, directors, or other parties related to the
Predecessor Company. A portion of the cost of the Predecessor Company's
purchase of member shares was paid to officers, directors, or other parties
related to the Predecessor Company.
A portion of the proceeds from the Company's sales of the Preferred Stock
was received from officers, directors, or other parties related to the Company.
The sales were conducted concurrently with, and on the same terms as, those
entered into with unrelated parties.
7. Commitments And Contingencies
Leases
The Company is obligated under several operating and capital lease
agreements, primarily for office space and equipment. Future annual minimum
rental payments under these leases as of December 31, 1999 are as follows:
Operating Capital
------------------- ------------------
2000 $ 2,299,014 $261,784
2001 2,300,184 181,345
2002 2,143,020 109,003
2003 1,684,661 25,545
2004 1,290,964 0
Thereafter 2,038,189 0
------------------- ------------------
$11,756,032 577,677
===================
Less amount representing interest and taxes 76,740
------------------
Present value of future minimum capital
lease payments 500,937
Less current portion 217,468
------------------
Long-term portion $283,469
==================
Rental expense was $54,904, $159,236, and $629,030 for the years ended
December 31, 1997, 1998, 1999, respectively.
Commission Obligation
The Company has entered into license agreements with property owners and/or
operators of several office buildings whereby the Company has the right to
provide communications services in these buildings. Under the terms of the
agreements, the Company is generally obligated to pay a commission based on the
70
<PAGE>
greater of a base fee or a percentage of revenue earned in the related building
or development. At December 31, 1999, the Company's aggregate minimum
obligation under these agreements is approximately $130,000 per year for the
next seven years.
Purchase Obligation
At December 31, 1999, the Company has contracts with several communications
providers with purchase commitments totaling approximately $1.6 million of which
approximately $1.1 million and $500,000 are payable in 2000 and 2001,
respectively.
Line of Credit
The Company entered into an agreement with Silicon Valley Bank ("Silicon")
on September 1, 1998 for a credit line totaling $500,000 bearing interest at
Silicon's prime rate plus 1.25%. The total amount was borrowed and subsequently
repaid prior to December 31, 1998. The agreement expired on April 22, 1999.
Borrowings were secured by a security interest in certain of the Company's
assets.
Employee Benefit Plan
In 1997, the Company adopted a 401(k) defined contribution plan.
Participants may elect to defer 15% of compensation up to a maximum amount
determined annually pursuant to Internal Revenue Service regulations. The
Company may provide matching contributions under this plan, but has not done so
in the periods presented.
Legal Proceedings
The Company is subject to legal proceedings and claims that arise in the
ordinary course of business. There are no pending legal proceedings to which
the Company is a party that management believes will have a material adverse
effect on the financial position, results of operations, or cash flows of the
Company (Note 10).
8. Income Taxes
On July 15, 1997, the Company recorded a deferred tax liability in the
amount of $73,487 which represents the Predecessor Company's tax consequences of
temporary differences in reporting items for financial statement and income tax
purposes at the time of the Reorganization (Note 1).
The income tax effects of temporary differences between the carrying
amounts of assets and liabilities in the financial statements and their
respective income tax bases, which give rise to deferred tax assets and
liabilities, as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1999
------------------- -------------------
Deferred income tax assets:
<S> <C> <C>
Net operating loss carryforwards $ 1,737,863 $ 7,198,975
Allowance for doubtful accounts 30,218 90,268
Other 14,358 29,119
------------------- -------------------
Total deferred income tax assets 1,782,439 7,318,362
Deferred income tax liabilities:
Depreciation (191,419) (940,989)
Valuation allowance (1,591,020) (6,377,373)
------------------- -------------------
Net deferred income taxes $ 0 $ 0
=================== ===================
</TABLE>
71
<PAGE>
The Company has provided a valuation allowance against its net deferred tax
assets, as management has concluded that it is not likely that such assets will
be realized in their entirety. The Company had approximately $19 million of
federal and state net operating loss carryforwards at December 31, 1999. The
net operating loss carryforwards begin to expire in the year 2017 if not
previously utilized. Utilization of existing net operating loss carryforwards
may be limited in future years if significant ownership changes occur.
The components of the provision for income taxes for the years ended
December 31, 1997, 1998, and 1999 are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------------- --------------- --------------
<S> <C> <C> <C>
Current $ 0 $ 0 $ 0
Deferred (310,766) (1,280,254) (4,786,353)
Increase in valuation allowance 310,766 1,280,254 4,786,353
------------- -------------- --------------
Total income tax benefit $ 0 $ 0 $ 0
============= ============== ==============
</TABLE>
The differences between the federal statutory income tax rate and the
Company's effective rate for the years ended December 31, 1997, 1998, and 1999
are as follows:
<TABLE>
<CAPTION>
1997 1998 1999
----------------- ---------------- -----------------
<S> <C> <C> <C>
Federal statutory rate (34)% (34)% (34)%
State income taxes, net of federal benefit (4) (4) (4)
Permanent differences 0 0 4
Increase in valuation allowance 38 38 34
----------- --------- ----------
Effective rate 0% 0% 0%
=========== ========= ==========
</TABLE>
9. Acquisition
On December 8, 1998, the Company acquired substantially all of the assets
of MTS Communications (the "MTS Acquisition"), a provider of communications
services in California, for total consideration of $2,574,848 consisting of
$1,904,398 in cash and the assumption of certain capital lease obligations with
a fair value of $670,450. The MTS Acquisition was accounted for as a purchase
and the results of operations of MTS Communications have been included since the
date of acquisition in the accompanying statements of operations. The purchase
price was allocated as follows:
Property and equipment $2,060,000
Tenant contracts 430,000
Cost in excess of net assets acquired 84,848
--------------
$2,574,848
==============
Prior to the MTS Acquisition, the Company advanced $200,000 to MTS
Communications in the form of a secured 8% promissory note to fund working
capital requirements of MTS Communications. The note was due March 8, 1999 and
was repaid in full.
The following unaudited pro forma results of operations for the years ended
December 31, 1997 and 1998 assumes that the MTS Acquisition occurred on January
1, 1997. The pro forma information is presented for informational purposes only
and may not be indicative of the actual results had the acquisition occurred on
the assumed date, nor is the information necessarily indicative of future
results of operations.
72
<PAGE>
1997 1998
------------------- --------------------
Revenues $ 2,325,428 $ 4,485,236
Net loss (2,006,128) (3,874,625)
Net loss per common share $ (0.76) $ (1.47)
Investment in SiteConnect, Inc.
In November 1999, the Company signed a letter of intent (the "Agreement")
to acquire 254,125 shares of common stock, representing less than 20% common
stock ownership, of SiteConnect, Inc. ("SiteConnect"), a Seattle-based
provider of communications services, for consideration of 281,250 shares of the
Company's common stock. The Agreement contains an option for the Company to
purchase the remaining outstanding common stock of SiteConnect for approximately
$5 million. The option is exercisable at any time prior to the first
anniversary of the closing date of the initial investment. The option is
payable in approximately 294,118 shares of the Company's common stock.
10. Events Subsequent To Year-End
Stock Split
In February 2000, a committee appointed by the Company's board of directors
approved a 4.5-for-1 stock split with respect to its outstanding common stock.
All shares of common stock and per share amounts in the accompanying financial
statements have been retroactively adjusted to reflect this split.
Initial Public Offering
On February 15, 2000, the Company completed the sale to the public of
11,500,000 shares of its common stock at a per share price of $17 for net
proceeds of approximately $179 million (the "IPO"). The Company may have a
contingent liability arising from a possible violation of Section 5 of the
Securities Act of 1933 in connection with the existence of a hyperlink on its
Web site to an audio announcement regarding the IPO. The Company does not
believe that the existence of this hyperlink caused a violation of the
Securities Act, and if any such claim is asserted, the Company intends to
contest the matter vigorously. Accordingly, the Company does not believe that
its exposure, if any, resulting from the existence of this hyperlink would be
material to its results of operations or financial condition.
Conversion of Preferred Stock
Simultaneous with the closing of the Company's initial public offering and
pursuant to the contractual agreements with the preferred stockholders, all
shares of the Company's Preferred Stock converted into 32,815,359 shares of
common stock. Pro forma stockholders' equity at December 31, 1999, after giving
effect to this conversion, would be $83.6 million (unaudited). Had the
conversion of the Preferred Stock occurred at the dates of its sales, net loss
per share would have been $(4.64) (unaudited) for the year ended December 31,
1999.
73
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited, in accordance with auditing standards generally accepted
in the United States, the financial statements of CYPRESS COMMUNICATIONS, INC.
included in this Form 10-K and have issued our report thereon dated February 21,
2000. Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedule listed in the index is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 21, 2000
74
<PAGE>
CYPRESS COMMUNICATIONS, INC.
SCHEDULES
Allowance for Doubtful Accounts:
<TABLE>
<CAPTION>
Charged to (Writeoffs)/
Beg. Balance Expense Recoveries Ending Balance
<S> ------------------- ------------------ ------------------ --------------------
For the Year Ended December 31, <C> <C> <C> <C>
1997........................... $ 0 $ 9,945 $ 0 $ 9,945
For the Year Ended December 31,
1998........................... $ 9,945 $ 69,575 $ 0 $ 79,520
For the Year Ended December 31,
1999........................... $79,520 $395,618 $(107,333) $367,805
</TABLE>
Deferred Tax Asset Valuation Allowance:
<TABLE>
<CAPTION>
Charged to
Beg. Balance Expense Reversals Ending Balance
------------------- ------------------ ------------------ --------------------
<S>
For the 5 1/2 ended December 31 <C> <C> <C> <C>
1997........................... $ 0 $ 310,766 $0 $ 310,766
For the Year Ended December 31,
1998........................... $ 310,766 $1,280,254 $0 $1,591,020
For the Year Ended December 31,
1999........................... $1,591,202 $4,786,171 $0 $6,377,373
</TABLE>
75
<PAGE>
Exhibit 3.1
SECOND AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CYPRESS COMMUNICATIONS, INC.
CYPRESS COMMUNICATIONS, INC., a corporation organized and existing under
the laws of the State of Delaware (the "Corporation"), hereby certifies as
follows:
1. The name of the Corporation is Cypress Communications, Inc. The date
of the filing of its original Certificate of Incorporation with the Secretary of
State of the State of Delaware was July 15, 1997.
2. This Second Amended and Restated Certificate of Incorporation (the
"Certificate") amends, restates and integrates the provisions of the Amended and
Restated Certificate of Incorporation that was filed with the Secretary of State
of the State of Delaware on September 30, 1998, as heretofore amended (the
"Amended and Restated Certificate"), and was duly adopted in accordance with the
provisions of Sections 242 and 245 of the Delaware General Corporation Law (the
"DGCL").
3. The text of the Amended and Restated Certificate is hereby amended and
restated in its entirety to provide as herein set forth in full.
ARTICLE I
The name of the Corporation is Cypress Communications, Inc.
ARTICLE II
The address of the Corporation's registered office in the State of Delaware
is c/o The Corporation Trust Company, 1209 Orange Street in the City of
Wilmington, County of New Castle. The name of its registered agent at such
address is The Corporation Trust Company.
ARTICLE III
The purpose of the Corporation is to engage in any lawful act or activity
for which corporations may be organized under the DGCL.
<PAGE>
ARTICLE IV
CAPITAL STOCK
-------------
The total number of shares of capital stock which the Corporation shall
have authority to issue is One Hundred Seventy-One Million (171,000,000) shares,
of which (i) One Hundred Fifty Million (150,000,000) shares shall be a class
designated as common stock, par value $.001 per share (the "Common Stock"), (ii)
One Million (1,000,000) shares shall be a class designated as Series Z Junior
Participating Cumulative Preferred Stock, par value $.001 per share (the "Series
Z Preferred Stock"), and (iii) Twenty Million (20,000,000) shares shall be a
class designated as undesignated preferred stock, par value $.001 per share (the
"Undesignated Preferred Stock"). The Series Z Preferred Stock and the
Undesignated Preferred Stock are sometimes collectively referred to herein as
the "Preferred Stock."
The number of authorized shares of the class of Undesignated Preferred
Stock may from time to time be increased or decreased (but not below the number
of shares outstanding) by the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock entitled to vote, without a vote of the
holders of the Preferred Stock (subject to the terms of the Series Z Preferred
Stock and except as otherwise provided in any certificate of designations of any
series of Undesignated Preferred Stock).
The powers, preferences and rights of, and the qualifications, limitations
and restrictions upon, each class or series of stock shall be determined in
accordance with, or as set forth below in, this Article IV.
A. COMMON STOCK
------------
Subject to all the rights, powers and preferences of the Preferred
Stock and except as provided by law or in this Article IV (or in any certificate
of designations of any series of Undesignated Preferred Stock):
(a) the holders of the Common Stock shall have the exclusive
right to vote for the election of directors of the Corporation ("Directors") and
on all other matters requiring stockholder action, each outstanding share
entitling the holder thereof to one vote on each matter properly submitted to
the stockholders of the Corporation for their 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 (or on any amendment to
a certificate of designations of any series of Undesignated Preferred Stock)
that alters or changes the powers, preferences, rights or other terms of one or
more outstanding series or class of Preferred Stock if the holders of such
affected series or class are entitled to vote, either separately or together
with the holders of one or more other such series or classes, on such amendment
pursuant to this Certificate (or pursuant to a certificate of designations of
any series of Undesignated Preferred Stock) or pursuant to the DGCL;
2
<PAGE>
(b) dividends may be declared and paid or set apart for payment
upon the Common Stock out of any assets or funds of the Corporation legally
available for the payment of dividends, but only when and as declared by the
Board of Directors or any authorized committee thereof; and
(c) upon the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, the net assets of the Corporation shall be
distributed pro rata to the holders of the Common Stock.
B. SERIES Z PREFERRED STOCK
------------------------
1. Designation and Amount. The total number of shares of Series Z
----------------------
Preferred Stock which the Corporation shall have authority to issue is One
Million (1,000,000) shares.
2. Dividends and Distributions.
---------------------------
(a) (i) Subject to the rights of the holders of any shares of any
series of Undesignated Preferred Stock (or any similar stock) ranking prior and
superior to the Series Z Preferred Stock with respect to dividends, the holders
of shares of Series Z Preferred Stock, in preference to the holders of shares of
Common Stock and of any other junior stock, shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the first day of March,
June, September and December in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series Z Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provisions
for adjustment hereinafter set forth, 1,000 times the aggregate per share amount
of all cash dividends, and 1,000 times the aggregate per share amount (payable
in kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series Z Preferred Stock. The multiple of
cash and non-cash dividends declared on the Common Stock to which holders of the
Series Z Preferred Stock are entitled, which shall be 1,000 initially but which
shall be adjusted from time to time as hereinafter provided, is hereinafter
referred to as the "Dividend Multiple." In the event the Corporation shall at
any time after February 9, 2000 (the "Rights Declaration Date") (i) declare or
pay any dividend on Common Stock payable in shares of Common Stock, or (ii)
effect a subdivision or combination or consolidation of the outstanding shares
of Common Stock (by reclassification or otherwise than by payment of a dividend
in shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the Dividend Multiple thereafter applicable to the
determination of the amount of dividends which holders of shares of Series Z
Preferred Stock shall be entitled to receive shall be the Dividend Multiple
applicable immediately prior to such event multiplied by a fraction,
3
<PAGE>
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(ii) Notwithstanding anything else contained in this paragraph
(a), the Corporation shall, out of funds legally available for that purpose,
declare a dividend or distribution on the Series Z Preferred Stock as provided
in this paragraph (a) immediately after it declares a dividend or distribution
on the Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been declared
on the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$1.00 per share on the Series Z Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(b) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series Z Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series Z Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series Z Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series Z Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix in
accordance with applicable law a record date for the determination of holders of
shares of Series Z Preferred Stock entitled to receive payment of a dividend or
distribution declared thereon, which record date shall be not more than such
number of days prior to the date fixed for the payment thereof as may be allowed
by applicable law.
3. Voting Rights. In addition to any other voting rights required by law,
-------------
the holders of shares of Series Z Preferred Stock shall have the following
voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each share of Series Z Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the Corporation.
The number of votes which a holder of a share of Series Z Preferred Stock is
entitled to cast, which shall initially be 1,000 but which may be adjusted from
time to time as hereinafter provided, is hereinafter referred to as the "Vote
Multiple." In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare or pay any dividend on Common Stock payable in
shares of Common Stock, or (ii) effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in
4
<PAGE>
shares of Common Stock) into a greater or lesser number of shares of Common
Stock, then in each such case the Vote Multiple thereafter applicable to the
determination of the number of votes per share to which holders of shares of
Series Z Preferred Stock shall be entitled shall be the Vote Multiple
immediately prior to such event multiplied by a fraction, the numerator of which
is the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(b) Except as otherwise provided herein or by law, the holders of
shares of Series Z Preferred Stock and the holders of shares of Common Stock and
the holders of shares of any other capital stock of this Corporation having
general voting rights, shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
(c) Except as otherwise required by applicable law or as set forth
herein, holders of Series Z Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are entitled
to vote with holders of Common Stock as set forth herein) for taking any
corporate action.
4. Certain Restrictions.
--------------------
(a) Whenever dividends or distributions payable on the Series Z
Preferred Stock as provided in Section B.2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series Z Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either as
to dividends or upon liquidation, dissolution or winding
up) to the Series Z Preferred Stock;
(ii) declare or pay dividends on or make any other distributions
on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up)
with the Series Z Preferred Stock, except dividends paid
ratably on the Series Z Preferred Stock and all such parity
stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all
such shares are then entitled;
(iii) except as permitted in subsection B.4(a)(iv) below, redeem,
purchase or otherwise acquire for consideration shares of
any stock ranking on a parity (either as to dividends or
upon liquidation, dissolution or winding up) with the
Series Z Preferred Stock, provided that the Corporation may
at any time
5
<PAGE>
redeem, purchase or otherwise acquire shares of any such
parity stock in exchange for shares of any stock of the
Corporation ranking junior (either as to dividends or upon
dissolution, liquidation or winding up) to the Series Z
Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series Z Preferred Stock, or any shares of any stock
ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series Z
Preferred Stock, except in accordance with a purchase offer
made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such
terms as the Board of Directors, after consideration of the
respective annual dividend rates and other relative rights
and preferences of the respective series and classes, shall
determine in good faith will result in fair and equitable
treatment among the respective series or classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subsection (a) of
this Section B.4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series Z Preferred Stock purchased or
-----------------
otherwise acquired by the Corporation in any manner whatsoever shall be retired
and canceled promptly after the acquisition thereof.
6. Liquidation, Dissolution or Winding Up. Upon any liquidation
--------------------------------------
(voluntary or otherwise), dissolution or winding up of the Corporation, no
distribution shall be made (x) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series Z Preferred Stock unless, prior thereto, the holders of shares of Series
Z Preferred Stock shall have received an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, plus an amount equal to the greater of (1) $1,000.00 per share or
(2) an aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount to be
distributed per share to holders of Common Stock, or (y) to the holders of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series Z Preferred Stock, except distributions made ratably
on the Series Z Preferred Stock and all other such parity stock in proportion to
the total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall at
any time after the Rights Declaration Date (i) declare or pay any dividend on
Common Stock payable in shares of Common Stock, or (ii) effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount per
6
<PAGE>
share to which holders of shares of Series Z Preferred Stock were entitled
immediately prior to such event under clause (x) of the preceding sentence shall
be adjusted by multiplying such amount by a fraction, the numerator of which is
the number of shares of Common Stock outstanding immediately after such event
and the denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Neither the consolidation of nor merging of the Corporation with or into
any other corporation or corporations, nor the sale or other transfer of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section B.6.
7. Consolidation, Merger, etc. In case the Corporation shall enter into
--------------------------
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in any such case the shares of Series Z
Preferred Stock shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 1,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged, plus accrued and unpaid
dividends, if any, payable with respect to the Series Z Preferred Stock. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare or pay any dividend on Common Stock payable in shares of Common Stock,
or (ii) effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series Z Preferred
Stock shall be adjusted by multiplying such amount by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
8. Redemption. The shares of Series Z Preferred Stock shall not be
----------
redeemable; provided, however, that the foregoing shall not limit the ability of
the Corporation to purchase or otherwise deal in such shares to the extent
otherwise permitted hereby and by law.
9. Ranking. Unless otherwise expressly provided in this Certificate or a
-------
certificate of designations relating to any other series of Undesignated
Preferred Stock, the Series Z Preferred Stock shall rank junior to every other
series of Undesignated Preferred Stock hereafter authorized, as to the payment
of dividends and the distribution of assets on liquidation, dissolution or
winding up and shall rank senior to the Common Stock.
10. Amendment. This Certificate shall not be amended in any manner which
---------
would materially alter or change the powers, preferences or special rights of
the Series Z Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of two-thirds or more of the outstanding shares
of Series Z Preferred Stock, voting separately as a class.
7
<PAGE>
11. Fractional Shares. Series Z Preferred Stock may be issued in whole
-----------------
shares or in any fraction of a share that is one one-thousandth (1/1,000th) of a
share or any integral multiple of such fraction, which shall entitle the holder,
in proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series Z Preferred Stock. In lieu of fractional
shares, the Corporation may elect to make a cash payment as provided in the
Shareholder Rights Agreement, between the Corporation and State Street Bank &
Trust Company, for fractions of a share other than one one-thousandth
(1/1,000th) of a share or any integral multiple thereof.
C. UNDESIGNATED PREFERRED STOCK
----------------------------
The Board of Directors or any authorized committee thereof is expressly
authorized, to the fullest extent permitted by law, to provide for the issuance
of the shares of Undesignated Preferred Stock in one or more series of such
stock, and by filing a certificate pursuant to applicable law of the State of
Delaware, to establish or change from time to time the number of shares of each
such series, and to fix the designations, powers, including voting powers, full
or limited, or no voting powers, preferences and the relative, participating,
optional or other special rights of the shares of each series and any
qualifications, limitations and restrictions thereof.
ARTICLE V
STOCKHOLDER ACTION
------------------
1. Action without Meeting. Except as otherwise provided herein, any
----------------------
action required or permitted to be taken by the stockholders of the Corporation
at any annual or special meeting of stockholders of the Corporation must be
effected at a duly called annual or special meeting of stockholders and may not
be taken or effected by a written consent of stockholders in lieu thereof.
2. Special Meetings. Except as otherwise required by statute and subject
----------------
to the rights, if any, of the holders of any series or class of Preferred Stock,
special meetings of the stockholders of the Corporation may be called only by
the Board of Directors acting pursuant to a resolution approved by the
affirmative vote of a majority of the Directors then in office. Only those
matters set forth in the notice of the special meeting may be considered or
acted upon at a special meeting of stockholders of the Corporation.
8
<PAGE>
ARTICLE VI
DIRECTORS
---------
1. General. The business and affairs of the Corporation shall be managed
-------
by or under the direction of the Board of Directors except as otherwise provided
herein or required by law.
2. Election of Directors. Election of Directors need not be by written
---------------------
ballot unless the By-laws of the Corporation (the "By-laws") shall so provide.
3. Number of Directors; Term of Office. The number of Directors of the
-----------------------------------
Corporation shall be fixed solely and exclusively by resolution duly adopted
from time to time by the Board of Directors. The Directors, other than those who
may be elected by the holders of any series or class of Preferred Stock, shall
be classified, with respect to the term for which they severally hold office,
into three classes, as nearly equal in number as reasonably possible. The
initial Class I Directors of the Corporation shall be Ward C. Bourdeaux, Jr.,
William P. Egan and Jeffrey H. Schutz; the initial Class II Directors of the
Corporation shall be Laurence S. Grafstein, Randall A. Hack and P. Eric Yopes;
and the initial Class III Directors of the Corporation shall be R. Stanley Allen
and John C. Halsted. The initial Class I Directors shall serve for a term
expiring at the annual meeting of stockholders to be held in 2000, the initial
Class II Directors shall serve for a term expiring at the annual meeting of
stockholders to be held in 2001, and the initial Class III Directors shall serve
for a term expiring at the annual meeting of stockholders to be held in 2002. At
each annual meeting of stockholders, Directors elected to succeed those
Directors whose terms expire shall be elected for a term of office to expire at
the third succeeding annual meeting of stockholders after their election.
Notwithstanding the foregoing, the Directors elected to each class shall hold
office until their successors are duly elected and qualified or until their
earlier resignation or removal.
Notwithstanding the foregoing, whenever, pursuant to the provisions of
Article IV of this Certificate, the holders of any one or more series or classes
of Preferred Stock shall have the right, voting separately as a series or class
or together with holders of other such series or classes, to elect Directors at
an annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of this Certificate and any certificate of designations applicable
thereto.
4. Vacancies. Subject to the rights, if any, of the holders of any series
---------
or class of Preferred Stock to elect Directors and to fill vacancies in the
Board of Directors relating thereto, any and all vacancies in the Board of
Directors, however occurring, including, without limitation, by reason of an
increase in size of the Board of Directors, or the death, resignation,
disqualification or removal of a Director, shall be filled solely and
exclusively by the affirmative vote of a majority of the remaining Directors
then in office, even if less than a quorum of the Board of Directors, and not by
the stockholders. Any Director appointed in accordance with the preceding
sentence shall hold office for the remainder of the full term of
9
<PAGE>
the class of Directors in which the new directorship was created or the vacancy
occurred and until such Director's successor shall have been duly elected and
qualified or until his or her earlier resignation or removal. Subject to the
rights, if any, of the holders of any series or class of Preferred Stock to
elect Directors, when the number of Directors is increased or decreased, the
Board of Directors shall, subject to Article VI.3 hereof, determine the class or
classes to which the increased or decreased number of Directors shall be
apportioned; provided, however, that no decrease in the number of Directors
-------- -------
shall shorten the term of any incumbent Director. In the event of a vacancy in
the Board of Directors, the remaining Directors, except as otherwise provided by
law, shall exercise the powers of the full Board of Directors until the vacancy
is filled.
5. Removal. Subject to the rights, if any, of any series or class of
-------
Preferred Stock to elect Directors and to remove any Director whom the holders
of any such stock have the right to elect, any Director (including persons
elected by Directors to fill vacancies in the Board of Directors) may be removed
from office (i) only with cause and (ii) only by the affirmative vote of the
holders of 75% or more of the shares then entitled to vote at an election of
Directors. At least forty-five (45) days prior to any meeting of stockholders at
which it is proposed that any Director be removed from office, written notice of
such proposed removal and the alleged grounds thereof shall be sent to the
Director whose removal will be considered at the meeting.
ARTICLE VII
LIMITATION OF LIABILITY
-----------------------
A Director of the Corporation shall not be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a Director, except for liability (a) for any breach of the Director's
duty of loyalty to the Corporation or its stockholders, (b) for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, (c) under Section 174 of the DGCL or (d) for any transaction
from which the Director derived an improper personal benefit. If the DGCL is
amended after the effective date of this Certificate to authorize corporate
action further eliminating or limiting 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 DGCL, as so amended.
Any repeal or modification of this Article VII by either of (i) the
stockholders of the Corporation or (ii) an amendment to the DGCL, shall not
adversely affect any right or protection existing at the time of such repeal or
modification with respect to any acts or omissions occurring before such repeal
or modification of a person serving as a Director at the time of such repeal or
modification.
10
<PAGE>
ARTICLE VIII
AMENDMENT OF BY-LAWS
--------------------
1. Amendment by Directors. Except as otherwise provided by law, the By-
----------------------
laws of the Corporation may be amended or repealed by the Board of Directors by
the affirmative vote of a majority of the Directors then in office.
2. Amendment by Stockholders. The By-laws of the Corporation may be
-------------------------
amended or repealed at any annual meeting of stockholders, or special meeting of
stockholders called for such purpose as provided in the By-laws, by the
affirmative vote of at least 75% of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal,
voting together as a single class; provided, however, that if the Board of
-------- -------
Directors recommends that stockholders approve such amendment or repeal at such
meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of the majority of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal,
voting together as a single class.
ARTICLE IX
AMENDMENT OF CERTIFICATE OF INCORPORATION
-----------------------------------------
The Corporation reserves the right to amend or repeal this Certificate in
the manner now or hereafter prescribed by statute and this Certificate, and all
rights conferred upon stockholders herein are granted subject to this
reservation. Whenever any vote of the holders of voting stock is required to
amend or repeal any provision of this Certificate, and in addition to any other
vote of holders of voting stock that is required by this Certificate or by law,
such amendment or repeal shall require the affirmative vote of the majority of
the outstanding shares entitled to vote on such amendment or repeal, and the
affirmative vote of the majority of the outstanding shares of each class
entitled to vote thereon as a class, at a duly constituted meeting of
stockholders called expressly for such purpose; provided, however, that the
affirmative vote of not less than 75% of the outstanding shares entitled to vote
on such amendment or repeal, and the affirmative vote of not less than 75% of
the outstanding shares of each class entitled to vote thereon as a class, shall
be required to amend or repeal any provision of Article V, Article VI, Article
VII, Article IX or Article X of this Certificate.
ARTICLE X
BUSINESS COMBINATIONS
---------------------
The Corporation elects to be governed by the provisions of Section 203 of
the DGCL.
[THE REMAINDER OF THIS PAGE HAS BEEN INTENTIONALLY LEFT BLANK]
11
<PAGE>
IN WITNESS WHEREOF, the Corporation has caused this Second Amended and
Restated Certificate of Incorporation to be signed by R. Stanley Allen, its
Chief Executive Officer, this 15th day of February, 2000, which signature
constitutes the affirmation or acknowledgment of such officer, under penalties
of perjury, that this instrument is the act and deed of the Corporation, and
that the facts stated therein are true.
CYPRESS COMMUNICATIONS, INC.
By: /s/ R. Stanley Allen
------------------------
R. Stanley Allen
Chief Executive Officer
<PAGE>
Exhibit 3.2
AMENDED AND RESTATED
BY-LAWS
OF
CYPRESS COMMUNICATIONS, INC.
(the "Corporation")
ARTICLE I
---------
Stockholders
------------
SECTION 1. Annual Meeting. The annual meeting of stockholders (any such
--------------
meeting being referred to in these By-laws as an "Annual Meeting") shall be held
at the hour, date and place within or without the United States which is fixed
by the Board of Directors, which time, date and place may subsequently be
changed at any time by vote of the Board of Directors. If no Annual Meeting has
been held for a period of thirteen months after the Corporation's last Annual
Meeting, a special meeting in lieu thereof may be held, and such special meeting
shall have, for the purposes of these By-laws or otherwise, all the force and
effect of an Annual Meeting. Any and all references hereafter in these By-laws
to an Annual Meeting or Annual Meetings also shall be deemed to refer to any
special meeting(s) in lieu thereof.
SECTION 2. Notice of Stockholder Business and Nominations.
----------------------------------------------
(a) Annual Meetings of Stockholders.
-------------------------------
(1) Nominations of persons for election to the Board of Directors of
the Corporation and the proposal of business to be considered by the
stockholders may be made at an Annual Meeting (a) pursuant to the
Corporation's notice of meeting, (b) by or at the direction of the Board of
Directors or (c) by any stockholder of the Corporation who was a
stockholder of record at the time of giving of notice provided for in this
By-law, who is entitled to vote at the meeting, who is present (in person
or by proxy) at the meeting and who complies with the notice procedures set
forth in this By-law. In addition to the other requirements set forth in
this By-law, for any proposal of business to be considered at an Annual
Meeting, it must be a proper subject for action by stockholders of the
Corporation under Delaware law.
(2) For nominations or other business to be properly brought before
an Annual Meeting by a stockholder pursuant to clause (c) of paragraph
(a)(1) of this By-law, the stockholder must have given timely notice
thereof in writing to the Secretary of
<PAGE>
the Corporation. To be timely, a stockholder's notice shall be delivered to
the Secretary at the principal executive offices of the Corporation not
later than the close of business on the 75th day nor earlier than the close
of business on the 105th day prior to the first anniversary of the
preceding year's Annual Meeting; provided, however, that in the event that
the date of the Annual Meeting is advanced by more than 30 days before or
delayed by more than 60 days after such anniversary date, notice by the
stockholder to be timely must be so delivered not earlier than the close of
business on the 105th day prior to such Annual Meeting and not later than
the close of business on the later of the 75th day prior to such Annual
Meeting or the 10th day following the day on which public announcement of
the date of such meeting is first made. Notwithstanding anything to the
contrary provided herein, for the first Annual Meeting following the
initial public offering of common stock of the Corporation, a stockholder's
notice shall be timely if delivered to the Secretary at the principal
executive offices of the Corporation not later than the close of business
on the later of the 75th day prior to the scheduled date of such Annual
Meeting or the 10th day following the day on which public announcement of
the date of such Annual Meeting is first made or sent by the Corporation.
Such stockholder's notice shall set forth (a) as to each person whom the
stockholder proposes to nominate for election or reelection as a director,
all information relating to such person that is required to be disclosed in
solicitations of proxies for election of directors in an election contest,
or is otherwise required, in each case pursuant to Regulation 14A under the
Securities Exchange Act of 1934, as amended (the "Exchange Act") and Rule
14a-11 thereunder (including such person's written consent to being named
in the proxy statement as a nominee and to serving as a director if
elected); (b) as to any other business that the stockholder proposes to
bring before the meeting, a brief description of the business desired to be
brought before the meeting, the reasons for conducting such business at the
meeting, any material interest in such business of such stockholder and the
beneficial owner, if any, on whose behalf the proposal is made, and the
names and addresses of other stockholders known by the stockholder
proposing such business to support such proposal, and the class and number
of shares of the Corporation's capital stock beneficially owned by such
other stockholders; and (c) as to the stockholder giving the notice and the
beneficial owner, if any, on whose behalf the nomination or proposal is
made (i) the name and address of such stockholder, as they appear on the
Corporation's books, and of such beneficial owner, and (ii) the class and
number of shares of the Corporation which are owned beneficially and of
record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph
(a)(2) of this By-law to the contrary, in the event that the number of
directors to be elected to the Board of Directors of the Corporation is
increased and there is no public announcement naming all of the nominees
for director or specifying the size of the increased Board of Directors
made by the Corporation at least 85 days prior to the first anniversary of
the preceding year's Annual Meeting, a stockholder's notice required by
this By-law shall
2
<PAGE>
also be considered timely, but only with respect to nominees for any new
positions created by such increase, if it shall be delivered to the
Secretary at the principal executive offices of the Corporation not later
than the close of business on the 10th day following the day on which such
public announcement is first made by the Corporation.
(b) General.
-------
(1) Only such persons who are nominated in accordance with the
provisions of this By-law shall be eligible for election and to serve as
directors and only such business shall be conducted at an Annual Meeting as
shall have been brought before the meeting in accordance with the
provisions of this By-law. The Board of Directors or a designated
committee thereof shall have the power to determine whether a nomination or
any business proposed to be brought before the meeting was made in
accordance with the provisions of this By-law. If neither the Board of
Directors nor such designated committee makes a determination as to whether
any stockholder proposal or nomination was made in accordance with the
provisions of this By-law, the presiding officer of the Annual Meeting
shall have the power and duty to determine whether the stockholder proposal
or nomination was made in accordance with the provisions of this By-law.
If the Board of Directors or a designated committee thereof or the
presiding officer, as applicable, determines that any stockholder proposal
or nomination was not made in accordance with the provisions of this By-
law, such proposal or nomination shall be disregarded and shall not be
presented for action at the Annual Meeting.
(2) For purposes of this By-law, "public announcement" shall mean
disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document
publicly filed by the Corporation with the Securities and Exchange
Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this By-law, a
stockholder shall also comply with all applicable requirements of the
Exchange Act and the rules and regulations thereunder with respect to the
matters set forth in this By-law. Nothing in this By-law shall be deemed
to affect any rights of (i) stockholders to request inclusion of proposals
in the Corporation's proxy statement pursuant to Rule 14a-8 under the
Exchange Act or (ii) the holders of any series or class of Preferred Stock
to elect directors under specified circumstances.
SECTION 3. Special Meetings. Except as otherwise required by statute and
----------------
subject to the rights, if any, of the holders of any series or class of
Preferred Stock, special meetings of the stockholders of the Corporation may be
called only by the Board of Directors acting pursuant to a resolution approved
by the affirmative vote of a majority of the Directors then in office. Only
those matters set forth in the notice of the special meeting may be considered
or acted upon at a special meeting of stockholders of the Corporation.
3
<PAGE>
SECTION 4. Notice of Meetings; Adjournments. A written notice of each
--------------------------------
Annual Meeting stating the hour, date and place of such Annual Meeting shall be
given not less than 10 days nor more than 60 days before the Annual Meeting, to
each stockholder entitled to vote thereat, by delivering such notice to such
stockholder or by mailing it, postage prepaid, addressed to such stockholder at
the address of such stockholder as it appears on the Corporation's stock
transfer books. Such notice shall be deemed to be given when hand delivered to
such address or deposited in the mail so addressed, with postage prepaid.
Notice of all special meetings of stockholders shall be given in the same
manner as provided for Annual Meetings, except that the written notice of all
special meetings shall state the purpose or purposes for which the meeting has
been called.
Notice of an Annual Meeting or special meeting of stockholders need not be
given to a stockholder if a written waiver of notice is signed before or after
such meeting by such stockholder or if such stockholder attends such meeting,
unless such attendance was for the express purpose of objecting at the beginning
of the meeting to the transaction of any business because the meeting was not
lawfully called or convened. Neither the business to be transacted at, nor the
purpose of, any Annual Meeting or special meeting of stockholders need be
specified in any written waiver of notice.
The Board of Directors may postpone and reschedule any previously scheduled
Annual Meeting or special meeting of stockholders and any record date with
respect thereto, regardless of whether any notice or public disclosure with
respect to any such meeting has been sent or made pursuant to Section 2 of this
Article I of these By-laws or otherwise. In no event shall the public
announcement of an adjournment, postponement or rescheduling of any previously
scheduled meeting of stockholders commence a new time period for the giving of a
stockholder's notice under Section 2 of this Article I of these By-laws.
When any meeting is convened, the presiding officer may adjourn the meeting
if (a) no quorum is present for the transaction of business, (b) the Board of
Directors determines that adjournment is necessary or appropriate to enable the
stockholders to consider fully information which the Board of Directors
determines has not been made sufficiently or timely available to stockholders,
or (c) the Board of Directors determines that adjournment is otherwise in the
best interests of the Corporation. When any Annual Meeting or special meeting
of stockholders is adjourned to another hour, date or place, notice need not be
given of the adjourned meeting other than an announcement at the meeting at
which the adjournment is taken of the hour, date and place to which the meeting
is adjourned; provided, however, that if the adjournment is for more than 30
days, or if after the adjournment a new record date is fixed for the adjourned
meeting, notice of the adjourned meeting shall be given to each stockholder of
record entitled to vote thereat and each stockholder who, by law or under the
Certificate of Incorporation of the Corporation (as the same may hereafter be
amended and/or restated, the "Certificate") or these By-laws, is entitled to
such notice.
4
<PAGE>
SECTION 5. Quorum. A majority of the shares entitled to vote, present in
------
person or represented by proxy, shall constitute a quorum at any meeting of
stockholders. If less than a quorum is present at a meeting, the holders of
voting stock representing a majority of the voting power present at the meeting
or the presiding officer may adjourn the meeting from time to time, and the
meeting may be held as adjourned without further notice, except as provided in
Section 5 of this Article I. At such adjourned meeting at which a quorum is
present, any business may be transacted which might have been transacted at the
meeting as originally noticed. The stockholders present at a duly constituted
meeting may continue to transact business until adjournment, notwithstanding the
withdrawal of enough stockholders to leave less than a quorum.
SECTION 6. Voting and Proxies. Stockholders shall have one vote for each
------------------
share of stock entitled to vote owned by them of record according to the stock
ledger of the Corporation, unless otherwise provided by law or by the
Certificate. Stockholders may vote either (i) in person, (ii) by written proxy
or (iii) by a transmission permitted by (S)212(c) of the Delaware General
Corporation Law ("DGCL"). Any copy, facsimile telecommunication or other
reliable reproduction of the writing or transmission permitted by (S)212(c) of
the DGCL may be substituted for or used in lieu of the original writing or
transmission for any and all purposes for which the original writing or
transmission could be used, provided that such copy, facsimile telecommunication
or other reproduction shall be a complete reproduction of the entire original
writing or transmission. Proxies shall be filed in accordance with the
procedures established for the meeting of stockholders. Except as otherwise
limited therein or as otherwise provided by law, proxies authorizing a person to
vote at a specific meeting shall entitle the persons authorized thereby to vote
at any adjournment of such meeting, but they shall not be valid after final
adjournment of such meeting. A proxy with respect to stock held in the name of
two or more persons shall be valid if executed by or on behalf of any one of
them unless at or prior to the exercise of the proxy the Corporation receives a
specific written notice to the contrary from any one of them.
SECTION 7. Action at Meeting. When a quorum is present at any meeting of
-----------------
stockholders, any matter before any such meeting (other than an election of a
director or directors) shall be decided by a majority of the votes properly cast
for or against such matter, except where a larger vote is required by law, by
the Certificate or by these By-laws. Any election of directors by stockholders
shall be determined by a plurality of the votes properly cast on the election of
directors. The Corporation shall not directly or indirectly vote any shares of
its own stock; provided, however, that the Corporation may vote shares which it
holds in a fiduciary capacity to the extent permitted by law.
SECTION 8. Stockholder Lists. The Secretary or an Assistant Secretary (or
-----------------
the Corporation's transfer agent or other person authorized by these By-laws or
by law) shall prepare and make, at least 10 days before every Annual Meeting or
special meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order, and showing the address of
each stockholder and the number of shares
5
<PAGE>
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours, for a period of at least 10 days prior to the meeting,
either at a place within the city where the meeting is to be held, which place
shall be specified in the notice of the meeting, or, if not so specified, at the
place where the meeting is to be held. The list shall also be produced and kept
at the hour, date and place of the meeting during the whole time thereof, and
may be inspected by any stockholder who is present.
SECTION 9. Presiding Officer. The Chairman of the Board, if one is
-----------------
elected, or if not elected or in his or her absence, the Chief Executive
Officer, or, in the absence of the Chairman of the Board and the Chief Executive
Officer, the President, shall preside at all Annual Meetings or special meetings
of stockholders and shall have the power, among other things, to adjourn such
meeting at any time and from time to time, subject to Sections 5 and 6 of this
Article I. The order of business and all other matters of procedure at any
meeting of the stockholders shall be determined by the presiding officer.
SECTION 10. Inspectors of Elections. The Corporation shall, in advance of
-----------------------
any meeting of stockholders, appoint one or more inspectors to act at the
meeting and make a written report thereof. The Corporation may designate one or
more persons as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
presiding officer shall appoint one or more inspectors to act at the meeting.
Any inspector may, but need not, be an officer, employee or agent of the
Corporation. Each inspector, before entering upon the discharge of his or her
duties, shall take and sign an oath faithfully to execute the duties of
inspector with strict impartiality and according to the best of his or her
ability. The inspectors shall perform such duties as are required by the DGCL,
including the counting of all votes and ballots. The inspectors may appoint or
retain other persons or entities to assist the inspectors in the performance of
the duties of the inspectors. The presiding officer may review all
determinations made by the inspectors, and in so doing the presiding officer
shall be entitled to exercise his or her sole judgment and discretion and he or
she shall not be bound by any determinations made by the inspectors. All
determinations by the inspectors and, if applicable, the presiding officer,
shall be subject to further review by any court of competent jurisdiction.
ARTICLE II
----------
Directors
---------
SECTION 1. Powers. The business and affairs of the Corporation shall be
------
managed by or under the direction of the Board of Directors except as otherwise
provided by the Certificate or required by law.
6
<PAGE>
SECTION 2. Number and Terms. The number of directors of the Corporation
----------------
shall be fixed solely and exclusively by resolution duly adopted from time to
time by the Board of Directors. The directors shall hold office in the manner
provided in the Certificate.
SECTION 3. Qualification. No director need be a stockholder of the
-------------
Corporation.
SECTION 4. Vacancies. Vacancies in the Board of Directors shall be filled
---------
in the manner provided in the Certificate.
SECTION 5. Removal. Directors may be removed from office in the manner
-------
provided in the Certificate.
SECTION 6. Resignation. A director may resign at any time by giving
-----------
written notice to the Chairman of the Board, if one is elected, the Chief
Executive Officer, the President or the Secretary. A resignation shall be
effective upon receipt, unless the resignation otherwise provides.
SECTION 7. Regular Meetings. The regular annual meeting of the Board of
----------------
Directors shall be held, without notice other than this Section 7, on the same
date and at the same place as the Annual Meeting following the close of such
meeting of stockholders. Other regular meetings of the Board of Directors may
be held at such hour, date and place as the Board of Directors may by resolution
from time to time determine and publicize by means of reasonable notice given to
any director who is not present at the meeting at which such resolution is
adopted.
SECTION 8. Special Meetings. Special meetings of the Board of Directors
----------------
may be called, orally or in writing, by or at the request of a majority of the
directors, the Chairman of the Board, if one is elected, or the Chief Executive
Officer. The person calling any such special meeting of the Board of Directors
may fix the hour, date and place thereof.
SECTION 9. Notice of Meetings. Notice of the hour, date and place of all
------------------
special meetings of the Board of Directors shall be given to each director by
the Secretary or an Assistant Secretary, or in case of the death, absence,
incapacity or refusal of such persons, by the Chairman of the Board, if one is
elected, the Chief Executive Officer or the President or such other officer
designated by the Chairman of the Board, if one is elected, the Chief Executive
Officer or the President. Notice of any special meeting of the Board of
Directors shall be given to each director in person, by telephone, or by
facsimile, electronic mail or other form of electronic communication, sent to
his or her business or home address, at least 24 hours in advance of the
meeting, or by written notice mailed to his or her business or home address, at
least 48 hours in advance of the meeting. Such notice shall be deemed to be
delivered when hand delivered to such address, read to such director by
telephone, deposited in the mail so addressed, with postage thereon prepaid if
mailed, dispatched or transmitted if faxed, telexed or telecopied, or when
delivered to the telegraph company if sent by telegram.
7
<PAGE>
A written waiver of notice signed before or after a meeting by a director
and filed with the records of the meeting shall be deemed to be equivalent to
notice of the meeting. The attendance of a director at a meeting shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting at the beginning of the meeting to
the transaction of any business because such meeting is not lawfully called or
convened. Except as otherwise required by law, by the Certificate or by these
By-laws, neither the business to be transacted at, nor the purpose of, any
meeting of the Board of Directors need be specified in the notice or waiver of
notice of such meeting.
SECTION 10. Quorum. At any meeting of the Board of Directors, a majority
------
of the total number of directors shall constitute a quorum for the transaction
of business, but if less than a quorum is present at a meeting, a majority of
the directors present may adjourn the meeting from time to time, and the meeting
may be held as adjourned without further notice, except as provided in Section 9
of this Article II. Any business which might have been transacted at the
meeting as originally noticed may be transacted at such adjourned meeting at
which a quorum is present. For purposes of this section, the total number of
directors includes any unfilled vacancies on the Board of Directors.
SECTION 11. Action at Meeting. At any meeting of the Board of Directors
-----------------
at which a quorum is present, the vote of a majority of the directors present
shall constitute action by the Board of Directors, unless otherwise required by
law, by the Certificate or by these By-laws.
SECTION 12. Action by Consent. Any action required or permitted to be
-----------------
taken at any meeting of the Board of Directors may be taken without a meeting if
all members of the Board of Directors consent thereto in writing. Such written
consent shall be filed with the records of the meetings of the Board of
Directors and shall be treated for all purposes as a vote at a meeting of the
Board of Directors.
SECTION 13. Manner of Participation. Directors may participate in
-----------------------
meetings of the Board of Directors by means of conference telephone or similar
communications equipment by means of which all directors participating in the
meeting can hear each other, and participation in a meeting in accordance
herewith shall constitute presence in person at such meeting for purposes of
these By-laws.
SECTION 14. Committees. The Board of Directors, by vote of a majority of
----------
the directors then in office, may elect from its number one or more committees,
including, without limitation, an Executive Committee, a Compensation Committee,
a Stock Option Committee and an Audit Committee, and may delegate thereto some
or all of its powers except those which by law, by the Certificate or by these
By-laws may not be delegated. Except as the Board of Directors may otherwise
determine, any such committee may make rules for the conduct of its business,
but unless otherwise provided by the Board of Directors or in such rules, its
business shall be conducted so far as possible in the same manner as is provided
by
8
<PAGE>
these By-laws for the Board of Directors. All members of such committees shall
hold such offices at the pleasure of the Board of Directors. The Board of
Directors may abolish any such committee at any time. Any committee to which the
Board of Directors delegates any of its powers or duties shall keep records of
its meetings and shall report its action to the Board of Directors.
SECTION 15. Compensation of Directors. Directors shall receive such
-------------------------
compensation for their services as shall be determined by a majority of the
Board of Directors, or a designated committee thereof, provided that directors
who are serving the Corporation as employees and who receive compensation for
their services as such, shall not receive any salary or other compensation for
their services as directors of the Corporation.
ARTICLE III
-----------
Officers
--------
SECTION 1. Enumeration. The officers of the Corporation shall consist of
-----------
a Chief Executive Officer, a President, a Treasurer, a Secretary and such other
officers, including, without limitation, a Chairman of the Board of Directors
and one or more Vice Presidents (including Executive Vice Presidents or Senior
Vice Presidents), Assistant Vice Presidents, Assistant Treasurers and Assistant
Secretaries, as the Board of Directors may determine.
SECTION 2. Election. At the regular annual meeting of the Board of
--------
Directors following the Annual Meeting, the Board of Directors shall elect the
Chief Executive Officer, the President, the Treasurer and the Secretary. Other
officers may be elected by the Board of Directors at such regular annual meeting
of the Board of Directors or at any other regular or special meeting.
SECTION 3. Qualification. No officer need be a stockholder or a director.
-------------
Any person may occupy more than one office of the Corporation at any time. Any
officer may be required by the Board of Directors to give bond for the faithful
performance of his or her duties in such amount and with such sureties as the
Board of Directors may determine.
SECTION 4. Tenure. Except as otherwise provided by the Certificate or by
------
these By-laws, each of the officers of the Corporation shall hold office until
the regular annual meeting of the Board of Directors following the next Annual
Meeting and until his or her successor is elected and qualified or until his or
her earlier resignation or removal.
SECTION 5. Resignation. Any officer may resign by delivering his or her
-----------
written resignation to the Corporation addressed to the Chief Executive Officer,
the President or the Secretary, and such resignation shall be effective upon
receipt unless it is specified to be effective at some other time or upon the
happening of some other event.
9
<PAGE>
SECTION 6. Removal. Except as otherwise provided by law, the Board of
-------
Directors may remove any officer with or without cause by the affirmative vote
of a majority of the directors then in office.
SECTION 7. Absence or Disability. In the event of the absence or
---------------------
disability of any officer, the Board of Directors may designate another officer
to act temporarily in place of such absent or disabled officer.
SECTION 8. Vacancies. Any vacancy in any office may be filled for the
---------
unexpired portion of the term by the Board of Directors.
SECTION 9. Chief Executive Officer. The Chief Executive Officer shall,
-----------------------
subject to the direction of the Board of Directors, have general supervision and
control of the Corporation's business. If there is no Chairman of the Board or
if he or she is absent, the Chief Executive Officer shall preside, when present,
at all meetings of stockholders and of the Board of Directors. The Chief
Executive Officer shall have such other powers and perform such other duties as
the Board of Directors may from time to time designate.
SECTION 10. Chairman of the Board. The Chairman of the Board, if one is
---------------------
elected, shall preside, when present, at all meetings of the stockholders and of
the Board of Directors. The Chairman of the Board shall have such other powers
and shall perform such other duties as the Board of Directors may from time to
time designate.
SECTION 11. President. The President shall have such powers and shall
---------
perform such duties as the Board of Directors or the Chief Executive Officer may
from time to time designate.
SECTION 12. Vice Presidents and Assistant Vice Presidents. Any Vice
---------------------------------------------
President (including any Executive Vice President or Senior Vice President) and
any Assistant Vice President shall have such powers and shall perform such
duties as the Board of Directors or the Chief Executive Officer may from time to
time designate.
SECTION 13. Treasurer and Assistant Treasurers. The Treasurer shall,
----------------------------------
subject to the direction of the Board of Directors and except as the Board of
Directors or the Chief Executive Officer may otherwise provide, have general
charge of the financial affairs of the Corporation and shall cause to be kept
accurate books of account. The Treasurer shall have custody of all funds,
securities, and valuable documents of the Corporation. He or she shall have
such other duties and powers as may be designated from time to time by the Board
of Directors or the Chief Executive Officer.
Any Assistant Treasurer shall have such powers and perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
designate.
10
<PAGE>
SECTION 14. Secretary and Assistant Secretaries. The Secretary shall
-----------------------------------
record all the proceedings of the meetings of the stockholders and the Board of
Directors (including committees of the Board) in books kept for that purpose.
In his or her absence from any such meeting, a temporary secretary chosen at the
meeting shall record the proceedings thereof. The Secretary shall have charge
of the stock ledger (which may, however, be kept by any transfer or other agent
of the Corporation). The Secretary shall have custody of the seal of the
Corporation, and the Secretary, or an Assistant Secretary, shall have authority
to affix it to any instrument requiring it, and, when so affixed, the seal may
be attested by his or her signature or that of an Assistant Secretary. The
Secretary shall have such other duties and powers as may be designated from time
to time by the Board of Directors or the Chief Executive Officer. In the
absence of the Secretary, any Assistant Secretary may perform his or her duties
and responsibilities.
Any Assistant Secretary shall have such powers and perform such duties as
the Board of Directors or the Chief Executive Officer may from time to time
designate.
SECTION 15. Other Powers and Duties. Subject to these By-laws and to such
-----------------------
limitations as the Board of Directors may from time to time prescribe, the
officers of the Corporation shall each have such powers and duties as generally
pertain to their respective offices, as well as such powers and duties as from
time to time may be conferred by the Board of Directors or the Chief Executive
Officer.
ARTICLE IV
----------
Capital Stock
-------------
SECTION 1. Certificates of Stock. Each stockholder shall be entitled to a
---------------------
certificate of the capital stock of the Corporation in such form as may from
time to time be prescribed by the Board of Directors. Such certificate shall be
signed by the Chairman of the Board of Directors, the President or a Vice
President and by the Treasurer or an Assistant Treasurer, or the Secretary or an
Assistant Secretary. The Corporation seal and the signatures by the
Corporation's officers, the transfer agent or the registrar may be facsimiles.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed on such certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he or she were such
officer, transfer agent or registrar at the time of its issue. Every
certificate for shares of stock which are subject to any restriction on transfer
and every certificate issued when the Corporation is authorized to issue more
than one class or series of stock shall contain such legend with respect thereto
as is required by law.
SECTION 2. Transfers. Subject to any restrictions on transfer and unless
---------
otherwise provided by the Board of Directors, shares of stock may be transferred
only on the books of
11
<PAGE>
the Corporation by the surrender to the Corporation or its transfer agent of the
certificate theretofore properly endorsed or accompanied by a written assignment
or power of attorney properly executed, with transfer stamps (if necessary)
affixed, and with such proof of the authenticity of signature as the Corporation
or its transfer agent may reasonably require.
SECTION 3. Record Holders. Except as may otherwise be required by law, by
--------------
the Certificate or by these By-laws, the Corporation shall be entitled to treat
the record holder of stock as shown on its books as the owner of such stock for
all purposes, including the payment of dividends and the right to vote with
respect thereto, regardless of any transfer, pledge or other disposition of such
stock, until the shares have been transferred on the books of the Corporation in
accordance with the requirements of these By-laws.
SECTION 4. Record Date. In order that the Corporation may determine the
-----------
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the Board of Directors may fix a record date, which record
date shall not precede the date upon which the resolution fixing the record date
is adopted by the Board of Directors, and which record date: (a) in the case of
determination of stockholders entitled to vote at any meeting of stockholders,
shall, unless otherwise required by law, not be more than 60 nor less than 10
days before the date of such meeting and (b) in the case of any other action,
shall not be more than 60 days prior to such other action. If no record date is
fixed: (i) the record date for determining stockholders entitled to notice of or
to vote at a meeting of stockholders shall be at the close of business on the
day next preceding the day on which notice is given, or, if notice is waived, at
the close of business on the day next preceding the day on which the meeting is
held and (ii) the record date for determining stockholders for any other purpose
shall be at the close of business on the day on which the Board of Directors
adopts the resolution relating thereto.
SECTION 5. Replacement of Certificates. In case of the alleged loss,
---------------------------
destruction or mutilation of a certificate of stock, a duplicate certificate may
be issued in place thereof, upon such terms as the Board of Directors may
prescribe.
ARTICLE V
---------
Indemnification
---------------
SECTION 1. Definitions. For purposes of this Article:
-----------
(a) "Corporate Status" describes the status of a person who is serving or
has served (i) as a Director of the Corporation, (ii) as an Officer of the
Corporation, or (iii) as a director, partner, trustee, officer, employee or
agent of any other corporation, partnership, joint
12
<PAGE>
venture, trust, employee benefit plan or other enterprise which such person is
or was serving at the request of the Corporation. For purposes of this Section
1(a), an Officer or Director of the Corporation who is serving or has served as
a director, partner, trustee, officer, employee or agent of a Subsidiary shall
be deemed to be serving at the request of the Corporation;
(b) "Director" means any person who serves or has served the Corporation
as a director on the Board of Directors of the Corporation;
(c) "Disinterested Director" means, with respect to each Proceeding in
respect of which indemnification is sought hereunder, a Director of the
Corporation who is not and was not a party to such Proceeding;
(d) "Expenses" means all reasonable attorneys' fees, retainers, court
costs, transcript costs, fees of expert witnesses, private investigators and
professional advisors (including, without limitation, accountants and investment
bankers), travel expenses, duplicating costs, printing and binding costs, costs
of preparation of demonstrative evidence and other courtroom presentation aids
and devices, costs incurred in connection with document review, organization,
imaging and computerization, telephone charges, postage, delivery service fees,
and all other disbursements, costs or expenses of the type customarily incurred
in connection with prosecuting, defending, preparing to prosecute or defend,
investigating, being or preparing to be a witness in, settling or otherwise
participating in, a Proceeding;
(e) "Non-Officer Employee" means any person who serves or has served as an
employee or agent of the Corporation, but who is not or was not a Director or
Officer;
(f) "Officer" means any person who serves or has served the Corporation as
an officer appointed by the Board of Directors of the Corporation;
(g) "Proceeding" means any threatened, pending or completed action, suit,
arbitration, alternate dispute resolution mechanism, inquiry, investigation,
administrative hearing or other proceeding, whether civil, criminal,
administrative, arbitrative or investigative; and
(h) "Subsidiary" shall mean any corporation, partnership, limited
liability company, joint venture, trust or other entity of which the Corporation
owns (either directly or through or together with another Subsidiary of the
Corporation) either (i) a general partner, managing member or other similar
interest or (ii) (A) 50% or more of the voting power of the voting capital
equity interests of such corporation, partnership, limited liability company,
joint venture or other entity, or (B) 50% or more of the outstanding voting
capital stock or other voting equity interests of such corporation, partnership,
limited liability company, joint venture or other entity.
13
<PAGE>
SECTION 2. Indemnification of Directors and Officers. Subject to the
-----------------------------------------
operation of Section 4 of this Article V of these By-laws, each Director and
Officer shall be indemnified and held harmless by the Corporation to the fullest
extent authorized by the DGCL, as the same exists or may hereafter be amended
(but, in the case of any such amendment, only to the extent that such amendment
permits the Corporation to provide broader indemnification rights than such law
permitted the Corporation to provide prior to such amendment) against any and
all Expenses, judgments, penalties, fines and amounts reasonably paid in
settlement that are incurred by such Director or Officer or on such Director's
or Officer's behalf in connection with any threatened, pending or completed
Proceeding or any claim, issue or matter therein, which such Director or Officer
is, or is threatened to be made, a party to or participant in by reason of such
Director's or Officer's Corporate Status, if such Director or Officer acted in
good faith and in a manner such Director or Officer reasonably believed to be in
or not opposed to the best interests of the Corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The rights of indemnification provided by this Section 2 shall
continue as to a Director or Officer after he or she has ceased to be a Director
or Officer and shall inure to the benefit of his or her heirs, executors,
administrators and personal representatives. Notwithstanding the foregoing, the
Corporation shall indemnify any Director or Officer seeking indemnification in
connection with a Proceeding initiated by such Director or Officer only if such
Proceeding was authorized by the Board of Directors of the Corporation, unless
such Proceeding was brought to enforce an Officer or Director's rights to
Indemnification or, in the case of Directors, advancement of Expenses under
these By-laws in accordance with the provisions set forth herein.
SECTION 3. Indemnification of Non-Officer Employees. Subject to the
----------------------------------------
operation of Section 4 of this Article V of these By-laws, each Non-Officer
Employee may, in the discretion of the Board of Directors of the Corporation, be
indemnified by the Corporation to the fullest extent authorized by the DGCL, as
the same exists or may hereafter be amended, against any or all Expenses,
judgments, penalties, fines and amounts reasonably paid in settlement that are
incurred by such Non-Officer Employee or on such Non-Officer Employee's behalf
in connection with any threatened, pending or completed Proceeding, or any
claim, issue or matter therein, which such Non-Officer Employee is, or is
threatened to be made, a party to or participant in by reason of such Non-
Officer Employee's Corporate Status, if such Non-Officer Employee acted in good
faith and in a manner such Non-Officer Employee reasonably believed to be in or
not opposed to the best interests of the Corporation and, with respect to any
criminal proceeding, had no reasonable cause to believe his or her conduct was
unlawful. The rights of indemnification provided by this Section 3 shall exist
as to a Non-Officer Employee after he or she has ceased to be a Non-Officer
Employee and shall inure to the benefit of his or her heirs, personal
representatives, executors and administrators. Notwithstanding the foregoing,
the Corporation may indemnify any Non-Officer Employee seeking indemnification
in connection with a Proceeding initiated by such Non-Officer Employee only if
such Proceeding was authorized by the Board of Directors of the Corporation.
14
<PAGE>
SECTION 4. Good Faith. Unless ordered by a court, no indemnification
----------
shall be provided pursuant to this Article V to a Director, to an Officer or to
a Non-Officer Employee unless a determination shall have been made that such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Corporation and, with respect to
any criminal Proceeding, such person had no reasonable cause to believe his or
her conduct was unlawful. Such determination shall be made by (a) a majority
vote of the Disinterested Directors, even though less than a quorum of the Board
of Directors, (b) a committee comprised of Disinterested Directors, such
committee having been designated by a majority vote of the Disinterested
Directors (even though less than a quorum), (c) if there are no such
Disinterested Directors, or if a majority of Disinterested Directors so directs,
by independent legal counsel in a written opinion, or (d) by the stockholders of
the Corporation.
SECTION 5. Advancement of Expenses to Directors Prior to Final
---------------------------------------------------
Disposition.
- -----------
(a) The Corporation shall advance all Expenses incurred by or on behalf of
any Director in connection with any Proceeding in which such Director is
involved by reason of such Director's Corporate Status within 10 days after the
receipt by the Corporation of a written statement from such Director requesting
such advance or advances from time to time, whether prior to or after final
disposition of such Proceeding. Such statement or statements shall reasonably
evidence the Expenses incurred by such Director and shall be preceded or
accompanied by an undertaking by or on behalf of such Director to repay any
Expenses so advanced if it shall ultimately be determined that such Director is
not entitled to be indemnified against such Expenses.
(b) If a claim for advancement of Expenses hereunder by a Director is not
paid in full by the Corporation within 10 days after receipt by the Corporation
of documentation of Expenses and the required undertaking, such Director may at
any time thereafter bring suit against the Corporation to recover the unpaid
amount of the claim and if successful in whole or in part, such Director shall
also be entitled to be paid the expenses of prosecuting such claim. The failure
of the Corporation (including its Board of Directors or any committee thereof,
independent legal counsel, or stockholders) to make a determination concerning
the permissibility of such advancement of Expenses under this Article V shall
not be a defense to the action and shall not create a presumption that such
advancement is not permissible. The burden of proving that a Director is not
entitled to an advancement of expenses shall be on the Corporation.
(c) In any suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the Corporation shall be
entitled to recover such expenses upon a final adjudication that the Director
has not met any applicable standard for indemnification set forth in the DGCL.
15
<PAGE>
SECTION 6. Advancement of Expenses to Officers and Non-Officer Employees
-------------------------------------------------------------
Prior to Final Disposition.
- --------------------------
(a) The Corporation may, at the discretion of the Board of Directors of
the Corporation, advance any or all Expenses incurred by or on behalf of any
Officer and Non-Officer Employee in connection with any Proceeding in which such
is involved by reason of the Corporate Status of such Officer or Non-Officer
Employee upon the receipt by the Corporation of a statement or statements from
such Officer or Non-Officer Employee requesting such advance or advances from
time to time, whether prior to or after final disposition of such Proceeding.
Such statement or statements shall reasonably evidence the Expenses incurred by
such Officer and Non-Officer Employee and shall be preceded or accompanied by an
undertaking by or on behalf of such to repay any Expenses so advanced if it
shall ultimately be determined that such Officer or Non-Officer Employee is not
entitled to be indemnified against such Expenses.
(b) In any suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the Corporation shall be
entitled to recover such expenses upon a final adjudication that the Officer or
Non-Officer Employee has not met any applicable standard for indemnification set
forth in the DGCL.
SECTION 7. Contractual Nature of Rights.
----------------------------
(a) The foregoing provisions of this Article V shall be deemed to be a
contract between the Corporation and each Director and Officer entitled to the
benefits hereof at any time while this Article V is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with respect to any state of facts then or theretofore existing or any
Proceeding theretofore or thereafter brought based in whole or in part upon any
such state of facts.
(b) If a claim for indemnification of Expenses hereunder by a Director or
Officer is not paid in full by the Corporation within 60 days after receipt by
the Corporation of a written claim for indemnification, such Director or Officer
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim, and if successful in whole or in part, such Director
or Officer shall also be entitled to be paid the expenses of prosecuting such
claim. The failure of the Corporation (including its Board of Directors or any
committee thereof, independent legal counsel, or stockholders) to make a
determination concerning the permissibility of such indemnification under this
Article V shall not be a defense to the action and shall not create a
presumption that such indemnification is not permissible. The burden of proving
that a Director or Officer is not entitled to indemnification shall be on the
Corporation.
(c) In any suit brought by a Director or Officer to enforce a right to
indemnification hereunder, it shall be a defense that such Director or Officer
has not met any applicable standard for indemnification set forth in the DGCL.
16
<PAGE>
SECTION 8. Non-Exclusivity of Rights. The rights to indemnification and
-------------------------
advancement of Expenses set forth in this Article V shall not be exclusive of
any other right which any Director, Officer, or Non-Officer Employee may have or
hereafter acquire under any statute, provision of the Certificate or these By-
laws, agreement, vote of stockholders or Disinterested Directors or otherwise.
SECTION 9. Insurance. The Corporation may maintain insurance, at its
---------
expense, to protect itself and any Director, Officer or Non-Officer Employee
against any liability of any character asserted against or incurred by the
Corporation or any such Director, Officer or Non-Officer Employee, or arising
out of any such person's Corporate Status, whether or not the Corporation would
have the power to indemnify such person against such liability under the DGCL or
the provisions of this Article V.
ARTICLE VI
----------
Miscellaneous Provisions
------------------------
SECTION 1. Fiscal Year. The fiscal year of the Corporation shall be
-----------
determined by the Board of Directors.
SECTION 2. Seal. The Board of Directors shall have power to adopt and
----
alter the seal of the Corporation.
SECTION 3. Execution of Instruments. All deeds, leases, transfers,
------------------------
contracts, bonds, notes and other obligations to be entered into by the
Corporation in the ordinary course of its business without director action may
be executed on behalf of the Corporation by the Chairman of the Board, if one is
elected, the Chief Executive Officer, the President or the Treasurer or any
other officer, employee or agent of the Corporation as the Board of Directors or
Executive Committee may authorize.
SECTION 4. Voting of Securities. Unless the Board of Directors otherwise
--------------------
provides, the Chairman of the Board, if one is elected, the Chief Executive
Officer, the President or the Treasurer may waive notice of and act on behalf of
this Corporation, or appoint another person or persons to act as proxy or
attorney in fact for this Corporation with or without discretionary power and/or
power of substitution, at any meeting of stockholders or shareholders of any
other corporation or organization, any of whose securities are held by this
Corporation.
SECTION 5. Resident Agent. The Board of Directors may appoint a resident
--------------
agent upon whom legal process may be served in any action or proceeding against
the Corporation.
SECTION 6. Corporate Records. The original or attested copies of the
-----------------
Certificate, By-laws and records of all meetings of the incorporators,
stockholders and the Board of
17
<PAGE>
Directors and the stock transfer books, which shall contain the names of all
stockholders, their record addresses and the amount of stock held by each, may
be kept outside the State of Delaware and shall be kept at the principal office
of the Corporation, at the office of its counsel or at an office of its transfer
agent or at such other place or places as may be designated from time to time by
the Board of Directors.
SECTION 7. Certificate. All references in these By-laws to the Certificate
-----------
shall be deemed to refer to the Amended and Restated Certificate of
Incorporation of the Corporation, as amended and/or restated and in effect from
time to time.
SECTION 8. Amendment of By-laws.
--------------------
(a) Amendment by Directors. Except as provided otherwise by law, these By-
----------------------
laws may be amended or repealed by the Board of Directors by the affirmative
vote of a majority of the directors then in office.
(b) Amendment by Stockholders. These By-laws may be amended or repealed at
-------------------------
any Annual Meeting, or special meeting of stockholders called for such purpose,
by the affirmative vote of at least 75% of the shares present in person or
represented by proxy at such meeting and entitled to vote on such amendment or
repeal, voting together as a single class; provided, however, that if the Board
of Directors recommends that stockholders approve such amendment or repeal at
such meeting of stockholders, such amendment or repeal shall only require the
affirmative vote of the majority of the shares present in person or represented
by proxy at such meeting and entitled to vote on such amendment or repeal,
voting together as a single class. Notwithstanding the foregoing, stockholder
approval shall not be required unless mandated by the Certificate, these By-
laws, or other applicable law.
Adopted by the Board of Directors on December 21, 1999; approved by the
stockholders on December 23, 1999; and effective as of February 8, 2000.
18
<PAGE>
Exhibit 4.2
- --------------------------------------------------------------------------------
CYPRESS COMMUNICATIONS, INC.
and
STATE STREET BANK AND TRUST COMPANY
as Rights Agent
----------------------
Shareholder Rights Agreement
Dated as of February 9, 2000
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Section Page
<S> <C>
1. Certain Definitions........................................................... 1
-------------------
2. Appointment of Rights Agent................................................... 7
---------------------------
3. Issue of Right Certificates................................................... 7
---------------------------
4. Form of Right Certificates.................................................... 9
--------------------------
5. Countersignature and Registration............................................. 10
---------------------------------
6. Transfer, Split Up, Combination and Exchange of Right Certificates;
-------------------------------------------------------------------
Mutilated, Destroyed, Lost or Stolen Right Certificates...................... 11
-------------------------------------------------------
7. Exercise of Rights; Exercise Price; Expiration Date of Rights................. 12
-------------------------------------------------------------
8. Cancellation and Destruction of Right Certificates............................ 14
--------------------------------------------------
9. Reservation and Availability of Preferred Stock............................... 14
-----------------------------------------------
10. Preferred Stock Record Date.................................................. 15
---------------------------
11. Adjustment of Exercise Price, Number and Kind of Shares or Number of
--------------------------------------------------------------------
Rights....................................................................... 16
12. Certificate of Adjusted Exercise Price or Number of Shares................... 24
----------------------------------------------------------
13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power......... 24
--------------------------------------------------------------------
14. Fractional Rights and Fractional Shares...................................... 26
---------------------------------------
15. Rights of Action............................................................. 27
----------------
16. Agreement of Right Holders................................................... 27
--------------------------
17. Right Certificate Holder Not Deemed a Shareholder............................ 28
-------------------------------------------------
18. Concerning the Rights Agent.................................................. 28
---------------------------
19. Merger or Consolidation or Change of Name of Rights Agent.................... 29
---------------------------------------------------------
20. Duties of Rights Agent....................................................... 29
----------------------
</TABLE>
(i)
<PAGE>
<TABLE>
<S> <C>
21. Change of Rights Agent........................................................ 32
----------------------
22. Issuance of New Right Certificates............................................ 32
----------------------------------
23. Redemption.................................................................... 33
----------
24. Exchange...................................................................... 34
--------
25. Notice of Certain Events...................................................... 36
------------------------
26. Notices....................................................................... 37
-------
27. Supplements and Amendments.................................................... 37
--------------------------
28. Successors.................................................................... 38
----------
29. Determinations and Actions by the Board of Directors.......................... 38
----------------------------------------------------
30. Benefits of this Agreement.................................................... 38
--------------------------
31. Severability.................................................................. 39
------------
32. Governing Law................................................................. 39
-------------
33. Counterparts.................................................................. 39
------------
34. Descriptive Headings.......................................................... 39
--------------------
</TABLE>
Exhibit A -- Terms of
Series Z Junior Participating
Cumulative Preferred Stock
Exhibit B -- Form of Right Certificate
(ii)
<PAGE>
SHAREHOLDER RIGHTS AGREEMENT
----------------------------
Agreement, dated as of February 9, 2000, between Cypress Communications,
Inc., a Delaware corporation (the "Company"), and State Street Bank and Trust
Company, a Massachusetts chartered trust company (the "Rights Agent").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, the Board of Directors of the Company desires to provide
shareholders of the Company with the opportunity to benefit from the long-term
prospects and value of the Company and to ensure that shareholders of the
Company receive fair and equal treatment in the event of any proposed takeover
of the Company; and
WHEREAS, on February 9, 2000, the Board of Directors of the Company
authorized and declared a dividend distribution of one Right (as such term is
hereinafter defined) for each outstanding share of Common Stock, par value $.001
per share, of the Company (the "Common Stock") outstanding as of February 15,
2000 (the "Record Date"), and authorized the issuance of one Right for each
share of Common Stock of the Company issued (whether or not originally issued or
sold from the Company's treasury, except in the case of treasury shares having
associated Rights) between the Record Date and the earlier of the Distribution
Date or the Expiration Date (as such terms are hereinafter defined), each Right
initially representing the right to purchase one one-thousandth of a share of
Series Z Junior Participating Cumulative Preferred Stock of the Company having
the rights, powers and preferences set forth on Exhibit A attached hereto, upon
---------
the terms and subject to the conditions hereinafter set forth (the "Rights");
and
WHEREAS, the Company desires to appoint the Rights Agent to act as rights
agent hereunder, in accordance with the terms and conditions hereof.
NOW, THEREFORE, in consideration of the premises and the mutual agreements
herein set forth, the parties hereby agree as follows:
Section 1. Certain Definitions. For purposes of this Agreement, the
-------------------
following terms have the meanings indicated:
(a) "Acquiring Person" shall mean any Person (as such term is
----------------
hereinafter defined) who or which, together with all Affiliates (as such term is
hereinafter defined) and Associates (as such term is hereinafter defined) of
such Person, shall be the Beneficial Owner (as such term is hereinafter defined)
of 15% or more of the shares of Common Stock of the Company then outstanding,
but shall not include (i) the Company, (ii) any Subsidiary (as such term is
hereinafter defined) of the Company, (iii) any employee benefit plan or
compensation arrangement of the Company or any Subsidiary of the Company or (iv)
any Person holding shares of Common Stock of the Company organized, appointed or
established by the Company or any Subsidiary of the Company for or pursuant to
the terms of any such employee benefit
<PAGE>
plan or compensation arrangement (the Persons described in clauses (i) through
(iv) above are referred to herein as "Exempt Persons"); provided, however, that
-------- -------
the term "Acquiring Person" shall not include any Grandfathered Person, unless
such Grandfathered Person at any time after the Grandfathered Time becomes the
Beneficial Owner of more than the Grandfathered Percentage applicable to such
Grandfathered Person.
Notwithstanding the foregoing, no Person shall become an "Acquiring Person"
as the result of an acquisition by the Company of Common Stock of the Company
which, by reducing the number of shares outstanding, increases the proportionate
number of shares Beneficially Owned by such Person to 15% (or in the case of a
Grandfathered Person, the Grandfathered Percentage applicable to such
Grandfathered Person) or more of the shares of Common Stock of the Company then
outstanding; provided, however, that if a Person shall become the Beneficial
-------- -------
Owner of 15% (or in the case of a Grandfathered Person, the Grandfathered
Percentage applicable to such Grandfathered Person) or more of the shares of
Common Stock of the Company then outstanding by reason of share purchases by the
Company and shall, after such share purchases by the Company, become the
Beneficial Owner of any additional shares (other than pursuant to a stock split,
stock dividend or similar transaction) of Common Stock of the Company and
immediately thereafter be the Beneficial Owner of 15% (or in the case of a
Grandfathered Person, the Grandfathered Percentage applicable to such
Grandfathered Person) or more of the shares of Common Stock of the Company then
outstanding, then such Person shall be deemed to be an "Acquiring Person."
In addition, notwithstanding the foregoing, a Person shall not be an
"Acquiring Person" if the Board of Directors of the Company determines that a
Person who would otherwise be an "Acquiring Person," has become such without
intending to become an "Acquiring Person," and such Person divests as promptly
as practicable (or within such period of time as the Board of Directors of the
Company determines is reasonable) a sufficient number of shares of Common Stock
of the Company so that such Person would no longer be an "Acquiring Person," as
defined pursuant to the foregoing provisions of this Section 1(a).
(b) "Adjustment Shares" shall have the meaning set forth in Section
-----------------
11(a)(ii) hereof.
(c) "Affiliate" and "Associate" shall have the respective meanings
--------- ---------
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations (the
"Rules") under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), as in effect on the date of this Agreement; provided, however, that no
-------- -------
Person who is a director or officer of the Company shall be deemed an Affiliate
or an Associate of any other director or officer of the Company solely as a
result of his or her position as director or officer of the Company.
(d) A Person shall be deemed the "Beneficial Owner" of, and shall be
----------------
deemed to "Beneficially Own" and have "Beneficial Ownership" of, any securities:
---------------- --------------------
2
<PAGE>
(i) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, Beneficially Owns (as determined
pursuant to Rule 13d-3 of the Rules under the Exchange Act, as in effect on
the date of this Agreement);
(ii) which such Person or any of such Person's Affiliates or
Associates, directly or indirectly, has:
(A) the right to acquire (whether or not such right is
exercisable immediately or only after the passage of time or upon the
satisfaction of any conditions or both) pursuant to any agreement,
arrangement or understanding (whether or not in writing) (other than
customary agreements with and between underwriters and selling group
members with respect to a bona fide public offering of securities) or
upon the exercise of conversion rights, exchange rights, rights (other
than the Rights), warrants or options, or otherwise; provided,
--------
however, that a Person shall not be deemed the "Beneficial Owner" of,
-------
or to "Beneficially Own" or have "Beneficial Ownership" of, (1)
securities tendered pursuant to a tender or exchange offer made by or
on behalf of such Person or any of such Person's Affiliates or
Associates until such tendered securities are accepted for purchase or
exchange; (2) securities issuable upon exercise of these Rights at any
time prior to the occurrence of a Triggering Event; or (3) securities
issuable upon exercise of Rights from and after the occurrence of a
Triggering Event, which Rights were acquired by such Person or any of
such Person's Affiliates or Associates prior to the Distribution Date
or pursuant to Sections 3(a), 11(i) or 22 hereof; or
(B) the right to vote pursuant to any agreement,
arrangement or understanding (whether or not in writing); provided,
--------
however, that a Person shall not be deemed the "Beneficial Owner" of,
-------
or to "Beneficially Own" or have "Beneficial Ownership" of, any
security under this clause (B) if the agreement, arrangement or
understanding to vote such security (1) arises solely from a revocable
proxy given in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the Rules of the Exchange Act and
(2) is not also then reportable by such Person on Schedule 13D under
the Exchange Act (or any comparable or successor report); or
(C) the right to dispose of pursuant to any agreement,
arrangement or understanding (whether or not in writing) (other than
customary arrangements with and between underwriters and selling group
members with respect to a bona fide public offering of securities); or
(iii) which are Beneficially Owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such
Person or any of such Person's Affiliates or Associates has any agreement,
arrangement or understanding (whether or not in writing) (other than
customary agreements with and
3
<PAGE>
between underwriters and selling group members with respect to a bona fide
public offering of securities) for the purpose of acquiring, holding,
voting (except pursuant to a revocable proxy as described in clause (B) of
Section 1(d)(ii) hereof) or disposing of any securities of the Company;
provided, however, that (1) no Person engaged in business as an underwriter of
- -------- -------
securities shall be deemed the Beneficial Owner of any securities acquired
through such Person's participation as an underwriter in good faith in a firm
commitment underwriting until the expiration of forty (40) days after the date
of such acquisition, and (2) no Person who is a director or an officer of the
Company shall be deemed, as a result of his or her position as director or
officer of the Company, the Beneficial Owner of any securities of the Company
that are Beneficially Owned by any other director or officer of the Company.
For all purposes of this Agreement, the phrase "then outstanding,"
when used with reference to the percentage of the then outstanding shares of
Common Stock of the Company Beneficially Owned by a Person, shall mean the
number of securities then issued and outstanding together with the number of
such securities not then actually issued and outstanding which such Person would
be deemed to Beneficially Own hereunder.
(e) "Business Day" shall mean any day other than a Saturday, Sunday,
------------
or a day on which banking institutions in the State of New York are authorized
or obligated by law or executive order to close.
(f) "Certificate of Incorporation" when used in reference to the
----------------------------
Company shall mean the Amended and Restated Certificate of Incorporation, as
amended, of the Company.
(g) "Close of Business" on any given date shall mean 5:00 P.M., New
-----------------
York, New York time, on such date; provided, however, that if such date is not a
-------- -------
Business Day it shall mean 5:00 P.M., New York, New York time, on the next
succeeding Business Day.
(h) "Common Stock" when used in reference to the Company shall mean
------------
the common stock, par value $.001 per share, of the Company or any other shares
of capital stock of the Company into which such stock shall be reclassified or
changed. "Common Stock" when used with reference to any Person other than the
Company organized in corporate form shall mean (i) the capital stock or other
equity interest of such Person with the greatest voting power, (ii) the equity
securities or other equity interest having power to control or direct the
management of such Person or (iii) if such Person is a Subsidiary of another
Person, the Person or Persons which ultimately control such first-mentioned
Person and which have issued any such outstanding capital stock, equity
securities or equity interest. "Common Stock" when used with reference to any
Person not organized in corporate form shall mean units of beneficial interest
which (x) shall represent the right to participate generally in the profits and
losses of such Person (including without limitation any flow-through tax
benefits resulting from an ownership interest in such Person) and (y) shall be
entitled to exercise the greatest voting
4
<PAGE>
power of such Person or, in the case of a limited partnership, shall have the
power to remove or otherwise replace the general partner or partners.
(i) "Current Value" shall have the meaning set forth in Section
-------------
11(a)(iii) hereof.
(j) "Depositary Agent" shall have the meaning set forth in Section
----------------
7(c) hereof.
(k) "Distribution Date" shall have the meaning defined in Section 3(a)
-----------------
hereof.
(l) "Exempt Person" shall have the meaning set forth in the definition
-------------
of "Acquiring Person."
(m) "Exercise Price" shall have the meaning defined in Section 4(a)
--------------
hereof.
(n) "Expiration Date" and "Final Expiration Date" shall have the
--------------- ---------------------
meanings set forth in Section 7(a) hereof.
(o) "Fair Market Value" of any securities or other property shall be
-----------------
as determined in accordance with Section 11(d) hereof.
(p) "Grandfathered Percentage" shall mean with respect to any
------------------------
Grandfathered Person, the percentage of the outstanding shares of Common Stock
of the Company that such Grandfathered Person, together with all Affiliates and
Associates of such Grandfathered Person, Beneficially Owns as of the
Grandfathered Time plus an additional 1/2%. In the event any Grandfathered
Person shall sell, transfer, or otherwise dispose of any outstanding shares of
Common Stock after the Grandfathered Time, the Grandfathered Percentage shall,
subsequent to such sale, transfer or disposition, mean, with respect to such
Grandfathered Person, the lesser of (i) the Grandfathered Percentage as in
effect immediately prior to such sale, transfer or disposition or (ii) the
percentage of outstanding shares of Common Stock that such Grandfathered Person
Beneficially Owns immediately following such sale, transfer or disposition plus
an additional 1/2%. For purposes of determining the percentage of the
outstanding shares of Common Stock of the Company that any Grandfathered Person,
together with all Affiliates and Associates of such Grandfathered Person,
Beneficially Owns as of the Grandfathered Time, (x) the total number of shares
of Common Stock of the Company Beneficially Owned by such Grandfathered Person,
together with all Affiliates and Associates of such Grandfathered Person, as of
the Grandfathered Time shall not be deemed to include any shares to be purchased
by such Grandfathered Person pursuant to the offering contemplated by the
Company's Registration Statement on Form S-1 (File No. 333-92011), including
pursuant to any over-allotment option relating thereto or any registration
statement filed under Rule 462(b) of the Securities Act of 1933, as amended,
relating thereto (collectively, the "Offering"), and (y) the total number of
shares of Common Stock of the Company outstanding as of the Grandfathered Time
shall be deemed to include all of the shares of Common Stock of the Company then
outstanding plus any shares to be sold pursuant to the Offering. In connection
with the foregoing, the Grandfathered Percentage applicable to a
5
<PAGE>
Grandfathered Person shall not be increased by virtue of any purchases by such
Grandfathered Person in the Offering.
(q) "Grandfathered Person" shall mean any Person who or which,
--------------------
together with all Affiliates and Associates of such Person, is, as of the
Grandfathered Time, the Beneficial Owner of 15% or more of the shares of Common
Stock of the Company then outstanding. Notwithstanding anything to the contrary
provided in this Agreement, any Grandfathered Person who after the Grandfathered
Time becomes the Beneficial Owner of less than 15% of the shares of Common Stock
of the Company then outstanding shall cease to be a Grandfathered Person.
(r) "Grandfathered Time" shall mean 5:00 p.m., New York, New York
------------------
time, on Wednesday, February 9, 2000.
(s) "Group" shall have the meaning set forth in clause (b) of the
-----
definition of "Person."
(t) "NASDAQ" shall have the meaning set forth in Section 9(b) hereof.
------
(u) "Person" shall mean (a) an individual, a corporation, a
------
partnership, an association, a joint stock company, a trust, a business trust, a
government or political subdivision, any unincorporated organization, or any
other association or entity, and (b) a "group" as that term is used for purposes
of Section 13(d)(3) of the Securities Exchange Act of 1934, as amended.
(v) "Preferred Stock" shall mean shares of Series Z Junior
---------------
Participating Cumulative Preferred Stock, par value $.001 per share, of the
Company having the rights and preferences set forth in Exhibit A attached
---------
hereto.
(w) "Preferred Stock Equivalents" shall have the meaning set forth in
---------------------------
Section 11(b) hereof.
(x) "Redemption Price" shall have the meaning defined in Section 23
----------------
hereof.
(y) "Registered Common Stock" shall have the meaning set forth in
-----------------------
Section 13(b) hereof.
(z) "Right Certificate" shall have the meaning set forth in Section
-----------------
3(a) hereof.
(aa) "Section 11(a)(ii) Event" shall have the meaning set forth in
-----------------------
Section 11(a)(ii) hereof.
(bb) "Section 11(a)(ii) Trigger Date" shall have the meaning set forth
------------------------------
in Section 11(a)(iii) hereof.
6
<PAGE>
(cc) "Section 13 Event" shall mean any event described in clauses (x),
----------------
(y) or (z) of Section 13(a) hereof.
(dd) "Section 24(a)(i) Exchange Ratio" shall have the meaning set
-------------------------------
forth in Section 24(a)(i) hereof.
(ee) "Section 24(a)(ii) Exchange Ratio" shall have the meaning set
--------------------------------
forth in Section 24(a)(ii) hereof.
(ff) "Spread" shall have the meaning set forth in Section 11(a)(iii)
------
hereof.
(gg) "Stock Acquisition Date" shall mean the date of the first public
----------------------
announcement (which for purposes of this definition shall include, without
limitation, the issuance of a press release or the filing of a publicly-
available report or other document with the Securities and Exchange Commission
or any other governmental agency) by the Company or an Acquiring Person that an
Acquiring Person has become such.
(hh) "Subsidiary" shall mean, with reference to any Person, any
----------
corporation or other entity of which securities or other ownership interests
having ordinary voting power sufficient, in the absence of contingencies, to
elect a majority of the board of directors or other persons performing similar
functions of such corporation or other entity are at the time directly or
indirectly Beneficially Owned or otherwise controlled by such Person either
alone or together with one or more Affiliates of such Person.
(ii) "Substitution Period" shall have the meaning set forth in Section
-------------------
11(a)(iii) hereof.
(jj) "Triggering Event" shall mean any Section 11(a)(ii) Event or any
----------------
Section 13 Event.
Section 2. Appointment of Rights Agent. The Company hereby appoints the
---------------------------
Rights Agent to act as agent for the Company and the holders of the Rights (who,
in accordance with Section 3 hereof, shall prior to the Distribution Date (as
hereinafter defined in Section 3(a)) also be the holders of the Common Stock of
the Company) in accordance with the terms and conditions hereof, and the Rights
Agent hereby accepts such appointment. The Company may from time to time
appoint such Co-Rights Agents as it may deem necessary or desirable. In the
event the Company appoints one or more Co-Rights Agents, the respective duties
of the Rights Agent and any Co-Rights Agents shall be as the Company shall
determine. The Company shall give ten (10) days' prior written notice to the
Rights Agent of the appointment of one or more Co-Rights Agents and the
respective duties of the Rights Agent and any such Co-Rights Agents. The Rights
Agent shall have no duty to supervise, and shall in no event be liable for, the
acts or omissions of any such Co-Rights Agent.
7
<PAGE>
Section 3. Issue of Right Certificates.
---------------------------
(a) From the date hereof until the earlier of (i) the Close of
Business on the tenth calendar day after the Stock Acquisition Date, or (ii) the
Close of Business on the tenth Business Day (or such later calendar day, if any,
as the Board of Directors of the Company may determine in its sole discretion
prior to the time at which any Person becomes an Acquiring Person) after the
date on which a tender or exchange offer by any Person, other than an Exempt
Person, is commenced within the meaning of Rule 14d-2(a) of the Exchange Act, or
any successor rule, or, if earlier, after the first public announcement of the
intention by any Person, other than an Exempt Person, to commence a tender or
exchange offer (whether by means of a pre-commencement communication within the
meaning of Rule 14d-2(b) of the Exchange Act, or any successor rule, or
otherwise) if, upon consummation thereof, such Person could become the
Beneficial Owner of 15% (or in the case of a Grandfathered Person, the
Grandfathered Percentage applicable to such Grandfathered Person) or more of the
shares of Common Stock of the Company then outstanding (including any such date
which is after the date of this Agreement and prior to the issuance of the
Rights) (the earliest of such dates being herein referred to as the
"Distribution Date"), (x) the Rights will be evidenced (subject to the
provisions of Section 3(b) hereof) by the certificates for the Common Stock of
the Company registered in the names of the holders of the Common Stock of the
Company (which certificates for Common Stock of the Company shall be deemed also
to be certificates for Rights) and not by separate certificates, and (y) the
Rights will be transferable only in connection with the transfer of the
underlying shares of Common Stock of the Company. As soon as practicable after
the Distribution Date, the Rights Agent will, at the Company's expense send, by
first-class, insured, postage prepaid mail, to each record holder of the Common
Stock of the Company as of the Close of Business on the Distribution Date, at
the address of such holder shown on the records of the Company, one or more
certificates, in substantially the form of Exhibit B attached hereto (the "Right
---------
Certificates"), evidencing one Right for each share of Common Stock of the
Company so held, subject to adjustment as provided herein. In the event that an
adjustment in the number of Rights per share of Common Stock of the Company has
been made pursuant to Section 11(o) hereof, the Company may make the necessary
and appropriate rounding adjustments (in accordance with Section 14(a) hereof)
at the time of distribution of the Right Certificates, so that Right
Certificates representing only whole numbers of Rights are distributed and cash
is paid in lieu of any fractional Rights. As of and after the Close of Business
on the Distribution Date, the Rights will be evidenced solely by such Right
Certificates.
(b) With respect to certificates for the Common Stock of the Company
issued prior to the Close of Business on the Record Date, the Rights will be
evidenced by such certificates for the Common Stock of the Company on or until
the Distribution Date (or the earlier redemption, expiration or termination of
the Rights), and the registered holders of the Common Stock of the Company also
shall be the registered holders of the associated Rights. Until the Distribution
Date (or the earlier redemption, expiration or termination of the Rights), the
transfer of any of the certificates for the Common Stock of the Company
outstanding prior to the date of this Agreement shall also constitute the
transfer of the Rights associated with the
8
<PAGE>
Common Stock of the Company represented by such certificate.
(c) Certificates for the Common Stock of the Company issued after the
Record Date, but prior to the earlier of the Distribution Date or the
redemption, expiration or termination of the Rights, shall be deemed also to be
certificates for Rights, and shall bear a legend, substantially in the form set
forth below:
This certificate also evidences and entitles the holder
hereof to certain Rights as set forth in a Shareholder
Rights Agreement between Cypress Communications, Inc. and
State Street Bank and Trust Company, as Rights Agent, as
amended, restated, renewed or extended from time to time
(the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on
file at the principal offices of Cypress Communications,
Inc. and the stock transfer administration office of the
Rights Agent. Under certain circumstances, as set forth in
the Rights Agreement, such Rights will be evidenced by
separate certificates and will no longer be evidenced by
this certificate. Cypress Communications, Inc. may redeem
the Rights at a redemption price of $0.01 per Right, subject
to adjustment, under the terms of the Rights Agreement.
Cypress Communications, Inc. will mail to the holder of this
certificate a copy of the Rights Agreement, as in effect on
the date of mailing, without charge promptly after receipt
of a written request therefor. As set forth in the Rights
Agreement, Rights issued to or held by Acquiring Persons or
any Affiliates or Associates thereof (as defined in the
Rights Agreement), and any subsequent holder of such Rights,
become null and void. The Rights shall not be exercisable,
and shall be void so long as held, by a holder in any
jurisdiction where the requisite qualification, if any, to
the issuance to such holder, or the exercise by such holder,
of the Rights in such jurisdiction shall not have been
obtained or be obtainable.
With respect to such certificates containing the foregoing legend, the Rights
associated with the Common Stock of the Company represented by such certificates
shall be evidenced by such certificates alone until the Distribution Date (or
the earlier redemption, expiration or termination of the Rights), and the
transfer of any of such certificates shall also constitute the transfer of the
Rights associated with the Common Stock of the Company represented by such
certificates. In the event that the Company purchases or acquires any shares of
Common Stock of the Company after the Record Date but prior to the Distribution
Date, any Rights associated with such Common Stock of the Company shall be
deemed canceled and retired so that the Company shall not be entitled to
exercise any Rights associated with the shares of Common Stock of the Company
which are no longer outstanding. The failure to print the foregoing legend on
any such certificate representing Common Stock of the Company or any defect
9
<PAGE>
therein shall not affect in any manner whatsoever the application or
interpretation of the provisions of Section 7(e) hereof.
Section 4. Form of Right Certificates.
--------------------------
(a) The Right Certificates (and the forms of election to purchase
shares and of assignment and certificate to be printed on the reverse thereof)
shall each be substantially in the form of Exhibit B attached hereto and may
---------
have such marks of identification or designation and such legends, summaries or
endorsements printed thereon as the Company may deem appropriate and as are not
inconsistent with the provisions of this Agreement, or as may be required to
comply with any applicable law, rule or regulation or with any rule or
regulation of any stock exchange on which the Rights may from time to time be
listed, or to conform to customary usage. The Right Certificates shall be in a
machine-printable format and in a form reasonably satisfactory to the Rights
Agent. Subject to the provisions of Section 11 and Section 22 hereof, the Right
Certificates, whenever distributed, shall show the date of countersignature, and
on their face shall entitle the holders thereof to purchase such number of one
one-thousandths of a share of Preferred Stock as shall be set forth therein at
the price set forth therein (the "Exercise Price"), but the number of such
shares and the Exercise Price shall be subject to adjustment as provided herein.
(b) Any Right Certificate issued pursuant to Section 3(a) or Section
22 hereof that represents Rights Beneficially Owned by (i) an Acquiring Person
or any Associate or Affiliate of an Acquiring Person, (ii) a transferee of an
Acquiring Person (or of any Associate or Affiliate of an Acquiring Person) who
becomes a transferee after the Acquiring Person becomes such, or (iii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
such and receives such Rights pursuant to either (A) a transfer (whether or not
for consideration) from the Acquiring Person to holders of equity interests in
such Acquiring Person or to any Person with whom the Acquiring Person has any
continuing agreement, arrangement or understanding (whether or not in writing)
regarding the transferred Rights, the shares of Common Stock of the Company
associated with such Rights or the Company or (B) a transfer which the Board of
Directors of the Company has determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of Section
7(e) hereof, and any Right Certificate issued pursuant to Section 6, Section 11
or Section 22 upon transfer, exchange, replacement or adjustment of any other
Right Certificate referred to in this sentence, shall have deleted therefrom the
second sentence of the existing legend on such Right Certificate and in
substitution therefor shall contain the following legend:
The Rights represented by this Right Certificate are or were
Beneficially Owned by a Person who was or became an
Acquiring Person or an Affiliate or an Associate of an
Acquiring Person (as such terms are defined in the Rights
Agreement). This Right Certificate and the Rights
represented hereby may become
10
<PAGE>
null and void under certain circumstances as specified in
Section 7(e) of the Rights Agreement.
The Company shall give notice to the Rights Agent promptly after it becomes
aware of the existence and identity of any Acquiring Person or any Associate or
Affiliate thereof. The Company shall instruct the Rights Agent in writing of the
Rights which should be so legended. The failure to print the foregoing legend on
any such Right Certificate or any defect therein shall not affect in any manner
whatsoever the application or interpretation of the provisions of Section 7(e)
hereof.
Section 5. Countersignature and Registration.
---------------------------------
(a) The Right Certificates shall be executed on behalf of the Company
by its Chairman of the Board of Directors, or its President or any Vice
President and by its Treasurer or any Assistant Treasurer, or by its Secretary
or any Assistant Secretary, either manually or by facsimile signature, and shall
have affixed thereto the Company's seal or a facsimile thereof which shall be
attested to by the Secretary or any Assistant Secretary of the Company, either
manually or by facsimile signature. The Right Certificates shall be manually
countersigned by an authorized signatory of the Rights Agent and shall not be
valid for any purpose unless so countersigned, and such countersignature upon
any Right Certificate shall be conclusive evidence, and the only evidence, that
such Right Certificate has been duly countersigned as required hereunder. In
case any officer of the Company who shall have signed any of the Right
Certificates shall cease to be such officer of the Company before
countersignature by the Rights Agent and issuance and delivery by the Company,
such Right Certificates, nevertheless, may be countersigned by an authorized
signatory of the Rights Agent, and issued and delivered by the Company with the
same force and effect as though the person who signed such Right Certificates
had not ceased to be such officer of the Company; and any Right Certificates may
be signed on behalf of the Company by any person who, at the actual date of the
execution of such Right Certificate, shall be a proper officer of the Company to
sign such Right Certificate, although at the date of the execution of this
Rights Agreement any such person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at one of its offices designated as the appropriate place for
surrender of Right Certificates upon exercise or transfer, books for
registration and transfer of the Right Certificates issued hereunder. Such
books shall show the names and addresses of the respective holders of the Right
Certificates, the number of Rights evidenced on its face by each of the Right
Certificates and the date of each of the Right Certificates.
Section 6. Transfer, Split Up, Combination and Exchange of Right
-----------------------------------------------------
Certificates; Mutilated, Destroyed, Lost or Stolen Right Certificates.
- ---------------------------------------------------------------------
(a) Subject to the provisions of Section 4(b), Section 7(e) and
Section 14 hereof, at any time after the Close of Business on the Distribution
Date, and at or prior to the
11
<PAGE>
Close of Business on the Expiration Date, any Right Certificate or Certificates
may be transferred, split up, combined or exchanged for another Right
Certificate or Certificates, entitling the registered holder to purchase a like
number of one one-thousandths of a share of Preferred Stock (or following a
Triggering Event, preferred stock, cash, property, debt securities, Common Stock
of the Company or any combination thereof) as the Right Certificate or
Certificates surrendered then entitled such holder to purchase and at the same
Exercise Price. Any registered holder desiring to transfer, split up, combine or
exchange any Right Certificate shall make such request in writing delivered to
the Rights Agent, and shall surrender the Right Certificate or Certificates to
be transferred, split up, combined or exchanged, with the form of assignment and
certificate duly executed, at the office or offices of the Rights Agent
designated for such purpose. Neither the Rights Agent nor the Company shall be
obligated to take any action whatsoever with respect to the transfer of any such
surrendered Right Certificate until the registered holder shall have completed
and signed the certificate contained in the form of assignment on the reverse
side of such Right Certificate and shall have provided such additional evidence
of the identity of the Beneficial Owner (or former Beneficial Owner) or
Affiliates or Associates thereof as the Company shall reasonably request.
Thereupon the Rights Agent shall, subject to Section 4(b), Section 7(e) and
Section 14 hereof, countersign and deliver to the Person entitled thereto a
Right Certificate or Certificates, as the case may be, as so requested. The
Company may require payment by the registered holder of a Right Certificate, of
a sum sufficient to cover any tax or governmental charge that may be imposed in
connection with any transfer, split up, combination or exchange of Right
Certificates.
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Right Certificate, and, in case of loss, theft or destruction, of indemnity or
security satisfactory to them, and reimbursement to the Company and the Rights
Agent of all reasonable expenses incidental thereto, and upon surrender to the
Rights Agent and cancellation of the Right Certificate, if mutilated, the
Company will execute and deliver a new Right Certificate of like tenor to the
Rights Agent for countersignature and delivery to the registered owner in lieu
of the Right Certificate so lost, stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Exercise Price; Expiration Date of Rights.
-------------------------------------------------------------
(a) Subject to Section 7(e) hereof, the registered holder of any
Right Certificate may exercise the Rights evidenced thereby (except as otherwise
provided herein) in whole or in part at any time after the Distribution Date
upon surrender of the Right Certificate, with the form of election to purchase
and the certificate on the reverse side thereof duly executed, to the Rights
Agent at the office or offices of the Rights Agent designated for such purpose,
together with payment of the aggregate Exercise Price for the total number of
one one-thousandths of a share of Preferred Stock (or other securities, cash or
other assets, as the case may be) as to which such surrendered Rights are then
exercised, at or prior to the earlier of (i) the Close of Business on the tenth
anniversary of the Record Date (the "Final Expiration Date"), (ii) the time at
which the Rights are redeemed as provided in Section 23 hereof or
12
<PAGE>
(iii) the time at which such Rights are exchanged as provided in Section 24
hereof (the earlier of (i), (ii) or (iii) being herein referred to as the
"Expiration Date"). Except as set forth in Section 7(e) hereof and
notwithstanding any other provision of this Agreement, any Person who prior to
the Distribution Date becomes a record holder of shares of Common Stock of the
Company may exercise all of the rights of a registered holder of a Right
Certificate with respect to the Rights associated with such shares of Common
Stock of the Company in accordance with the provisions of this Agreement, as of
the date such Person becomes a record holder of shares of Common Stock of the
Company.
(b) The Exercise Price for each one one-thousandth of a share of
Preferred Stock pursuant to the exercise of a Right shall initially be One
Hundred Ten Dollars ($110.00), shall be subject to adjustment from time to time
as provided in Section 11 and Section 13 hereof and shall be payable in lawful
money of the United States of America in accordance with Section 7(c) below.
(c) As promptly as practicable following the Distribution Date, the
Company shall deposit with a corporation, trust, bank or similar institution in
good standing organized under the laws of the United States or any State of the
United States, which is authorized under such laws to exercise corporate trust
or stock transfer powers and is subject to supervision or examination by a
federal or state authority (such institution is hereinafter referred to as the
"Depositary Agent"), certificates representing the shares of Preferred Stock
that may be acquired upon exercise of the Rights and the Company shall cause
such Depositary Agent to enter into an agreement pursuant to which the
Depositary Agent shall issue receipts representing interests in the shares of
Preferred Stock so deposited. Upon receipt of a Right Certificate representing
exercisable Rights, with the form of election to purchase and the certificate on
the reverse side thereof duly executed, accompanied by payment of the Exercise
Price for the shares to be purchased and an amount equal to any applicable
transfer tax (as determined by the Rights Agent) by certified check or bank
draft payable to the order of the Company or by money order, the Rights Agent
shall, subject to Section 20(k) hereof, thereupon promptly (i) requisition from
the Depositary Agent (or make available, if the Rights Agent is the Depositary
Agent) depositary receipts or certificates for the number of one one-thousandths
of a share of Preferred Stock to be purchased and the Company hereby irrevocably
authorizes the Depositary Agent to comply with all such requests, (ii) when
appropriate, requisition from the Company the amount of cash, if any, to be paid
in lieu of issuance of fractional shares in accordance with Section 14 hereof,
(iii) promptly after receipt of such certificates or depositary receipts, cause
the same to be delivered to or upon the order of the registered holder of such
Right Certificate, registered in such name or names as may be designated by such
holder and (iv) when appropriate, after receipt promptly deliver such cash to or
upon the order of the registered holder of such Right Certificate. In the event
that the Company is obligated to issue other securities (including Common Stock)
of the Company, pay cash or distribute other property pursuant to Section 11(a)
hereof, the Company will make all arrangements necessary so that such other
securities, cash or other property are available for distribution by the Rights
Agent, if and when appropriate. The payment of the Exercise Price may be made
by certified or bank check payable to the order of the Company, or by money
13
<PAGE>
order or wire transfer of immediately available funds to the account of the
Company (provided that notice of such wire transfer shall be given by the holder
of the related Right to the Rights Agent).
(d) In case the registered holder of any Right Certificate shall
exercise less than all the Rights evidenced thereby, a new Right Certificate
evidencing Rights equivalent to the Rights remaining unexercised shall be issued
by the Rights Agent and delivered to the registered holder of such Right
Certificate or to his duly authorized assigns, subject to the provisions of
Section 14 hereof.
(e) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Section 11(a)(ii) Event or Section 13 Event,
any Rights Beneficially Owned by (i) an Acquiring Person or any Associate or
Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or
of any Associate or Affiliate of an Acquiring Person) who becomes a transferee
after the Acquiring Person becomes such or (iii) a transferee of an Acquiring
Person (or of any Associate or Affiliate of an Acquiring Person) who becomes a
transferee prior to or concurrently with the Acquiring Person becoming such and
receives such Rights pursuant to either (A) a transfer (whether or not for
consideration) from the Acquiring Person to holders of equity interests in such
Acquiring Person or to any Person with whom the Acquiring Person has any
continuing agreement, arrangement or understanding regarding the transferred
Rights, the shares of Common Stock of the Company associated with such Rights or
the Company, or (B) a transfer which the Board of Directors of the Company has
determined is part of a plan, arrangement or understanding which has as a
primary purpose or effect the avoidance of this Section 7(e), shall be null and
void without any further action and no holder of such Rights shall have any
rights whatsoever with respect to such Rights, whether under any provision of
this Agreement or otherwise. The Company shall use all reasonable efforts to
ensure that the provisions of this Section 7(e) and Section 4(b) hereof are
complied with, but shall have no liability to any holder of Right Certificates
or other Person as a result of its failure to make any determinations with
respect to an Acquiring Person or any Affiliates or Associates of an Acquiring
Person or any transferee of any of them hereunder.
(f) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder of Rights upon the occurrence of any
purported exercise as set forth in this Section 7 unless such registered holder
shall have (i) completed and signed the certificate contained in the form of
election to purchase set forth on the reverse side of the Right Certificate
surrendered for such exercise, and (ii) provided such additional evidence of the
identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or
Associates thereof as the Company shall reasonably request.
Section 8. Cancellation and Destruction of Right Certificates. All Right
--------------------------------------------------
Certificates surrendered for the purpose of exercise, transfer, split up,
combination or exchange shall, if surrendered to the Company or any of its
agents, be delivered to the Rights Agent for
14
<PAGE>
cancellation or in canceled form, or, if surrendered to the Rights Agent, shall
be canceled by it, and no Right Certificates shall be issued in lieu thereof
except as expressly permitted by any of the provisions of this Agreement. The
Company shall deliver to the Rights Agent for cancellation and retirement, and
the Rights Agent shall so cancel and retire, any other Right Certificate
purchased or acquired by the Company otherwise than upon the exercise thereof.
The Rights Agent shall deliver all canceled Right Certificates to the Company.
Section 9. Reservation and Availability of Preferred Stock.
-----------------------------------------------
(a) The Company covenants and agrees that it will cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock or any authorized and issued shares of Preferred Stock held in
its treasury, the number of shares of Preferred Stock that will be sufficient to
permit the exercise in full of all outstanding and exercisable Rights. Upon the
occurrence of any events resulting in an increase in the aggregate number of
shares of Preferred Stock issuable upon exercise of all outstanding Rights in
excess of the number then reserved, the Company shall make appropriate increases
in the number of shares so reserved.
(b) The Company shall use its best efforts to cause, from and after
such time as the Rights become exercisable, all shares of Preferred Stock issued
or reserved for issuance to be listed, upon official notice of issuance, upon
the principal national securities exchange, if any, upon which the Common Stock
of the Company is listed or, if the principal market for the Common Stock of the
Company is not on any national securities exchange, to be eligible for listing
on the Nasdaq National Market of The Nasdaq Stock Market, Inc. ("NASDAQ") or any
successor thereto or other comparable nationally recognized securities quotation
system.
(c) The Company shall use its best efforts to (i) file, as soon as
practicable following the earliest date after the occurrence of a Section
11(a)(ii) Event on which the consideration to be delivered by the Company upon
exercise of the Rights has been determined in accordance with Section 11(a)(iii)
hereof, or as soon as required by law following the Distribution Date, as the
case may be, a registration statement under the Securities Act of 1933, as
amended (the "Securities Act"), with respect to the securities purchasable upon
exercise of the Rights on an appropriate form, (ii) cause such registration
statement to become effective as soon as practicable after such filing and (iii)
cause such registration statement to remain effective (with a prospectus that at
all times meets the requirements of the Securities Act) until the earlier of (A)
the date as of which the Rights are no longer exercisable for such securities or
(B) the Expiration Date. The Company will also take such action as may be
appropriate under, and which will ensure compliance with, the securities or
"blue sky" laws of the various states in connection with the exercisability of
the Rights. The Company may temporarily suspend, for a period of time not to
exceed ninety (90) days after the date determined in accordance with the
provisions of the first sentence of this Section 9(c), the exercisability of the
Rights in order to prepare and file such registration statement and permit it to
become effective. Upon such suspension, the Company shall issue a public
announcement stating that the exercisability of the Rights has been temporarily
suspended, as well as a public
15
<PAGE>
announcement at such time as the suspension is no longer in effect, in each case
with prompt written notice to the Rights Agent. Notwithstanding any such
provision of this Agreement to the contrary, the Rights shall not be exercisable
in any jurisdiction unless the requisite qualification in such jurisdiction
shall have been obtained.
(d) The Company covenants and agrees that it will take all such
action as may be necessary to ensure that all shares of Preferred Stock
delivered upon the exercise of the Rights shall, at the time of delivery of the
certificates or depositary receipts for such shares (subject to payment of the
Exercise Price), be duly and validly authorized and issued and fully paid and
nonassessable.
(e) The Company further covenants and agrees that it will pay when
due and payable any and all federal and state transfer taxes and charges which
may be payable in respect of the issuance or delivery of the Right Certificates
or of any certificates for shares of Preferred Stock upon the exercise of
Rights. The Company shall not, however, be required to pay any transfer tax
which may be payable in respect of any transfer or delivery of Right
Certificates to a person other than, or in respect of the issuance or delivery
of securities in a name other than that of, the registered holder of the Right
Certificates evidencing Rights surrendered for exercise or to issue or deliver
any certificates for securities in a name other than that of the registered
holder upon the exercise of any Rights until such tax shall have been paid (any
such tax being payable by the holder of such Right Certificate at the time of
surrender) or until it has been established to the Company's satisfaction that
no such tax is due.
Section 10. Preferred Stock Record Date. Each Person in whose name any
---------------------------
certificate for Preferred Stock (including any fraction of a share of Preferred
Stock) is issued upon the exercise of Rights shall for all purposes be deemed to
have become the holder of record of the shares of Preferred Stock represented
thereby on, and such certificate shall be dated, the date upon which the Right
Certificate evidencing such Rights was duly surrendered and payment of the
Exercise Price (and any applicable transfer taxes) was made; provided, however,
-------- -------
that if the date of such surrender and payment is a date upon which the
Preferred Stock transfer books of the Company are closed, such person shall be
deemed to have become the record holder of such shares on, and such certificate
shall be dated, the next succeeding Business Day on which the Preferred Stock
transfer books of the Company are open; and further provided, however, that if
-------- -------
delivery of shares of Preferred Stock is delayed pursuant to Section 9(c), such
Person shall be deemed to have become the record holder of such shares of
Preferred Stock only when such shares first become deliverable. Prior to the
exercise of the Right evidenced thereby, the holder of a Right Certificate shall
not be entitled to any rights of a shareholder of the Company with respect to
shares for which the Rights shall be exercisable, including, without limitation,
the right to vote, to receive dividends or other distributions or to exercise
any preemptive rights, and shall not be entitled to receive any notice of any
proceedings of the Company, except as provided herein.
Section 11. Adjustment of Exercise Price, Number and Kind of Shares or
----------------------------------------------------------
Number of Rights. The Exercise Price, the number and kind of shares covered by
- ----------------
each Right and the
16
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number of Rights outstanding are subject to adjustment from time to time as
provided in this Section 11.
(a) (i) In the event the Company shall at any time after the date of
this Agreement (A) declare a dividend on the Preferred Stock payable in
shares of Preferred Stock, (B) subdivide the outstanding Preferred Stock,
(C) combine the outstanding Preferred Stock into a smaller number of shares
or (D) issue any shares of its capital stock in a reclassification of the
Preferred Stock (including any such reclassification in connection with a
consolidation or merger in which the Company is the continuing or surviving
corporation), except as otherwise provided in this Section 11(a) and
Section 7(e) hereof, the Exercise Price in effect at the time of the record
date for such dividend or of the effective date of such subdivision,
combination or reclassification, and the number and kind of shares of
capital stock issuable on such date, shall be proportionately adjusted so
that the holder of any Right exercised after such time shall be entitled to
receive the aggregate number and kind of shares of capital stock which, if
such Right had been exercised immediately prior to such date and at a time
when the Preferred Stock transfer books of the Company were open, such
holder would have owned upon such exercise and been entitled to receive by
virtue of such dividend, subdivision, combination or reclassification;
provided, however, that in no event shall the consideration to be paid upon
-------- -------
the exercise of a Right be less than the aggregate par value of the shares
of capital stock of the Company issuable upon exercise of a Right. If an
event occurs which would require an adjustment under both Section 11(a)(i)
and Section 11(a)(ii) hereof, the adjustment provided for in this Section
11(a)(i) shall be in addition to, and shall be made prior to, any
adjustment required pursuant to Section 11(a)(ii) hereof.
(ii) Subject to the provisions of Section 24 hereof, in the event
any Person, alone or together with its Affiliates and Associates, shall
become an Acquiring Person, then, promptly following any such occurrence (a
"Section 11(a)(ii) Event"), proper provision shall be made so that each
holder of a Right, except as provided in Section 7(e) hereof, shall
thereafter have a right to receive, upon exercise thereof at the then
current Exercise Price in accordance with the terms of this Agreement, such
number of shares of Preferred Stock of the Company as shall equal the
result obtained by (x) multiplying the then current Exercise Price by the
then number of one one-thousandths of a share of Preferred Stock for which
a Right was exercisable immediately prior to the first occurrence of a
Section 11(a)(ii) Event, whether or not such Right was then exercisable,
and dividing that product by (y) 50% of the Fair Market Value per one one-
thousandth of a share of the Preferred Stock (determined pursuant to
Section 11(d)) on the date of the occurrence of a Section 11(a)(ii) Event
(such number of shares being referred to as the "Adjustment Shares").
(iii) In lieu of issuing any shares of Preferred Stock in accordance
with Section 11(a)(ii) hereof, the Company, acting by or pursuant to a
resolution of the Board of Directors of the Company, may, and in the event
that the number of shares of
17
<PAGE>
Preferred Stock which are authorized by the Company's Certificate of
Incorporation but not outstanding or reserved for issuance for purposes
other than upon exercise of the Rights is not sufficient to permit the
exercise in full of the Rights in accordance with the foregoing
subparagraph (ii) of this Section 11(a), the Company, acting by or pursuant
to a resolution of the Board of Directors of the Company, shall: (A)
determine the excess of (X) the Fair Market Value of the Adjustment Shares
issuable upon the exercise of a Right (the "Current Value") over (Y) the
Exercise Price attributable to each Right (such excess being referred to as
the "Spread") and (B) with respect to all or a portion of each Right
(subject to Section 7(e) hereof), make adequate provision to substitute for
the Adjustment Shares, upon payment of the applicable Exercise Price, (1)
Common Stock of the Company, (2) cash, (3) a reduction in the Exercise
Price, (4) Preferred Stock Equivalents which the Board of Directors of the
Company has deemed to have the same value as shares of Common Stock of the
Company, (5) debt securities of the Company, (6) other assets or securities
of the Company or (7) any combination of the foregoing which, when added to
any shares of Preferred Stock issued upon such exercise, has an aggregate
value equal to the Current Value, where such aggregate value has been
determined by the Board of Directors of the Company based upon the advice
of a nationally recognized investment banking firm selected by the Board of
Directors of the Company; provided, however, that if the Company shall not
-------- -------
have made adequate provision to deliver value pursuant to clause (B) above
within thirty (30) days following the later of (x) the first occurrence of
a Section 11(a)(ii) Event and (y) the date on which the Company's right of
redemption pursuant to Section 23(a) expires (the later of (x) and (y)
being referred to herein as the "Section 11(a)(ii) Trigger Date"), then the
Company shall be obligated to deliver, upon the surrender for exercise of a
Right and without requiring payment of the Exercise Price, shares of
Preferred Stock (to the extent available) and then, if necessary, cash,
which shares and/or cash have an aggregate value equal to the Spread. If
the Board of Directors of the Company shall determine in good faith that it
is likely that sufficient additional shares of Preferred Stock could be
authorized for issuance upon exercise in full of the Rights, the 30-day
period set forth above may be extended to the extent necessary, but not
more than ninety (90) days after the Section 11(a)(ii) Trigger Date, in
order that the Company may seek shareholder approval for the authorization
of such additional shares (such period, as it may be extended, being
referred to herein as the "Substitution Period"). To the extent that the
Company determines that some action need be taken pursuant to the first
and/or second sentences of this Section 11(a)(iii), the Company (x) shall
provide, subject to Section 7(e) hereof, that such action shall apply
uniformly to all outstanding Rights and (y) may suspend the exercisability
of the Rights until the expiration of the Substitution Period in order to
seek any authorization of additional shares and/or to decide the
appropriate form of distribution to be made pursuant to such first sentence
and to determine the value thereof. In the event of any such suspension,
the Company shall issue a public announcement stating that the
exercisability of the Rights has been temporarily suspended and a public
announcement at such time as the suspension is no longer in effect. For
purposes of this Section 11(a)(iii), the value of the Preferred Stock shall
be the Fair Market Value (as
18
<PAGE>
determined pursuant to Section 11(d) hereof) per share of the Preferred
Stock on the Section 11(a)(ii) Trigger Date and the value of any Preferred
Stock Equivalent shall be deemed to have the same value as the Preferred
Stock on such date.
(b) If the Company shall fix a record date for the issuance of
rights, options or warrants to all holders of Preferred Stock entitling them
(for a period expiring within forty-five (45) calendar days after such record
date) to subscribe for or purchase Preferred Stock (or securities having the
same or more favorable rights, privileges and preferences as the shares of
Preferred Stock ("Preferred Stock Equivalents")) or securities convertible into
Preferred Stock or Preferred Stock Equivalents at a price per share of Preferred
Stock or per share of Preferred Stock Equivalents (or having a conversion price
per share, if a security convertible into Preferred Stock or Preferred Stock
Equivalents) less than the Fair Market Value (as determined pursuant to Section
11(d) hereof) per share of Preferred Stock on such record date, the Exercise
Price to be in effect after such record date shall be determined by multiplying
the Exercise Price in effect immediately prior to such record date by a
fraction, the numerator of which shall be the number of shares of Preferred
Stock outstanding on such record date, plus the number of shares of Preferred
Stock which the aggregate offering price of the total number of shares of
Preferred Stock and/or Preferred Stock Equivalents to be offered (and the
aggregate initial conversion price of the convertible securities so to be
offered) would purchase at such Fair Market Value and the denominator of which
shall be the number of shares of Preferred Stock outstanding on such record
date, plus the number of additional shares of Preferred Stock and Preferred
Stock Equivalents to be offered for subscription or purchase (or into which the
convertible securities so to be offered are initially convertible); provided,
--------
however, that in no event shall the consideration to be paid upon the exercise
- -------
of a Right be less than the aggregate par value of the shares of stock of the
Company issuable upon exercise of a Right. In case such subscription price may
be paid in a consideration part or all of which shall be in a form other than
cash, the value of such consideration shall be the Fair Market Value thereof
determined in accordance with Section 11(d) hereof. Shares of Preferred Stock
owned by or held for the account of the Company shall not be deemed outstanding
for the purpose of any such computation. Such adjustments shall be made
successively whenever such a record date is fixed; and in the event that such
rights or warrants are not so issued, the Exercise Price shall be adjusted to be
the Exercise Price which would then be in effect if such record date had not
been fixed.
(c) If the Company shall fix a record date for the making of a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger in which the Company is the
continuing or surviving corporation), of evidences of indebtedness, cash (other
than a regular periodic cash dividend out of the earnings or retained earnings
of the Company), assets (other than a dividend payable in Preferred Stock, but
including any dividend payable in stock other than Preferred Stock) or
convertible securities, subscription rights or warrants (excluding those
referred to in Section 11(b)), the Exercise Price to be in effect after such
record date shall be determined by multiplying the Exercise Price in effect
immediately prior to such record date by a fraction, the numerator of which
shall be the Fair Market Value (as determined pursuant to Section 11(d) hereof)
per one
19
<PAGE>
one-thousandth of a share of Preferred Stock on such record date, less the Fair
Market Value (as determined pursuant to Section 11(d) hereof) of the portion of
the cash, assets or evidences of indebtedness so to be distributed or of such
convertible securities, subscription rights or warrants applicable to one one-
thousandth of a share of Preferred Stock and the denominator of which shall be
the Fair Market Value (as determined pursuant to Section 11(d) hereof) per one
one-thousandth of a share of Preferred Stock; provided, however, that in no
-------- -------
event shall the consideration to be paid upon the exercise of a Right be less
than the aggregate par value of the shares of stock of the Company issuable upon
exercise of a Right. Such adjustments shall be made successively whenever such a
record date is fixed; and in the event that such distribution is not so made,
the Exercise Price shall again be adjusted to be the Exercise Price which would
be in effect if such record date had not been fixed.
(d) For the purpose of this Agreement, the "Fair Market Value" of any
share of Preferred Stock, Common Stock or any other stock or any Right or other
security or any other property shall be determined as provided in this Section
11(d).
(i) In the case of a publicly-traded stock or other security,
the Fair Market Value on any date shall be deemed to be the average of
the daily closing prices per share of such stock or per unit of such
other security for the 30 consecutive Trading Days (as such term is
hereinafter defined) immediately prior to such date; provided,
--------
however, that in the event that the Fair Market Value per share of any
-------
share of stock is determined during a period following the
announcement by the issuer of such stock of (x) a dividend or
distribution on such stock payable in shares of such stock or
securities convertible into shares of such stock or (y) any
subdivision, combination or reclassification of such stock, and prior
to the expiration of the 30 Trading Day period after the ex-dividend
date for such dividend or distribution, or the record date for such
subdivision, combination or reclassification, then, and in each such
case, the Fair Market Value shall be properly adjusted to take into
account ex-dividend trading. The closing price for each day shall be
the last sale price, regular way, or, in case no such sale takes place
on such day, the average of the closing bid and asked prices, regular
way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or
admitted to trading on the New York Stock Exchange or, if the
securities are not listed or admitted to trading on the New York Stock
Exchange, as reported in the principal consolidated transaction
reporting system with respect to securities listed on the principal
national securities exchange on which such security is listed or
admitted to trading; or, if not listed or admitted to trading on any
national securities exchange, the last quoted price (or, if not so
quoted, the average of the last quoted high bid and low asked prices)
in the over-the-counter market, as reported by NASDAQ or such other
system then in use; or, if on any such date no bids for such security
are quoted by any such organization, the average of the closing bid
and asked prices as furnished by a professional market maker making a
market in such security selected by the Board of
20
<PAGE>
Directors of the Company. If on any such date no market maker is
making a market in such security, the Fair Market Value of such
security on such date shall be determined reasonably and with utmost
good faith to the holders of the Rights by the Board of Directors of
the Company, provided, however, that if at the time of such
-------- -------
determination there is an Acquiring Person, the Fair Market Value of
such security on such date shall be determined by a nationally
recognized investment banking firm selected by the Board of Directors
of the Company, which determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights. The term "Trading Day" shall mean a day
on which the principal national securities exchange on which such
security is listed or admitted to trading is open for the transaction
of business or, if such security is not listed or admitted to trading
on any national securities exchange, a Business Day.
(ii) If a security is not publicly held or not so listed or
traded, "Fair Market Value" shall mean the fair value per share of
stock or per other unit of such security, determined reasonably and
with utmost good faith to the holders of the Rights by the Board of
Directors of the Company; provided, however, that if at the time of
-------- -------
such determination there is an Acquiring Person, the Fair Market Value
of such security on such date shall be determined by a nationally
recognized investment banking firm selected by the Board of Directors
of the Company, which determination shall be described in a statement
filed with the Rights Agent and shall be binding on the Rights Agent
and the holders of the Rights; provided, however, that for the
-------- -------
purposes of making any adjustment provided for by Section 11(a)(ii)
hereof, the Fair Market Value of a share of Preferred Stock shall not
be less than the product of the then Fair Market Value of a share of
Common Stock multiplied by the higher of the then Dividend Multiple or
Vote Multiple (as both of such terms are defined in the terms of the
Series Z Junior Participating Cumulative Preferred Stock attached
hereto as Exhibit A) applicable to the Preferred Stock and shall not
---------
exceed 105% of the product of the then Fair Market Value of a share of
Common Stock multiplied by the higher of the then Dividend Multiple or
Vote Multiple applicable to the Preferred Stock.
(iii) In the case of property other than securities, the Fair
Market Value thereof shall be determined reasonably and with utmost
good faith to the holders of Rights by the Board of Directors of the
Company; provided, however, that if at the time of such determination
-------- -------
there is an Acquiring Person, the Fair Market Value of such property
on such date shall be determined by a nationally recognized investment
banking firm selected by the Board of Directors of the Company, which
determination shall be described in a statement filed with the Rights
Agent and shall be binding upon the Rights Agent and the holders of
the Rights.
21
<PAGE>
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Exercise Price shall be required unless such adjustment would require an
increase or decrease of at least 1% in the Exercise Price; provided, however,
-------- -------
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent or to the nearest hundred-thousandth of a share of Common Stock of the
Company or ten-millionth of a share of Preferred Stock, as the case may be, or
to such other figure as the Board of Directors of the Company may deem
appropriate. Notwithstanding the first sentence of this Section 11(e), any
adjustment required by this Section 11 shall be made no later than the earlier
of (i) three (3) years from the date of the transaction which mandates such
adjustment or (ii) the Expiration Date.
(f) If as a result of any provision of Section 11(a) or Section 13(a)
hereof, the holder of any Right thereafter exercised shall become entitled to
receive any shares of capital stock of the Company other than Preferred Stock,
thereafter the number of such other shares so receivable upon exercise of any
Right shall be subject to adjustment from time to time in a manner and on terms
as nearly equivalent as practicable to the provisions with respect to the
Preferred Stock contained in Section 11(a), (b), (c), (d), (e), (g) through (k)
and (m), inclusive, and the provisions of Sections 7, 9, 10, 13 and 14 hereof
with respect to the Preferred Stock shall apply on like terms to any such other
shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made to the Exercise Price hereunder shall evidence the right to
purchase, at the adjusted Exercise Price, the number of one one-thousandths of a
share of Preferred Stock (or other securities or amount of cash or combination
thereof) purchasable from time to time hereunder upon exercise of the Rights,
all subject to further adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Exercise Price as a result of the
calculations made in Section 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Exercise Price, that number of one one-thousandths of
a share of Preferred Stock (calculated to the nearest ten-millionth) as the
Board of Directors of the Company determines is appropriate to preserve the
economic value of the Rights, including, by way of example, that number obtained
by (i) multiplying (x) the number of one one-thousandths of a share of Preferred
Stock for which a Right may be exercisable immediately prior to this adjustment
by (y) the Exercise Price in effect immediately prior to such adjustment of the
Exercise Price and (ii) dividing the product so obtained by the Exercise Price
in effect immediately after such adjustment of the Exercise Price.
(i) The Company may elect on or after the date of any adjustment of
the Exercise Price to adjust the number of Rights, in substitution for any
adjustment in the number of shares of Preferred Stock purchasable upon the
exercise of a Right. Each of the Rights outstanding after the adjustment in the
number of Rights shall be exercisable for the number of
22
<PAGE>
one one-thousandths of a share of Preferred Stock for which a Right was
exercisable immediately prior to such adjustment. Each Right held of record
prior to such adjustment of the number of Rights shall become that number of
Rights (calculated to the nearest hundred-thousandth) obtained by dividing the
Exercise Price in effect immediately prior to adjustment of the Exercise Price
by the Exercise Price in effect immediately after adjustment of the Exercise
Price. The Company shall make a public announcement of its election to adjust
the number of Rights, indicating the record date for the adjustment, and, if
known at the time, the amount of the adjustment to be made. This record date may
be the date on which the Exercise Price is adjusted or any day thereafter, but,
if the Right Certificates have been issued, shall be at least ten (10) days
later than the date of the public announcement. If Right Certificates have been
issued, upon each adjustment of the number of Rights pursuant to this Section
11(i), the Company shall, as promptly as practicable, cause to be distributed to
holders of record of Right Certificates on such record date Right Certificates
evidencing, subject to Section 14 hereof, the additional Rights to which such
holders shall be entitled as a result of such adjustment, or, at the option of
the Company, shall cause to be distributed to such holders of record in
substitution and replacement for the Right Certificates held by such holders
prior to the date of adjustment, and upon surrender thereof, if required by the
Company, new Right Certificates evidencing all the Rights to which such holders
shall be entitled after such adjustment. Right Certificates so to be distributed
shall be issued, executed and countersigned in the manner provided for herein
(and may bear, at the option of the Company, the adjusted Exercise Price) and
shall be registered in the names of the holders of record of Right Certificates
on the record date specified in the public announcement.
(j) Irrespective of any adjustment or change in the Exercise Price or
the number of one one-thousandths of a share of Preferred Stock issuable upon
the exercise of the Rights, the Right Certificates theretofore and thereafter
issued may continue to express the Exercise Price per share and the number of
shares which were expressed in the initial Right Certificates issued hereunder
without prejudice to any adjustment or change.
(k) Before taking any action that would cause an adjustment reducing
the Exercise Price below the then stated value, if any, of the number of one
one-thousandths of a share of Preferred Stock issuable upon exercise of the
Rights, the Company shall take any corporate action which may, in the opinion of
its counsel, be necessary in order that the Company may validly and legally
issue fully paid and nonassessable shares of Preferred Stock at such adjusted
Exercise Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Exercise Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuing to the holder of any Right exercised after such record date
the number of one one-thousandths of a share of Preferred Stock or other capital
stock or securities of the Company, if any, issuable upon such exercise over and
above the number of one one-thousandths of a share of Preferred Stock and other
capital stock or securities of the Company, if any, issuable upon such exercise
on the basis of the Exercise Price in effect prior to such adjustment; provided,
--------
however, that the Company
- -------
23
<PAGE>
shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Exercise Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that in its good faith judgment the Board of Directors of the Company
shall determine to be advisable in order that any consolidation or subdivision
of the Preferred Stock, issuance wholly for cash of any shares of Preferred
Stock at less than the Fair Market Value, issuance wholly for cash of shares of
Preferred Stock or securities which by their terms are convertible into or
exchangeable for shares of Preferred Stock, stock dividends or issuance of
rights, options or warrants referred to hereinabove in this Section 11,
hereafter made by the Company to holders of its Preferred Stock, shall not be
taxable to such shareholders.
(n) The Company covenants and agrees that it shall not, at any time
after the Distribution Date and so long as the Rights have not been redeemed
pursuant to Section 23 hereof or exchanged pursuant to Section 24 hereof, (i)
consolidate with (other than a Subsidiary of the Company in a transaction that
complies with the proviso at the end of this sentence), (ii) merge with or into,
or (iii) sell or transfer (or permit any Subsidiary to sell or transfer), in one
transaction or a series of related transactions, assets or earning power
aggregating 50% or more of the assets or earning power of the Company and its
Subsidiaries taken as a whole, to any other Person or Persons (other than the
Company and/or any of its Subsidiaries in one or more transactions each of which
complies with the proviso at the end of this sentence) if (x) at the time of or
immediately after such consolidation, merger or sale there are any rights,
warrants or other instruments outstanding or agreements or arrangements in
effect which would substantially diminish or otherwise eliminate the benefits
intended to be afforded by the Rights, or (y) prior to, simultaneously with or
immediately after such consolidation, merger or sale the shareholders of such
Person or Persons shall have received a distribution of Rights previously owned
by such Person or Persons or any of their Affiliates and Associates; provided,
--------
however, that this Section 11(n) shall not affect the ability of any Subsidiary
- -------
of the Company to consolidate with, or merge with or into, or sell or transfer
assets or earning power to, any other Subsidiary of the Company. The Company
further covenants and agrees that after the Distribution Date it will not,
except as permitted by Section 23 or Section 27 hereof, take (or permit any
Subsidiary to take) any action if at the time such action is taken it is
reasonably foreseeable that such action will substantially diminish or otherwise
eliminate the benefits intended to be afforded by the Rights.
(o) Notwithstanding anything in this Agreement to the contrary, in
the event the Company shall at any time after the date of this Agreement and
prior to the Distribution Date (i) declare or pay any dividend on the
outstanding Common Stock of the Company payable in shares of Common Stock of the
Company or (ii) effect a subdivision, combination or consolidation of the
outstanding shares of Common Stock of the Company (by reclassification or
otherwise than by payment of dividends in shares of Common Stock of the
24
<PAGE>
Company) into a greater or lesser number of shares of Common Stock of the
Company, then in any such case (A) the number of one one-thousandths of a share
of Preferred Stock purchasable after such event upon proper exercise of each
Right shall be determined by multiplying the number of one one-thousandths of a
share of Preferred Stock so purchasable immediately prior to such event by a
fraction, the numerator of which is the number of shares of Common Stock of the
Company outstanding immediately prior to such event and the denominator of which
is the number of shares of Common Stock of the Company outstanding immediately
after such event, and (B) each share of Common Stock of the Company outstanding
immediately after such event shall have issued with respect to it that number of
Rights which each share of Common Stock of the Company outstanding immediately
prior to such event had issued with respect to it. The adjustments provided for
in this Section 11(o) shall be made successively whenever such a dividend is
declared or paid or such a subdivision, combination or consolidation is
effected.
(p) The exercise of Rights under Section 11(a)(ii) shall only result
in the loss of rights under Section 11(a)(ii) to the extent so exercised and
shall not otherwise affect the rights of holders of Right Certificates under
this Rights Agreement, including rights to purchase securities of any other
Person or Persons following a Section 13 Event which has occurred or may
thereafter occur, as set forth in Section 13 hereof. Upon exercise of a Right
Certificate under Section 11(a)(ii), the Rights Agent shall return such Right
Certificate duly marked to indicate that such exercise has occurred.
Section 12. Certificate of Adjusted Exercise Price or Number of Shares.
----------------------------------------------------------
Whenever an adjustment is made as provided in Section 11 or Section 13 hereof,
the Company shall (a) promptly prepare a certificate setting forth such
adjustment and a brief statement of the facts accounting for such adjustment,
(b) promptly file with the Rights Agent and with each transfer agent for the
Preferred Stock and the Common Stock of the Company a copy of such certificate
and (c) mail a brief summary thereof to each holder of a Right Certificate (or,
if prior to the Distribution Date, to each holder of a certificate representing
shares of Common Stock of the Company) in accordance with Section 26 hereof.
The Rights Agent shall be fully protected in relying on any such certificate and
on any adjustment contained therein and shall not be deemed to have knowledge of
any such adjustment unless and until it shall have received such certificate.
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
------------------------------------------------------
Earning Power.
- -------------
(a) In the event that, following the Stock Acquisition Date, directly
or indirectly, (x) the Company shall consolidate with, or merge with and into,
any other Person (other than a Subsidiary of the Company in a transaction which
is not prohibited by Section 11(n) hereof), and the Company shall not be the
continuing or surviving corporation of such consolidation or merger, (y) any
other Person (other than a Subsidiary of the Company in a transaction which is
not prohibited by the proviso at the end of the first sentence of Section 11(n)
hereof) shall consolidate with the Company, or merge with and into the Company
and the Company shall be the continuing or surviving corporation of such merger
and, in
25
<PAGE>
connection with such merger, all or part of the shares of Common Stock of the
Company shall be changed into or exchanged for stock or other securities of any
other Person or cash or any other property, or (z) the Company shall sell,
mortgage or otherwise transfer (or one or more of its Subsidiaries shall sell,
mortgage or otherwise transfer), in one transaction or a series of related
transactions, assets or earning power aggregating 50% or more of the assets or
earning power of the Company and its Subsidiaries (taken as a whole) to any
other Person (other than the Company or any Subsidiary of the Company in one or
more transactions, each of which is not prohibited by the proviso at the end of
the first sentence of Section 11(n) hereof), then, and in each such case, proper
provision shall be made so that: (i) each holder of a Right, except as provided
in Section 7(e) hereof, shall have the right to receive, upon the exercise
thereof at the then current Exercise Price in accordance with the terms of this
Agreement, such number of validly authorized and issued, fully paid and
nonassessable shares of freely tradeable Common Stock of such other Person
(including the Company as successor thereto or as the surviving corporation),
free and clear of rights of call or first refusal, liens, encumbrances, transfer
restrictions or other adverse claims, as shall be equal to the result obtained
by (1) multiplying the then current Exercise Price by the number of one one-
thousandths of a share of Preferred Stock for which a Right is exercisable
immediately prior to the first occurrence of a Section 13 Event, and dividing
that product by (2) 50% of the Fair Market Value (determined pursuant to Section
11(d) hereof) per share of the Common Stock of such other Person on the date of
consummation of such consolidation, merger, sale or transfer; (ii) the issuer of
such Common Stock shall thereafter be liable for, and shall assume, by virtue of
such consolidation, merger, sale, mortgage or transfer, all the obligations and
duties of the Company pursuant to this Agreement; (iii) the term "Company" shall
thereafter be deemed to refer to such issuer, it being specifically intended
that the provisions of Section 11 hereof shall apply to such issuer; and (iv)
such issuer shall take such steps (including, but not limited to, the
reservation of a sufficient number of shares of its Common Stock to permit
exercise of all outstanding Rights in accordance with this Section 13(a) and the
making of payments in cash and/or other securities in accordance with Section
11(a)(iii) hereof) in connection with such consummation as may be necessary to
assure that the provisions hereof shall thereafter be applicable, as nearly as
reasonably may be, in relation to its shares of Common Stock thereafter
deliverable upon the exercise of the Rights.
(b) The Company shall not consummate any such consolidation, merger, sale
or transfer with any such Person referred to in clauses (x), (y) or (z) of
Section 13(a) unless prior thereto (x) such other Person shall have a sufficient
number of authorized shares of its Common Stock, which have not been issued or
reserved for issuance, to permit the exercise in full of the Rights in
accordance with this Section 13, and (y) the Company and such other Person shall
have executed and delivered to the Rights Agent a supplemental agreement
providing for the terms set forth in Section 13(a) and (b) and further providing
that, as soon as practicable after the date of any consolidation, merger, sale
or transfer of assets mentioned in Section 13(a), such other Person at its own
expense will:
(i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities purchasable
upon exercise of the Rights on
26
<PAGE>
an appropriate form, cause such registration statement to become effective
as soon as practicable after such filing and cause such registration
statement to remain effective (with a prospectus that at all times meets
the requirements of the Securities Act) until the Expiration Date;
(ii) qualify or register the Rights and the securities
purchasable upon exercise of the Rights under the blue sky laws of such
jurisdictions as may be necessary or appropriate;
(iii) list (or continue the listing of) the Rights and the
securities purchasable upon exercise of the Rights on a national securities
exchange or to meet the eligibility requirements for quotation on NASDAQ;
and
(iv) deliver to holders of the Rights historical financial
statements for such other Person and each of its Affiliates which comply in
all respects with the requirements for registration on Form 10 under the
Exchange Act.
(c) In case any Person which is to be a party to a transaction
referred to in this Section 13 has a provision in any of its authorized
securities or in its certificate of incorporation or by-laws or other instrument
governing its affairs, which provision would have the effect of (i) causing such
Person to issue (other than to holders of Rights pursuant to this Section 13),
in connection with, or as a consequence of, the consummation of a transaction
referred to in this Section 13, shares of Common Stock of such Person at less
than the then current Fair Market Value (determined pursuant to Section 11(d))
or securities exercisable for, or convertible into, Common Stock of such Person
at less than such Fair Market Value, or (ii) providing for any special payment,
tax or similar provisions in connection with the issuance of the Common Stock of
such Person pursuant to the provisions of this Section 13, then, in such event,
the Company shall not consummate any such transaction unless prior thereto the
Company and such Person shall have executed and delivered to the Rights Agent a
supplemental agreement providing that the provision in question of such Person
shall have been canceled, waived or amended, or that the authorized securities
shall be redeemed, so that the applicable provision will have no effect in
connection with, or as a consequence of, the consummation of the proposed
transaction.
The provisions of this Section 13 shall similarly apply to successive mergers or
consolidations or sales or other transfers.
Section 14. Fractional Rights and Fractional Shares.
---------------------------------------
(a) The Company shall not be required to issue fractions of Rights,
except prior to the Distribution Date as provided in Section 11(o) hereof, or to
distribute Right Certificates which evidence fractional Rights. If the Company
elects not to issue such fractional Rights, the Company shall pay, in lieu of
such fractional Rights, to the registered holders of the Right Certificates with
regard to which such fractional Rights would otherwise
27
<PAGE>
be issuable, an amount in cash equal to the same fraction of the Fair Market
Value of a whole Right, as determined pursuant to Section 11(d) hereof.
(b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions which are integral multiples of one one-
thousandth of a share of Preferred Stock) upon exercise of the Rights or to
distribute certificates which evidence fractional shares of Preferred Stock
(other than fractions which are integral multiples of one one-thousandth of a
share of Preferred Stock). In lieu of fractional shares of Preferred Stock that
are not integral multiples of one one-thousandth of a share of Preferred Stock,
the Company may pay to the registered holders of Right Certificates at the time
such Rights are exercised as herein provided an amount in cash equal to the same
fraction of the Fair Market Value of one one-thousandth of a share of Preferred
Stock. For purposes of this Section 14(b), the Fair Market Value of one one-
thousandth of a share of Preferred Stock shall be determined pursuant to Section
11(d) hereof for the Trading Day immediately prior to the date of such exercise.
(c) The holder of a Right by the acceptance of the Rights expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right, except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of this
----------------
Agreement, other than rights of action vested in the Rights Agent pursuant to
Sections 18 and 20 hereof, are vested in the respective registered holders of
the Right Certificates (or, prior to the Distribution Date, the registered
holders of the Common Stock of the Company); and any registered holder of any
Right Certificate (or, prior to the Distribution Date, of the Common Stock of
the Company), without the consent of the Rights Agent or of the holder of any
other Right Certificate (or, prior to the Distribution Date, of the Common Stock
of the Company), may, in such registered holder's own behalf and for such
registered holder's own benefit, enforce, and may institute and maintain any
suit, action or proceeding against the Company to enforce, or otherwise act in
respect of, his right to exercise the Right evidenced by such Right Certificate
in the manner provided in such Right Certificate and in this Agreement. Without
limiting the foregoing or any remedies available to the holders of Rights, it is
specifically acknowledged that the holders of Rights would not have an adequate
remedy at law for any breach of this Agreement and shall be entitled to specific
performance of the obligations hereunder and injunctive relief against actual or
threatened violations of the obligations hereunder of any Person subject to this
Agreement. Holders of Rights shall be entitled to recover the reasonable costs
and expenses, including attorneys' fees, incurred by them in any action to
enforce the provisions of this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right, by
--------------------------
accepting the same, consents and agrees with the Company and the Rights Agent
and with every other holder of a Right that:
28
<PAGE>
(a) prior to the Distribution Date, each Right will be transferable
only simultaneously and together with the transfer of shares of Common Stock of
the Company;
(b) after the Distribution Date, the Right Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the office or offices of the Rights Agent designated for such purpose, duly
endorsed or accompanied by a proper instrument of transfer;
(c) subject to Sections 6(a) and 7(f), the Company and the Rights
Agent may deem and treat the person in whose name a Right Certificate (or, prior
to the Distribution Date, the associated certificate representing Common Stock
of the Company) is registered as the absolute owner thereof and of the Rights
evidenced thereby (notwithstanding any notations of ownership or writing on the
Right Certificates or the associated certificate representing Common Stock of
the Company made by anyone other than the Company or the Rights Agent) for all
purposes whatsoever, and, subject to the last sentence of Section 7(e), neither
the Company nor the Rights Agent shall be affected by any notice to the
contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as the result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority prohibiting or otherwise restraining
performance of such obligations; provided, however, that the Company must use
-------- -------
its best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
Section 17. Right Certificate Holder Not Deemed a Shareholder. No holder,
-------------------------------------------------
as such, of any Right Certificate shall be entitled to vote, receive dividends
or be deemed for any purpose the holder of the shares of Preferred Stock or any
other securities of the Company which may at any time be issuable on the
exercise of the Rights represented thereby, nor shall anything contained herein
or in any Right Certificate be construed to confer upon the holder of any Right
Certificate, as such, any of the rights of a shareholder of the Company or any
right to vote for the election of directors or upon any matter submitted to
shareholders at any meeting thereof, or to give or withhold consent to any
corporate action, or to receive notice of meetings or other actions affecting
shareholders (except as provided in Section 25 hereof), or to receive dividends
or subscription rights, or otherwise, until the Right or Rights evidenced by
such Right Certificate shall have been exercised in accordance with the
provisions hereof.
Section 18. Concerning the Rights Agent.
---------------------------
(a) The Company agrees to pay to the Rights Agent such compensation
as shall be agreed to in writing between the Company and the Rights Agent for
all services rendered by it hereunder and, from time to time, on demand of the
Rights Agent, its
29
<PAGE>
reasonable expenses and counsel fees and disbursements and other disbursements
incurred in the administration and execution of this Agreement and the exercise
and performance of its duties hereunder. The Company also agrees to indemnify
the Rights Agent for, and to hold it harmless against, any loss, liability, or
expense, incurred without gross negligence, bad faith or willful misconduct on
the part of the Rights Agent, for anything done or omitted by the Rights Agent
in connection with the acceptance and administration of this Agreement,
including the costs and expenses of defending against any claim of liability
arising therefrom, directly or indirectly. The provisions of this Section 18(a)
shall survive the expiration of the Rights and the termination of this
Agreement.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with its administration of this Agreement in reliance upon any Right Certificate
or certificate representing Common Stock of the Company, Preferred Stock, or
other securities of the Company, instrument of assignment or transfer, power of
attorney, endorsement, affidavit, letter, notice, direction, consent,
certificate, statement, or other paper or document believed by it in good faith
and without negligence to be genuine and to be signed and executed by the proper
Person or Persons.
(c) The Rights Agent shall not be liable for consequential damages
under any provision of this Agreement or for any consequential damages arising
out of any act or failure to act hereunder.
Section 19. Merger or Consolidation or Change of Name of Rights Agent.
---------------------------------------------------------
(a) Any corporation into which the Rights Agent or any successor
Rights Agent may be merged or with which it may be consolidated, or any
corporation resulting from any merger or consolidation to which the Rights Agent
or any successor Rights Agent shall be a party, or any corporation succeeding to
the corporate trust or shareholder services business of the Rights Agent or any
successor Rights Agent, shall be the successor to the Rights Agent under this
Agreement without the execution or filing of any paper or any further act on the
part of any of the parties hereto, provided that such corporation would be
eligible for appointment as a successor Rights Agent under the provisions of
Section 21 hereof. In case at the time such successor Rights Agent shall
succeed to the agency created by this Agreement, any of the Right Certificates
shall have been countersigned but not delivered, any such successor Rights Agent
may adopt the countersignature of the predecessor Rights Agent and deliver such
Right Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Right Certificates either in the name of the predecessor or in
the name of the successor Rights Agent; and in all such cases such Right
Certificates shall have the full force provided in the Right Certificates and in
this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Right Certificates shall have been countersigned but
not delivered, the
30
<PAGE>
Rights Agent may adopt the countersignature under its prior name and deliver
Right Certificates so countersigned; and in case at that time any of the Right
Certificates shall not have been countersigned, the Rights Agent may countersign
such Right Certificates either in its prior name or in its changed name; and in
all such cases such Right Certificates shall have the full force provided in the
Right Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
----------------------
duties and obligations expressly imposed by this Agreement upon the following
terms and conditions, by all of which the Company and the holders of Right
Certificates, by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel selected by it
(who may be legal counsel for the Company), and the opinion of such counsel
shall be full and complete authorization and protection to the Rights Agent as
to any action taken or omitted by it in good faith and in accordance with such
opinion.
(b) Whenever in the performance of its duties under this Agreement
the Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any Acquiring Person and the
determination of "Fair Market Value") be proved or established by the Company
prior to taking or suffering any action hereunder, such fact or matter (unless
other evidence in respect thereof shall be herein specifically prescribed) may
be deemed to be conclusively proved and established by a certificate signed by a
person believed by the Rights Agent to be the Chairman of the Board of
Directors, a Vice Chairman of the Board of Directors, the President, a Vice
President, the Treasurer, any Assistant Treasurer, the Secretary or an Assistant
Secretary of the Company and delivered to the Rights Agent. Any such certificate
shall be full authorization to the Rights Agent for any action taken or suffered
in good faith by it under the provisions of this Agreement in reliance upon such
certificate.
(c) The Rights Agent shall be liable hereunder only for its own gross
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Right
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Right Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Right Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 7(e) hereof) or any adjustment required
under the
31
<PAGE>
provisions of Sections 11, 13 or 23(c) hereof or responsible for the manner,
method or amount of any such adjustment or the ascertaining of the existence of
facts that would require any such adjustment (except with respect to the
exercise of Rights evidenced by Right Certificates after receipt of a
certificate describing any such adjustment furnished in accordance with Section
12 hereof), nor shall it be responsible for any determination by the Board of
Directors of the Company of the Fair Market Value of the Rights or Preferred
Stock pursuant to the provisions of Section 14 hereof; nor shall it by any act
hereunder be deemed to make any representation or warranty as to the
authorization or reservation of any shares of Common Stock of the Company or
Preferred Stock to be issued pursuant to this Agreement or any Right Certificate
or as to whether or not any shares of Common Stock of the Company or Preferred
Stock will, when so issued, be validly authorized and issued, fully paid and
nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder and
certificates delivered pursuant to any provision hereof from any person believed
by the Rights Agent to be the Chairman of the Board of Directors, any Vice
Chairman of the Board of Directors, the President, a Vice President, the
Secretary, an Assistant Secretary, the Treasurer or an Assistant Treasurer of
the Company, and is authorized to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken or suffered to be taken by it in good faith in accordance with
instructions of any such officer. Any application by the Rights Agent for
written instructions from the Company may, at the option of the Rights Agent,
set forth in writing any action proposed to be taken or omitted by the Rights
Agent under this Agreement and the date on or after which such action shall be
taken or such omission shall be effective. The Rights Agent shall not be liable
for any action taken by, or omission of, the Rights Agent in accordance with a
proposal included in such application on or after the date specified in such
application (which date shall not be less than five Business Days after the date
any officer of the Company actually receives such application, unless any such
officer shall have consented in writing to an earlier date) unless, prior to
taking any such action (or the effective date in the case of an omission), the
Rights Agent shall have received written instructions in response to such
application specifying the action to be taken or omitted.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not the Rights
Agent under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other legal entity.
(i) The Rights Agent may execute and exercise any of the rights or
powers
32
<PAGE>
hereby vested in it or perform any duty hereunder either itself or by or through
its attorneys or agents.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Right Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause (1) or clause (2)
thereof, the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any successor
----------------------
Rights Agent may resign and be discharged from its duties under this Agreement
upon thirty (30) days' notice in writing mailed to the Company by first class
mail. The Company may remove the Rights Agent or any successor Rights Agent
(with or without cause), effective immediately or on a specified date, by
written notice given to the Rights Agent or successor Rights Agent, as the case
may be, and to each transfer agent of the Common Stock of the Company and
Preferred Stock, and by giving notice to the holders of the Right Certificates
by any means reasonably determined by the Company to inform such holders of such
removal (including without limitation, by including such information in one or
more of the Company's reports to shareholders or reports or filings with the
Securities and Exchange Commission). If the Rights Agent shall resign or be
removed or shall otherwise become incapable of acting, the Company shall appoint
a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of thirty (30) days after giving notice of such
removal or after it has been notified in writing of such resignation or
incapacity by the resigning or incapacitated Rights Agent or by the holder of a
Right Certificate (who shall, with such notice, submit his Right Certificate for
inspection by the Company), then the incumbent Rights Agent or the registered
holder of any Right Certificate may apply to any court of competent jurisdiction
for the appointment of a new Rights Agent. Any successor Rights Agent, whether
appointed by the Company or by such a court, shall be (a) a corporation
organized and doing business under the laws of the United States or the State of
New York (or of any other state of the United States so long as such corporation
is authorized to do business as a banking institution in the State of New York),
in good standing, which is authorized under such laws to exercise stock transfer
or corporate trust powers and is subject to supervision or examination by
federal or state authority and which has at the time of its appointment as
Rights Agent a combined capital and surplus of at least $100,000,000 or (b) an
Affiliate of a corporation described in clause (a) of this sentence. After
appointment, the successor Rights Agent shall be vested with the same powers,
rights, duties and responsibilities as if it had been originally named as Rights
Agent without further act or deed; but the predecessor Rights Agent shall
deliver and transfer to the successor Rights Agent any property at the time held
by it hereunder, and execute and deliver
33
<PAGE>
any further assurance, conveyance, act or deed necessary for the purpose. Not
later than the effective date of any such appointment, the Company shall file
notice thereof in writing with the predecessor Rights Agent and each transfer
agent of the Common Stock of the Company and the Preferred Stock, and mail a
notice thereof in writing to the registered holders of the Right Certificates.
Failure to give any notice provided for in this Section 21, however, or any
defect therein, shall not affect the legality or validity of the resignation or
removal of the Rights Agent or the appointment of the successor Rights Agent, as
the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding any of
----------------------------------
the provisions of this Agreement or of the Rights to the contrary, the Company
may, at its option, issue new Right Certificates evidencing Rights in such form
as may be approved by the Board of Directors of the Company to reflect any
adjustment or change in the Exercise Price per share and the number or kind or
class of shares of stock or other securities or property purchasable under the
Right Certificates made in accordance with the provisions of this Agreement. In
addition, in connection with the issuance or sale of shares of Common Stock of
the Company following the Distribution Date and prior to the redemption or
expiration of the Rights, the Company (a) shall, with respect to shares of
Common Stock of the Company so issued or sold pursuant to the exercise of stock
options or under any employee plan or arrangement, or upon the exercise,
conversion or exchange of securities hereafter issued by the Company, and (b)
may, in any other case, if deemed necessary or appropriate by the Board of
Directors of the Company, issue Right Certificates representing the appropriate
number of Rights in connection with such issuance or sale; provided, however,
-------- -------
that (i) no such Right Certificate shall be issued if, and to the extent that,
the Company shall be advised by counsel that such issuance would create a
significant risk of material adverse tax consequences to the Company or the
person to whom such Right Certificate would be issued, and (ii) no such Right
Certificate shall be issued if, and to the extent that, appropriate adjustments
shall otherwise have been made in lieu of the issuance thereof.
Section 23. Redemption.
----------
(a) The Board of Directors of the Company may, at its option, redeem
all but not less than all of the then outstanding Rights at a redemption price
of $0.01 per Right, appropriately adjusted to reflect any dividend declared or
paid on the Common Stock of the Company in shares of Common Stock of the Company
or any subdivision or combination of the outstanding shares of Common Stock of
the Company or similar event occurring after the date of this Agreement (such
redemption price, as adjusted from time to time, being hereinafter referred to
as the "Redemption Price"). The Rights may be redeemed only until the earlier
to occur of (i) the time at which any Person becomes an Acquiring Person or (ii)
the Final Expiration Date.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the redemption of the Rights in accordance with Section 23
hereof, and without any further action and without any notice, the right to
exercise the Rights will terminate and the only right thereafter of the holders
of Rights shall be to receive the Redemption Price for each
34
<PAGE>
Right so held. Promptly after the action of the Board of Directors of the
Company ordering the redemption of the Rights in accordance with Section 23
hereof, the Company shall give notice of such redemption to the Rights Agent and
the holders of the then outstanding Rights by mailing such notice to the Rights
Agent and to all such holders at their last addresses as they appear upon the
registry books of the Rights Agent or, prior to the Distribution Date, on the
registry books of the Transfer Agent for the Common Stock of the Company. Any
notice which is mailed in the manner herein provided shall be deemed given,
whether or not the holder receives the notice. The Company promptly shall mail a
notice of any such exchange to all of the holders of such Rights at their last
addresses as they appear upon the registry books of the Rights Agent. Any notice
which is mailed in the manner herein provided shall be deemed given, whether or
not the holder receives the notice. Each such notice of redemption will state
the method by which the payment of the Redemption Price will be made. Neither
the Company nor any of its Affiliates or Associates may redeem, acquire or
purchase for value any Rights at any time in any manner other than that
specifically set forth in this Section 23 or Section 24 hereof or in connection
with the purchase of shares of Common Stock of the Company prior to the
Distribution Date.
(c) The Company may, at its option, pay the Redemption Price in cash,
shares of Common Stock of the Company (based on the Fair Market Value of the
Common Stock of the Company as of the time of redemption) or any other form of
consideration deemed appropriate by the Board of Directors of the Company.
Section 24. Exchange.
--------
(a) (i) The Board of Directors of the Company may, at its option,
at any time on or after the occurrence of a Section 11(a)(ii) Event,
exchange all or part of the then outstanding and exercisable Rights
(which shall not include Rights that have become void pursuant to the
provisions of Section 7(e) hereof) for shares of Common Stock of the
Company at an exchange ratio of one share of Common Stock of the
Company per Right, appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof
(such exchange ratio being hereinafter referred to as the "Section
24(a)(i) Exchange Ratio"). Notwithstanding the foregoing, the Board of
Directors of the Company shall not be empowered to effect such
exchange at any time after any Person (other than an Exempt Person),
together with all Affiliates and Associates of such Person, becomes
the Beneficial Owner of 50% or more of the Common Stock of the
Company.
(ii) Notwithstanding the foregoing, the Board of Directors of
the Company may, at its option, at any time on or after the occurrence
of a Section 11(a)(ii) Event, exchange all or part of the then
outstanding and exercisable Rights (which shall not include Rights
that have become void pursuant to the provisions of Section 7(e)
hereof) for shares of Common Stock of the Company at an exchange ratio
specified in the following sentence, as appropriately
35
<PAGE>
adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date of this Agreement. Subject to the
adjustment described in the foregoing sentence, each Right may be
exchanged for that number of shares of Common Stock of the Company
obtained by dividing the Spread (as defined in Section 11(a)(iii)) by
the then Fair Market Value per one one-thousandth of a share of
Preferred Stock on the earlier of (x) the date on which any person
becomes an Acquiring Person or (y) the date on which a tender or
exchange offer by any Person (other than an Exempt Person) is first
published or sent or given within the meaning of Rule 14d-4(a) of the
Exchange Act or any successor rule, if upon consummation thereof such
Person could become an Acquiring Person (such exchange ratio being
referred to herein as the "Section 24(a)(ii) Exchange Ratio").
Notwithstanding the foregoing, the Board of Directors of the Company
shall not be empowered to effect such exchange at any time after any
Person (other than an Exempt Person), together with all Affiliates and
Associates of such Person, becomes the Beneficial Owner of 50% or more
of the Common Stock of the Company.
(b) Immediately upon the action of the Board of Directors of the
Company ordering the exchange of any Rights pursuant to subsection (a) of this
Section 24 and without any further action and without any notice, the right to
exercise such Rights shall terminate and the only right thereafter of a holder
of such Rights shall be to receive that number of shares of Common Stock of the
Company equal to the number of such Rights held by such holder multiplied by the
Section 24(a)(i) Exchange Ratio or the Section 24(a)(ii) Exchange Ratio, as
applicable. The Company shall promptly give notice of any such exchange in
accordance with Section 26 hereof and shall promptly mail a notice of any such
exchange to all of the holders of such Rights at their last addresses as they
appear upon the registry books of the Rights Agent; provided, however, that the
-------- -------
failure to give, or any defect in, such notice shall not affect the validity of
such exchange. Any notice which is mailed in the manner herein provided shall
be deemed given, whether or not the holder receives the notice. Each such
notice of exchange will state the method by which the exchange of the shares of
Common Stock of the Company for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become void pursuant to the provisions of Section 7(e) hereof)
held by each holder of Rights.
(c) In any exchange pursuant to this Section 24, the Company, at its
option, may substitute Preferred Stock (or Preferred Stock Equivalent, as such
term is defined in Section 11(b) hereof) for Common Stock of the Company
exchangeable for Rights, at the initial rate of one one-thousandth of a share of
Preferred Stock (or Preferred Stock Equivalent) for each share of Common Stock
of the Company, as appropriately adjusted to reflect adjustments in the voting
rights of the Preferred Stock pursuant to the terms thereof, so that the
fraction of a share of Preferred Stock delivered in lieu of each share of Common
Stock of the Company shall have the same voting rights as one share of Common
Stock of the Company.
36
<PAGE>
(d) In the event that there shall not be sufficient shares of Common
Stock of the Company or Preferred Stock (or Preferred Stock Equivalents) issued
but not outstanding or authorized but unissued to permit any exchange of Rights
as contemplated in accordance with this Section 24, the Company shall take all
such action as may be necessary to authorize additional shares of Common Stock
of the Company or Preferred Stock (or Preferred Stock Equivalent) for issuance
upon exchange of the Rights.
(e) The Company shall not be required to issue fractions of Common
Stock of the Company or to distribute certificates which evidence fractional
shares of Common Stock of the Company. If the Company elects not to issue such
fractional shares of Common Stock of the Company, the Company shall pay, in lieu
of such fractional shares of Common Stock of the Company, to the registered
holders of the Right Certificates with regard to which such fractional shares of
Common Stock of the Company would otherwise be issuable, an amount in cash equal
to the same fraction of the Fair Market Value of a whole share of Common Stock
of the Company. For the purposes of this paragraph (e), the Fair Market Value
of a whole share of Common Stock of the Company shall be the closing price of a
share of Common Stock of the Company (as determined pursuant to the second
sentence of Section 11(d)(i) hereof) for the Trading Day immediately prior to
the date of exchange pursuant to this Section 24.
Section 25. Notice of Certain Events.
------------------------
(a) In case the Company shall propose, at any time after the
Distribution Date, (i) to pay any dividend payable in stock of any class to the
holders of Preferred Stock or to make any other distribution to the holders of
Preferred Stock (other than a regular periodic cash dividend out of earnings or
retained earnings of the Company), or (ii) to offer to the holders of Preferred
Stock rights or warrants to subscribe for or to purchase any additional shares
of Preferred Stock or shares of stock of any class or any other securities,
rights or options, or (iii) to effect any reclassification of its Preferred
Stock (other than a reclassification involving only the subdivision of
outstanding shares of Preferred Stock), or (iv) to effect any consolidation or
merger into or with, or to effect any sale, mortgage or other transfer (or to
permit one or more of its Subsidiaries to effect any sale, mortgage or other
transfer), in one transaction or a series of related transactions, of 50% or
more of the assets or earning power of the Company and its Subsidiaries (taken
as a whole) to, any other Person (other than a Subsidiary of the Company in one
or more transactions each of which is not prohibited by the proviso at the end
of the first sentence of Section 11(n) hereof), (v) to effect the liquidation,
dissolution or winding up of the Company, or (vi) to declare or pay any dividend
on the Common Stock of the Company payable in Common Stock of the Company or to
effect a subdivision, combination or consolidation of the Common Stock of the
Company (by reclassification or otherwise than by payment of dividends in Common
Stock of the Company) then in each such case, the Company shall give to each
holder of a Right Certificate and to the Rights Agent, in accordance with
Section 26 hereof, a notice of such proposed action, which shall specify the
record date for the purposes of such stock dividend, distribution of rights or
warrants, or the date on which such reclassification, consolidation, merger,
sale, transfer, liquidation, dissolution, or winding up is to take place and the
date of participation therein by
37
<PAGE>
the holders of the shares of Common Stock of the Company and/or Preferred Stock,
if any such date is to be fixed, and such notice shall be so given in the case
of any action covered by clause (i) or (ii) above at least twenty (20) days
prior to the record date for determining holders of the shares of Preferred
Stock for purposes of such action, and in the case of any such other action, at
least twenty (20) days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of the shares of Common
Stock of the Company and/or Preferred Stock, whichever shall be the earlier;
provided, however, no such notice shall be required pursuant to this Section 25
- -------- -------
as a result of any Subsidiary of the Company effecting a consolidation or merger
with or into, or effecting a sale or other transfer of assets or earnings power
to, any other Subsidiary of the Company in a manner not inconsistent with the
provisions of this Agreement.
(b) In case any Section 11(a)(ii) Event shall occur, then, in any
such case, the Company shall as soon as practicable thereafter give to each
registered holder of a Right Certificate and to the Rights Agent, in accordance
with Section 26 hereof, a notice of the occurrence of such event, which shall
specify the event and the consequences of the event to holders of Rights under
Section 11(a)(ii) hereof.
Section 26. Notices. Notices or demands authorized by this Agreement to
-------
be given or made by the Rights Agent or by the holder of any Right Certificate
to or on the Company shall be sufficiently given or made if sent by first-class
mail, postage prepaid, by facsimile transmission or by nationally-recognized
overnight courier addressed (until another address is filed in writing with the
Rights Agent) as follows:
Cypress Communications, Inc.
Fifteen Piedmont Center, Suite 710
Atlanta, Georgia 30305
Attention: Secretary
Subject to the provisions of Section 21, any notice or demand authorized by this
Agreement to be given or made by the Company or by the holder of any Right
Certificate to or on the Rights Agent shall be sufficiently given or made if
sent by first-class mail, postage prepaid, by facsimile transmission or by
nationally-recognized overnight courier addressed (until another address is
filed in writing with the Company) as follows:
State Street Bank and Trust Company
c/o EquiServe Limited Partnership
150 Royall Street
Canton, MA 02021
Attention: Client Administration
Notices or demands authorized by this Agreement to be given or made by the
Company or the Rights Agent to the holder of any Right Certificate (or, prior to
the Distribution Date, to the holder of any certificate representing shares of
Common Stock of the Company) shall be
38
<PAGE>
sufficiently given or made if sent by first-class mail, postage prepaid,
addressed to such holder at the address of such holder as shown on the registry
books of the Company.
Section 27. Supplements and Amendments. Prior to the occurrence of a
--------------------------
Section 11(a)(ii) Event, the Company and the Rights Agent shall, if the Board of
Directors of the Company so directs, supplement or amend any provision of this
Agreement as the Board of Directors of the Company may deem necessary or
desirable without the approval of any holders of certificates representing
shares of Common Stock of the Company. From and after the occurrence of a
Section 11(a)(ii) Event, the Company and the Rights Agent shall, if the Board of
Directors of the Company so directs, supplement or amend this Agreement without
the approval of any holder of Right Certificates in order (i) to cure any
ambiguity, (ii) to correct or supplement any provision contained herein which
may be defective or inconsistent with any other provisions herein, (iii) to
shorten or lengthen any time period hereunder, or (iv) to change or supplement
the provisions hereof in any manner which the Board of Directors of the Company
may deem necessary or desirable and which shall not adversely affect the
interests of the holders of Right Certificates (other than an Acquiring Person
or any Affiliate or Associate of an Acquiring Person); provided, however, that
-------- -------
from and after the occurrence of a Section 11(a)(ii) Event this Agreement may
not be supplemented or amended to lengthen, pursuant to clause (iii) of this
sentence, (A) a time period relating to when the Rights may be redeemed at such
time as the Rights are not then redeemable or (B) any other time period unless
such lengthening is for the purpose of protecting, enhancing or clarifying the
rights of, and the benefits to, the holders of Rights (other than an Acquiring
Person or any Affiliate or Associate of an Acquiring Person). Without limiting
the foregoing, the Company may at any time prior to the occurrence of a Section
11(a)(ii) Event amend this Agreement to lower the threshold set forth in Section
1(a) to not less than the greater of (i) the sum of .001% and the largest
percentage of the outstanding Common Stock of the Company then known by the
Company to be Beneficially Owned by any Person (other than the Company, any
Subsidiary of the Company, any employee benefit plan of the Company or any
Subsidiary of the Company, or any entity holding Common Stock of the Company for
or pursuant to the terms of any such plan) and (ii) 10%. Upon the delivery of
such certificate from an appropriate officer of the Company which states that
the proposed supplement or amendment is in compliance with the terms of this
Section 27, the Rights Agent shall execute such supplement or amendment. Prior
to the occurrence of a Section 11(a)(ii) Event, the interests of the holders of
Rights shall be deemed coincident with the interests of the holders of Common
Stock of the Company. Notwithstanding any other provision hereof, the Rights
Agent's consent must be obtained regarding any amendment or supplement pursuant
to this Section 27 which alters the Rights Agent's rights or duties.
Section 28. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors. The
----------------------------------------------------
Board of Directors of the Company shall have the exclusive power and authority
to administer this
39
<PAGE>
Agreement and to exercise all rights and powers specifically granted to the
Board of Directors or to the Company, or as may be necessary or advisable in the
administration of this Agreement, including without limitation, the right and
power to (i) interpret the provisions of this Agreement and (ii) make all
determinations deemed necessary or advisable for the administration of this
Agreement (including a determination to redeem or not redeem the Rights or to
amend the Agreement). All such actions, calculations, interpretations and
determinations (including, for purposes of clause (y) below, all omissions with
respect to the foregoing) which are done or made by the Board of Directors in
good faith shall (x) be final, conclusive and binding on the Company, the Rights
Agent, the holders of the Rights and all other parties, and (y) not subject any
member of the Board of Directors to any liability to the holders of the Rights
or to any other person.
Section 30. Benefits of this Agreement. Nothing in this Agreement shall
--------------------------
be construed to give to any person or corporation other than the Company, the
Rights Agent and the registered holders of the Right Certificates (and, prior to
the Distribution Date, the Common Stock of the Company) any legal or equitable
right, remedy or claim under this Agreement; but this Agreement shall be for the
sole and exclusive benefit of the Company, the Rights Agent and the registered
holders of the Right Certificates (and, prior to the Distribution Date,
registered holders of the Common Stock of the Company).
Section 31. Severability. If any term, provision, covenant or restriction
------------
of this Agreement is held by a court of competent jurisdiction or other
authority to be invalid, void or unenforceable, the remainder of the terms,
provisions, covenants and restrictions of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that notwithstanding anything in this Agreement to the
- -------- -------
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and the Board of
Directors of the Company determines in its good faith judgment that severing the
invalid language from the Agreement would adversely affect the purpose or effect
of the Agreement, the right of redemption set forth in Section 23 hereof shall
be reinstated and shall not expire until the Close of Business on the tenth day
following the date of such determination by the Board of Directors.
Section 32. Governing Law. This Agreement, each Right and each Right
-------------
Certificate issued hereunder shall be deemed to be a contract made under the
laws of the State of Delaware and for all purposes shall be governed by and
construed in accordance with the laws of such State applicable to contracts to
be made and to be performed entirely within such State. The courts of the State
of Delaware and of the United States of America located in the State of Delaware
(the "Delaware Courts") shall have exclusive jurisdiction over any litigation
arising out of or relating to this Agreement and the transactions contemplated
hereby, and any Person commencing or otherwise involved in any such litigation
shall waive any objection to the laying of venue of such litigation in the
Delaware Courts and shall not plead or claim in any Delaware Court that such
litigation brought therein has been brought in an inconvenient forum.
40
<PAGE>
Section 33. Counterparts. This Agreement may be executed in any number
------------
of counterparts and each of such counterparts shall for all purposes be deemed
to be an original, and all such counterparts shall together constitute but one
and the same instrument.
Section 34. Descriptive Headings. Descriptive headings of the several
--------------------
Sections of this Agreement are inserted for convenience only and shall not
control or affect the meaning or construction of any of the provisions hereof.
[Remainder of page intentionally left blank]
41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as an instrument under seal and attested, all as of the day and
year first above written.
ATTEST: CYPRESS COMMUNICATIONS, INC.
By: /s/ Mark A. Graves By: /s/ R. Stanley Allen
---------------------------- -------------------------------------
Name: R. Stanley Allen
Title: Chief Executive Officer
ATTEST: STATE STREET BANK AND TRUST COMPANY, as
Rights Agent
By: /s/ Carole A. McHugh By: /s/ Charles V. Rossi
---------------------------- -------------------------------------
Name: Charles V. Rossi
Title: Vice President
<PAGE>
Exhibit A
---------
TERMS OF THE
SERIES Z JUNIOR PARTICIPATING CUMULATIVE
PREFERRED STOCK
of
CYPRESS COMMUNICATIONS, INC.
1. Designation and Amount. The total number of shares of Series Z
----------------------
Preferred Stock which the Corporation shall have authority to issue is [number
spelled out] ([number]) shares.
2. Dividends and Distributions.
---------------------------
(a) (i) Subject to the rights of the holders of any shares of any
series of Undesignated Preferred Stock (or any similar stock) ranking prior and
superior to the Series Z Preferred Stock with respect to dividends, the holders
of shares of Series Z Preferred Stock, in preference to the holders of shares of
Common Stock and of any other junior stock, shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the first day of March,
June, September and December in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series Z Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provisions
for adjustment hereinafter set forth, 1,000 times the aggregate per share amount
of all cash dividends, and 1,000 times the aggregate per share amount (payable
in kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series Z Preferred Stock. The multiple
of cash and non-cash dividends declared on the Common Stock to which holders of
the Series Z Preferred Stock are entitled, which shall be 1,000 initially but
which shall be adjusted from time to time as hereinafter provided, is
hereinafter referred to as the "Dividend Multiple." In the event the
Corporation shall at any time after __________, 2000 (the "Rights Declaration
Date") (i) declare or pay any dividend on Common Stock payable in shares of
Common Stock, or (ii) effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the Dividend Multiple
thereafter applicable to the determination of the amount of dividends which
holders of shares of Series Z
A-1
<PAGE>
Preferred Stock shall be entitled to receive shall be the Dividend Multiple
applicable immediately prior to such event multiplied by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(ii) Notwithstanding anything else contained in this paragraph
(a), the Corporation shall, out of funds legally available for that purpose,
declare a dividend or distribution on the Series Z Preferred Stock as provided
in this paragraph (a) immediately after it declares a dividend or distribution
on the Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been declared
on the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$1.00 per share on the Series Z Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(b) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series Z Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series Z Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series Z Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series Z Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix
in accordance with applicable law a record date for the determination of holders
of shares of Series Z Preferred Stock entitled to receive payment of a dividend
or distribution declared thereon, which record date shall be not more than such
number of days prior to the date fixed for the payment thereof as may be allowed
by applicable law.
3. Voting Rights. In addition to any other voting rights required by
-------------
law, the holders of shares of Series Z Preferred Stock shall have the following
voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each share of Series Z Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the Corporation.
The number of votes which a holder of a share of Series Z Preferred Stock is
entitled to cast, which shall initially be 1,000 but which may be adjusted from
time to time as hereinafter provided, is hereinafter referred to as the "Vote
Multiple." In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare or pay any dividend on Common Stock payable in
shares of Common Stock, or (ii) effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into
A-2
<PAGE>
a greater or lesser number of shares of Common Stock, then in each such case the
Vote Multiple thereafter applicable to the determination of the number of votes
per share to which holders of shares of Series Z Preferred Stock shall be
entitled shall be the Vote Multiple immediately prior to such event multiplied
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(b) Except as otherwise provided herein or by law, the holders of
shares of Series Z Preferred Stock and the holders of shares of Common Stock and
the holders of shares of any other capital stock of this Corporation having
general voting rights, shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
(c) Except as otherwise required by applicable law or as set forth
herein, holders of Series Z Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are entitled
to vote with holders of Common Stock as set forth herein) for taking any
corporate action.
4. Certain Restrictions.
--------------------
(a) Whenever dividends or distributions payable on the Series Z
Preferred Stock as provided in Section C.2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series Z Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or
winding up) to the Series Z Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution
or winding up) with the Series Z Preferred Stock, except
dividends paid ratably on the Series Z Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) except as permitted in subsection C.4(a)(iv) below,
redeem, purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up)
with the Series Z Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for
A-3
<PAGE>
shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation
or winding up) to the Series Z Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series Z Preferred Stock, or any shares of any stock
ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series Z
Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by
the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative
rights and preferences of the respective series and
classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or
classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subsection (a) of
this Section C.4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series Z Preferred Stock purchased
-----------------
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof.
6. Liquidation, Dissolution or Winding Up. Upon any liquidation
--------------------------------------
(voluntary or otherwise), dissolution or winding up of the Corporation, no
distribution shall be made (x) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series Z Preferred Stock unless, prior thereto, the holders of shares of Series
Z Preferred Stock shall have received an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, plus an amount equal to the greater of (1) $1,000.00 per share or
(2) an aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount to be
distributed per share to holders of Common Stock, or (y) to the holders of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series Z Preferred Stock, except distributions made ratably
on the Series Z Preferred Stock and all other such parity stock in proportion to
the total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall at
any time after the Rights Declaration Date (i) declare or pay any dividend on
Common Stock payable in shares of Common Stock, or (ii) effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount per share to which holders of shares of Series Z
Preferred Stock were entitled immediately prior to such event under clause (x)
of the preceding
A-4
<PAGE>
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Neither the consolidation of nor merging of the Corporation with or into
any other corporation or corporations, nor the sale or other transfer of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section C.6.
7. Consolidation, Merger, etc. In case the Corporation shall enter into
--------------------------
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in any such case the shares of Series Z
Preferred Stock shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 1,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged, plus accrued and unpaid
dividends, if any, payable with respect to the Series Z Preferred Stock. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare or pay any dividend on Common Stock payable in shares of Common Stock,
or (ii) effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series Z Preferred
Stock shall be adjusted by multiplying such amount by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
8. Redemption. The shares of Series Z Preferred Stock shall not be
----------
redeemable; provided, however, that the foregoing shall not limit the ability of
the Corporation to purchase or otherwise deal in such shares to the extent
otherwise permitted hereby and by law.
9. Ranking. Unless otherwise expressly provided in this Certificate or a
-------
certificate of designations relating to any other series of Undesignated
Preferred Stock, the Series Z Preferred Stock shall rank junior to every other
series of Preferred Stock previously or hereafter authorized, as to the payment
of dividends and the distribution of assets on liquidation, dissolution or
winding up and shall rank senior to the Common Stock.
10. Amendment. This Certificate shall not be amended in any manner which
---------
would materially alter or change the powers, preferences or special rights of
the Series Z Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of two-thirds or more of the outstanding shares
of Series Z Preferred Stock, voting separately as a class.
A-5
<PAGE>
11. Fractional Shares. Series Z Preferred Stock may be issued in whole
-----------------
shares or in any fraction of a share that is one one-thousandth (1/1,000th) of a
share or any integral multiple of such fraction, which shall entitle the holder,
in proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series Z Preferred Stock. In lieu of fractional
shares, the Corporation may elect to make a cash payment as provided in the
Shareholder Rights Agreement, dated ___________, 2000, between the Corporation
and State Street Bank & Trust Company, for fractions of a share other than one
one-thousandth (1/1,000th) of a share or any integral multiple thereof.
A-6
<PAGE>
Exhibit B
---------
[Form of Right Certificate]
Certificate No. R- ______ Rights
NOT EXERCISABLE AFTER _____________, 2010 OR EARLIER IF NOTICE OF REDEMPTION IS
GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF CYPRESS
COMMUNICATIONS, INC., AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE
SHAREHOLDER RIGHTS AGREEMENT BETWEEN CYPRESS COMMUNICATIONS, INC. AND STATE
STREET BANK AND TRUST COMPANY, AS RIGHTS AGENT, DATED AS OF ___________, 2000
(THE "RIGHTS AGREEMENT"). AS SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT,
RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF
AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS BECOME NULL AND VOID.
Right Certificate
CYPRESS COMMUNICATIONS, INC.
This certifies that _________________________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Shareholder Rights Agreement dated as of _____________, 2000 (the "Rights
Agreement") between Cypress Communications, Inc. (the "Company") and State
Street Bank and Trust Company, as Rights Agent (the "Rights Agent"), to purchase
from the Company at any time after the Distribution Date (as such term is
defined in the Rights Agreement) and prior to the close of business on
____________, 2010 at the office or offices of the Rights Agent designated for
such purpose, or its successors as Rights Agent, one one-thousandth of a fully
paid, non-assessable share of the Series Z Junior Participating Cumulative
Preferred Stock (the "Preferred Stock") of the Company, at a purchase price of
_____ per one one-thousandth of a share (the "Exercise Price"), upon
presentation and surrender of this Right Certificate with the Form of Election
to Purchase and the related Certificate duly executed. The number of Rights
evidenced by this Right Certificate (and the number of shares which may be
purchased upon exercise thereof) set forth above, and the Exercise Price per
share set forth above, are the number and Exercise Price as of _______________,
based on the Preferred Stock as constituted at such date.
B-1
<PAGE>
Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined
in the Rights Agreement), if the Rights evidenced by this Right Certificate are
beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of
any such Person (as such terms are defined in the Rights Agreement), (ii) a
transferee of any such Acquiring Person, Associate or Affiliate, or (iii) under
certain circumstances specified in the Rights Agreement, a transferee of a
Person who, after such transfer, became an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, such Rights shall become null and void and no
holder hereof shall have any right with respect to such Rights from and after
the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Exercise Price and the number of
shares of Preferred Stock or other securities which may be purchased upon the
exercise of the Rights evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal office of the
Company and the designated office of the Rights Agent and are also available
upon written request to the Company or the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office or offices of the Rights Agent designated for such
purpose, may be exchanged for another Right Certificate or Certificates of like
tenor and date evidencing Rights entitling the holder to purchase a like
aggregate number of shares of Preferred Stock as the Rights evidenced by the
Right Certificate or Certificates surrendered shall have entitled such holder to
purchase. If this Right Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Right Certificate or
Certificates for the number of whole Rights not exercised. If this Right
Certificate shall be exercised in whole or in part pursuant to Section 11(a)(ii)
of the Rights Agreement, the holder shall be entitled to receive this Right
Certificate duly marked to indicate that such exercise has occurred as set forth
in the Rights Agreement.
Under certain circumstances, subject to the provisions of the Rights
Agreement, the Board of Directors of the Company at its option may exchange all
or any part of the Rights evidenced by this Certificate for shares of the
Company's Common Stock or Preferred Stock at an exchange ratio (subject to
adjustment) specified in the Rights Agreement.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Board of Directors of the Company at its
option at a
B-2
<PAGE>
redemption price of $0.01 per Right (payable in cash, Common Stock or other
consideration deemed appropriate by the Board of Directors).
The Company is not obligated to issue fractional shares of stock upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one one-thousandth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depositary receipts). If
the Company elects not to issue such fractional shares, in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Preferred
Stock, Common Stock or any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by an authorized signatory of the Rights
Agent.
WITNESS the facsimile signature of the proper officers of the Company as a
document under seal.
Attested: CYPRESS COMMUNICATIONS, INC.
By:_______________________________ By: _______________________________
[Secretary or Assistant Secretary] Name:
Title: [Chairman, Vice Chairman,
President or Vice President]
Countersigned:
[RIGHTS AGENT]
By:_______________________________
Name:
Title:
B-3
<PAGE>
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto ____________________________________ (Please print name and
address of transferee) ____________________________________ this Right
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ___________________ Attorney, to
transfer the within Right Certificate on the books of the within-named Company,
with full power of substitution.
Dated: ______________, _____ _________________________________
Signature
Signature Guaranteed: _______________________
B-4
<PAGE>
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Right Certificate ____ are ____ are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, the
undersigned ____ did ____ did not directly or indirectly acquire the Rights
evidenced by this Right Certificate from any Person who is, was or became an
Acquiring Person or an Affiliate or Associate of any such Person.
Dated: ______________, _____ ___________________________________
Signature
B-5
<PAGE>
NOTICE
------
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-6
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to
exercise the Right Certificate.)
To CYPRESS COMMUNICATIONS, INC.:
The undersigned hereby irrevocably elects to exercise _______ Rights
represented by this Right Certificate to purchase the shares of Preferred Stock
issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued in the name of:
Please insert social security
or other identifying taxpayer number: __________________
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
______________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this
Right Certificate or if the Rights are being exercised pursuant to Section
11(a)(ii) of the Rights Agreement, a new Right Certificate for the balance of
such Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying taxpayer number: _____________________
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
______________________________________________________________________________
Dated: ______________, _____ _________________________________
Signature
Signature Guaranteed: _______________________
B-7
<PAGE>
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Right Certificate ____ are ____ are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, the
undersigned ____ did ____ did not directly or indirectly acquire the Rights
evidenced by this Right Certificate from any Person who is, was or became an
Acquiring Person, or an Affiliate or Associate of any such Person.
Dated: __________________, ____ _______________________________
Signature
B-8
<PAGE>
NOTICE
------
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-9
<PAGE>
Exhibit 10.2
CYPRESS COMMUNICATIONS, INC.
2000 STOCK OPTION AND INCENTIVE PLAN
SECTION 1. GENERAL PURPOSE OF THE PLAN; DEFINITIONS
----------------------------------------
The name of the plan is the Cypress Communications, Inc. 2000 Stock Option
and Incentive Plan (the "Plan"). The purpose of the Plan is to encourage and
enable the officers, employees, Independent Directors and other key persons
(including consultants) of Cypress Communications, Inc. (the "Company") and its
Subsidiaries upon whose judgment, initiative and efforts the Company largely
depends for the successful conduct of its business to acquire a proprietary
interest in the Company. It is anticipated that providing such persons with a
direct stake in the Company's welfare will assure a closer identification of
their interests with those of the Company, thereby stimulating their efforts on
the Company's behalf and strengthening their desire to remain with the Company.
The following terms shall be defined as set forth below:
"Act" means the Securities Act of 1933, as amended, and the rules and
regulations thereunder.
"Administrator" is defined in Section 2(a).
"Award" or "Awards," except where referring to a particular category of
grant under the Plan, shall include Incentive Stock Options, Non-Qualified Stock
Options, Deferred Stock Awards, Restricted Stock Awards, Unrestricted Stock
Awards and Performance Share Awards.
"Board" means the Board of Directors of the Company.
"Change of Control" is defined in Section 15.
"Code" means the Internal Revenue Code of 1986, as amended, and any
successor Code, and related rules, regulations and interpretations.
"Committee" means the Compensation Committee of the Board.
"Covered Employee" means an employee who is a "Covered Employee" within the
meaning of Section 162(m) of the Code.
"Deferred Stock Award" means Awards granted pursuant to Section 7.
"Effective Date" means the date on which the Plan is approved by
stockholders as set forth in Section 17.
<PAGE>
"Exchange Act" means the Securities Exchange Act of 1934, as amended, and
the rules and regulations thereunder.
"Fair Market Value" of the Stock on any given date means the fair market
value of the Stock determined in good faith by the Administrator; provided,
however, that if the Stock is admitted to quotation on the National Association
of Securities Dealers Automated Quotation System ("NASDAQ"), NASDAQ National
System or a national securities exchange, the determination shall be made by
reference to market quotations. If there are no market quotations for such date,
the determination shall be made by reference to the last date preceding such
date for which there are market quotations; provided further, however, that if
the date for which Fair Market Value is determined is the first day when trading
prices for the Stock are reported on NASDAQ or on a national securities
exchange, the Fair Market Value shall be the "Price to the Public" (or
equivalent) set forth on the cover page for the final prospectus relating to the
Company's Initial Public Offering.
"Incentive Stock Option" means any Stock Option designated and qualified as
an "incentive stock option" as defined in Section 422 of the Code.
"Independent Director" means a member of the Board who is not also an
employee of the Company or any Subsidiary.
"Initial Public Offering" means the consummation of the first fully
underwritten, firm commitment public offering pursuant to an effective
registration statement under the Act, other than on Forms S-4 or S-8 or their
then equivalents, covering the offer and sale by the Company of its equity
securities, or such other event as a result of or following which the Stock
shall be publicly held.
"Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
"Option" or "Stock Option" means any option to purchase shares of Stock
granted pursuant to Section 5.
"Performance Share Award" means Awards granted pursuant to Section 9.
"Performance Cycle" means one or more periods of time, which may be of
varying and overlapping durations, as the Administrator may select, over which
the attainment of one or more performance criteria will be measured for the
purpose of determining a grantee's right to and the payment of a Performance
Share Award, Restricted Stock Award or Deferred Stock Award.
"Restricted Stock Award" means Awards granted pursuant to Section 6.
2
<PAGE>
"Stock" means the Common Stock, par value $.001 per share, of the Company,
subject to adjustments pursuant to Section 3.
"Subsidiary" means any corporation or other entity (other than the Company)
in any unbroken chain of corporations or other entities beginning with the
Company if each of the corporations or entities (other than the last corporation
or entity in the unbroken chain) owns stock or other interests possessing 50
percent or more of the economic interest or the total combined voting power of
all classes of stock or other interests in one of the other corporations or
entities in the chain.
"Unrestricted Stock Award" means any Award granted pursuant to Section 8.
SECTION 2. ADMINISTRATION OF PLAN; ADMINISTRATOR AUTHORITY TO SELECT GRANTEES
------------------------------------------------------------------
AND DETERMINE AWARDS
--------------------
(a) Committee. The Plan shall be administered by either the Board or the
---------
Committee (in either case, the "Administrator").
(b) Powers of Administrator. The Administrator shall have the power and
-----------------------
authority to grant Awards consistent with the terms of the Plan, including the
power and authority:
(i) to select the individuals to whom Awards may from time to
time be granted;
(ii) to determine the time or times of grant, and the extent,
if any, of Incentive Stock Options, Non-Qualified Stock Options, Restricted
Stock Awards, Deferred Stock Awards, Unrestricted Stock Awards and
Performance Share Awards, or any combination of the foregoing, granted to
any one or more grantees;
(iii) to determine the number of shares of Stock to be covered
by any Award;
(iv) to determine and modify from time to time the terms and
conditions, including restrictions, not inconsistent with the terms of the
Plan, of any Award, which terms and conditions may differ among individual
Awards and grantees, and to approve the form of written instruments
evidencing the Awards;
(v) to accelerate at any time the exercisability or vesting
of all or any portion of any Award;
(vi) subject to the provisions of Section 5(a)(ii), to extend
at any time the period in which Stock Options may be exercised;
(vii) to determine at any time whether, to what extent, and
under what circumstances distribution or the receipt of Stock and other
amounts payable with respect to an Award shall be deferred either
automatically or at the election of the grantee and whether and to what
extent the Company shall pay or credit amounts constituting interest (at
rates determined by the Administrator) or dividends or deemed dividends on
such deferrals; and
3
<PAGE>
(viii) at any time to adopt, alter and repeal such rules,
guidelines and practices for administration of the Plan and for its own
acts and proceedings as it shall deem advisable; to interpret the terms and
provisions of the Plan and any Award (including related written
instruments); to make all determinations it deems advisable for the
administration of the Plan; to decide all disputes arising in connection
with the Plan; and to otherwise supervise the administration of the Plan.
All decisions and interpretations of the Administrator shall be binding on
all persons, including the Company and Plan grantees.
(c) Delegation of Authority to Grant Awards. The Administrator, in its
---------------------------------------
discretion, may delegate to the Chief Executive Officer of the Company all or
part of the Administrator's authority and duties with respect to the granting of
Awards at Fair Market Value, to individuals who are not subject to the reporting
and other provisions of Section 16 of the Exchange Act or "covered employees"
within the meaning of Section 162(m) of the Code. The Chief Executive Officer
shall be deemed a one-person committee of the Board. Any such delegation by the
Administrator shall include a limitation as to the amount of Awards that may be
granted during the period of the delegation and shall contain guidelines as to
the determination of the exercise price of any Stock Option or Stock
Appreciation Right, the conversion ratio or price of other Awards and the
vesting criteria. The Administrator may revoke or amend the terms of a
delegation at any time but such action shall not invalidate any prior actions of
the Administrator's delegate or delegates that were consistent with the terms of
the Plan.
(d) Indemnification. Neither the Board nor the Committee, nor any member
---------------
of either or any delegatee thereof, shall be liable for any act, omission,
interpretation, construction or determination made in good faith in connection
with the Plan, and the members of the Board and the Committee (and any delegatee
thereof) shall be entitled in all cases to indemnification and reimbursement by
the Company in respect of any claim, loss, damage or expense (including, without
limitation, reasonable attorneys' fees) arising or resulting therefrom to the
fullest extent permitted by law and/or under any directors' and officers'
liability insurance coverage which may be in effect from time to time.
SECTION 3. STOCK ISSUABLE UNDER THE PLAN; MERGERS; SUBSTITUTION
----------------------------------------------------
(a) Stock Issuable. The maximum number of shares of Stock reserved and
--------------
available for issuance under the Plan shall be 5,439,804 shares, subject to
adjustment as provided in this Section 3(a) and Section 3(b). For purposes of
this limitation, the shares of Stock underlying any Awards under this Plan which
are forfeited, canceled, reacquired by the Company,
4
<PAGE>
satisfied without the issuance of Stock or otherwise terminated (other than by
exercise) shall be added back to the shares of Stock available for issuance
under the Plan. In addition, the shares of Stock underlying any awards under the
Company's 1997 Management Option Plan which are forfeited, canceled, reacquired
by the Company, satisfied without the issuance of Stock or otherwise terminated
(other than by exercise) shall be added to the shares of Stock available for
issuance under the Plan, thereby increasing the maximum number of shares of
Stock reserved and available for issuance under the Plan set forth above.
Subject to such overall limitation, shares of Stock may be issued up to such
maximum number pursuant to any type or types of Award; provided, however, that
from and after the date grants under this Plan become subject to Section 162(m)
of the Code, Stock Options with respect to no more than 1,500,000 shares of
Stock may be granted to any one individual grantee during any one calendar year
period. The shares available for issuance under the Plan may be authorized but
unissued shares of Stock or shares of Stock reacquired by the Company and held
in its treasury.
(b) Changes in Stock. Subject to Section 3(c) hereof, if, as a result of
----------------
any reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other similar change in the Company's capital
stock, the outstanding shares of Stock are increased or decreased or are
exchanged for a different number or kind of shares or other securities of the
Company, or additional shares or new or different shares or other securities of
the Company or other non-cash assets are distributed with respect to such shares
of Stock or other securities, or, if, as a result of any merger or
consolidation, sale of all or substantially all of the assets of the Company,
the outstanding shares of Stock are converted into or exchanged for a different
number or kind of securities of the Company or any successor entity (or a parent
or subsidiary thereof), the Administrator shall make an appropriate or
proportionate adjustment in (i) the maximum number of shares reserved for
issuance under the Plan, (ii) the number of Stock Options that can be granted to
any one individual grantee and the maximum number of shares that may be granted
under a Performance-based Award, (iii) the number and kind of shares or other
securities subject to any then outstanding Awards under the Plan, (iv) the
repurchase price per share subject to each outstanding Restricted Stock Award,
and (v) the price for each share subject to any then outstanding Stock Options
under the Plan, without changing the aggregate exercise price (i.e., the
exercise price multiplied by the number of Stock Options) as to which such Stock
Options remain exercisable. The adjustment by the Administrator shall be final,
binding and conclusive. No fractional shares of Stock shall be issued under the
Plan resulting from any such adjustment, but the Administrator in its discretion
may make a cash payment in lieu of fractional shares.
The Administrator may also adjust the number of shares subject to
outstanding Awards and the exercise price and the terms of outstanding Awards to
take into consideration material changes in accounting practices or principles,
extraordinary dividends, acquisitions or dispositions of stock or property or
any other event if it is determined by the Administrator that such adjustment is
appropriate to avoid distortion in the operation of the Plan, provided that no
such adjustment shall be made in the case of an Incentive Stock Option, without
the consent of the grantee, if it would constitute a modification, extension or
renewal of the Option within the meaning of Section 424(h) of the Code.
5
<PAGE>
(c) Mergers and Other Transactions. In the case of and subject to the
------------------------------
consummation of (i) the dissolution or liquidation of the Company, (ii) the sale
of all or substantially all of the assets of the Company on a consolidated basis
to an unrelated person or entity, (iii) a merger, reorganization or
consolidation in which the outstanding shares of Stock are converted into or
exchanged for a different kind of securities of the successor entity and the
holders of the Company's outstanding voting power immediately prior to such
transaction do not own a majority of the outstanding voting power of the
successor entity immediately upon completion of such transaction, or (iv) the
sale of all of the Stock of the Company to an unrelated person or entity (in
each case, a "Sale Event"), all Options that are not exercisable immediately
prior to the effective time of the Sale Event shall become fully exercisable as
of the effective time of the Sale Event and all other Awards with conditions and
restrictions relating solely to the passage of time and continued employment
shall become fully vested and nonforfeitable as of the effective time of the
Sale Event, except as the Administrator may otherwise specify with respect to
particular Awards. Upon the effective time of the Sale Event, the Plan and all
outstanding Awards granted hereunder shall terminate, unless provision is made
in connection with the Sale Event in the sole discretion of the parties thereto
for the assumption or continuation of Awards theretofore granted by the
successor entity, or the substitution of such Awards with new Awards of the
successor entity or parent thereof, with appropriate adjustment as to the number
and kind of shares and, if appropriate, the per share exercise prices, as such
parties shall agree (after taking into account any acceleration hereunder). In
the event of such termination, each grantee shall be permitted, within a
specified period of time prior to the consummation of the Sale Event as
determined by the Administrator, to exercise all outstanding Options held by
such grantee, including those that will become exercisable upon the consummation
of the Sale Event; provided, however, that the exercise of Options not
exercisable prior to the Sale Event shall be subject to the consummation of the
Sale Event.
Notwithstanding anything to the contrary in this Section 3.2(c), in the
event of a Sale Event pursuant to which holders of the Stock of the Company will
receive upon consummation thereof a cash payment for each share surrendered in
the Sale Event, the Company shall have the right, but not the obligation, to
make or provide for a cash payment to the grantees holding Options, in exchange
for the cancellation thereof, in an amount equal to the difference between (A)
the value as determined by the Administrator of the consideration payable per
share of Stock pursuant to the Sale Event (the "Sale Price") times the number of
shares of Stock subject to outstanding Options (to the extent then exercisable
at prices not in excess of the Sale Price) and (B) the aggregate exercise price
of all such outstanding Options.
(d) Substitute Awards. The Administrator may grant Awards under the Plan
-----------------
in substitution for stock and stock based awards held by employees, directors or
other key persons of another corporation in connection with the merger or
consolidation of the employing corporation with the Company or a Subsidiary or
the acquisition by the Company or a Subsidiary of property or stock of the
employing corporation. The Administrator may direct that the substitute awards
be granted on such terms and conditions as the Administrator
6
<PAGE>
considers appropriate in the circumstances. Any substitute Awards granted under
the Plan shall not count against the share limitation set forth in Section 3(a).
SECTION 4. ELIGIBILITY
-----------
Grantees under the Plan will be such full or part-time officers and other
employees, Independent Directors and key persons (including consultants and
prospective employees) of the Company and its Subsidiaries as are selected from
time to time by the Administrator in its sole discretion.
SECTION 5. STOCK OPTIONS
-------------
Any Stock Option granted under the Plan shall be in such form as the
Administrator may from time to time approve.
Stock Options granted under the Plan may be either Incentive Stock Options
or Non-Qualified Stock Options. Incentive Stock Options may be granted only to
employees of the Company or any Subsidiary that is a "subsidiary corporation"
within the meaning of Section 424(f) of the Code. To the extent that any Option
does not qualify as an Incentive Stock Option, it shall be deemed a Non-
Qualified Stock Option.
No Incentive Stock Option shall be granted under the Plan after December
20, 2009.
(a) Stock Options. The Administrator in its discretion may grant Stock
-------------
Options to eligible employees, Independent Directors and key persons of the
Company or any Subsidiary. Stock Options granted pursuant to this Section 5(a)
shall be subject to the following terms and conditions and shall contain such
additional terms and conditions, not inconsistent with the terms of the Plan, as
the Administrator shall deem desirable. If the Administrator so determines,
Stock Options may be granted in lieu of cash compensation at the optionee's
election, subject to such terms and conditions as the Administrator may
establish.
(i) Exercise Price. The exercise price per share for the Stock
--------------
covered by a Stock Option granted pursuant to this Section 5(a) shall be
determined by the Administrator at the time of grant but shall not be less
than 100 percent of the Fair Market Value on the date of grant in the case
of Incentive Stock Options, or 85 percent of the Fair Market Value on the
date of grant, in the case of Non-Qualified Stock Options (other than
options granted in lieu of cash compensation). If an employee owns or is
deemed to own (by reason of the attribution rules of Section 424(d) of the
Code) more than 10 percent of the combined voting power of all classes of
stock of the Company or any parent or subsidiary corporation and an
Incentive Stock Option is granted to such employee, the option price of
such Incentive Stock Option shall be not less than 110 percent of the Fair
Market Value on the grant date.
7
<PAGE>
(ii) Option Term. The term of each Stock Option shall be fixed
-----------
by the Administrator, but no Stock Option shall be exercisable more than 10
years after the date the Stock Option is granted. If an employee owns or is
deemed to own (by reason of the attribution rules of Section 424(d) of the
Code) more than 10 percent of the combined voting power of all classes of
stock of the Company or any parent or subsidiary corporation and an
Incentive Stock Option is granted to such employee, the term of such Stock
Option shall be no more than five years from the date of grant.
(iii) Exercisability; Rights of a Stockholder. Stock Options
---------------------------------------
shall become exercisable at such time or times, whether or not in
installments, as shall be determined by the Administrator at or after the
grant date. The Administrator may at any time accelerate the exercisability
of all or any portion of any Stock Option. An optionee shall have the
rights of a stockholder only as to shares acquired upon the exercise of a
Stock Option and not as to unexercised Stock Options.
(iv) Method of Exercise. Stock Options may be exercised in
------------------
whole or in part, by giving written notice of exercise to the Company,
specifying the number of shares to be purchased. Payment of the purchase
price may be made by one or more of the following methods to the extent
provided in the Option Award agreement:
(A) In cash, by certified or bank check or other
instrument acceptable to the Administrator;
(B) Through the delivery (or attestation to the
ownership) of shares of Stock that have been purchased by the optionee
on the open market or that have been beneficially owned by the
optionee for at least six months and are not then subject to
restrictions under any Company plan. Such surrendered shares shall be
valued at Fair Market Value on the exercise date;
(C) By the optionee delivering to the Company a properly
executed exercise notice together with irrevocable instructions to a
broker to promptly deliver to the Company cash or a check payable and
acceptable to the Company for the purchase price; provided that in the
event the optionee chooses to pay the purchase price as so provided,
the optionee and the broker shall comply with such procedures and
enter into such agreements of indemnity and other agreements as the
Administrator shall prescribe as a condition of such payment
procedure; or
(D) By the optionee delivering to the Company a
promissory note if the Board has expressly authorized the loan of
funds to the optionee for the purpose of enabling or assisting the
optionee to effect the exercise of his Stock Option; provided that at
least so much of the exercise price as represents the par value of the
Stock shall be paid other than with a promissory note if otherwise
required by state law.
8
<PAGE>
Payment instruments will be received subject to collection. The delivery of
certificates representing the shares of Stock to be purchased pursuant to
the exercise of a Stock Option will be contingent upon receipt from the
optionee (or a purchaser acting in his stead in accordance with the
provisions of the Stock Option) by the Company of the full purchase price
for such shares and the fulfillment of any other requirements contained in
the Option Award agreement or applicable provisions of laws. In the event
an optionee chooses to pay the purchase price by previously-owned shares of
Stock through the attestation method, the number of shares of Stock
transferred to the optionee upon the exercise of the Stock Option shall be
net of the number of shares attested to.
(v) Annual Limit on Incentive Stock Options. To the extent required
---------------------------------------
for "incentive stock option" treatment under Section 422 of the Code, the
aggregate Fair Market Value (determined as of the time of grant) of the
shares of Stock with respect to which Incentive Stock Options granted under
this Plan and any other plan of the Company or its parent and subsidiary
corporations become exercisable for the first time by an optionee during
any calendar year shall not exceed $100,000. To the extent that any Stock
Option exceeds this limit, it shall constitute a Non-Qualified Stock
Option.
(b) Reload Options. At the discretion of the Administrator, Options
--------------
granted under the Plan may include a "reload" feature pursuant to which an
optionee exercising an option by the delivery of a number of shares of Stock in
accordance with Section 5(a)(iv)(B) hereof would automatically be granted an
additional Option (with an exercise price equal to the Fair Market Value of the
Stock on the date the additional Option is granted and with such other terms as
the Administrator may provide) to purchase that number of shares of Stock equal
to the sum of (i) the number delivered to exercise the original Option and (ii)
the number withheld to satisfy tax liabilities, with an Option term equal to the
remainder of the original Option term unless the Administrator otherwise
determines in the Award agreement for the original Option grant.
(c) Non-transferability of Options. No Stock Option shall be transferable
------------------------------
by the optionee otherwise than by will or by the laws of descent and
distribution and all Stock Options shall be exercisable, during the optionee's
lifetime, only by the optionee, or by the optionee's legal representative or
guardian in the event of the optionee's incapacity. Notwithstanding the
foregoing, the Administrator, in its sole discretion, may provide in the Award
agreement regarding a given Option that the optionee may transfer his Non-
Qualified Stock Options to members of his immediate family, to trusts for the
benefit of such family members, or to partnerships in which such family members
are the only partners, provided that the transferee agrees in writing with the
Company to be bound by all of the terms and conditions of this Plan and the
applicable Option.
9
<PAGE>
SECTION 6. RESTRICTED STOCK AWARDS
-----------------------
(a) Nature of Restricted Stock Awards. A Restricted Stock Award is an
---------------------------------
Award entitling the recipient to acquire, at such purchase price as determined
by the Administrator, shares of Stock subject to such restrictions and
conditions as the Administrator may determine at the time of grant ("Restricted
Stock"). Conditions may be based on continuing employment (or other service
relationship) and/or achievement of pre-established performance goals and
objectives. The grant of a Restricted Stock Award is contingent on the grantee
executing the Restricted Stock Award agreement. The terms and conditions of each
such agreement shall be determined by the Administrator, and such terms and
conditions may differ among individual Awards and grantees.
(b) Rights as a Stockholder. Upon execution of a written instrument
-----------------------
setting forth the Restricted Stock Award and payment of any applicable purchase
price, a grantee shall have the rights of a stockholder with respect to the
voting of the Restricted Stock, subject to such conditions contained in the
written instrument evidencing the Restricted Stock Award. Unless the
Administrator shall otherwise determine, certificates evidencing the Restricted
Stock shall remain in the possession of the Company until such Restricted Stock
is vested as provided in Section 6(d) below, and the grantee shall be required,
as a condition of the grant, to deliver to the Company a stock power endorsed in
blank.
(c) Restrictions. Restricted Stock may not be sold, assigned, transferred,
------------
pledged or otherwise encumbered or disposed of except as specifically provided
herein or in the Restricted Stock Award agreement. If a grantee's employment (or
other service relationship) with the Company and its Subsidiaries terminates for
any reason, the Company shall have the right to repurchase Restricted Stock that
has not vested at the time of termination at its original purchase price, from
the grantee or the grantee's legal representative.
(d) Vesting of Restricted Stock. The Administrator at the time of grant
---------------------------
shall specify the date or dates and/or the attainment of pre-established
performance goals, objectives and other conditions on which the non-
transferability of the Restricted Stock and the Company's right of repurchase or
forfeiture shall lapse. Subsequent to such date or dates and/or the attainment
of such pre-established performance goals, objectives and other conditions, the
shares on which all restrictions have lapsed shall no longer be Restricted Stock
and shall be deemed "vested." Except as may otherwise be provided by the
Administrator either in the Award agreement or, subject to Section 13 below, in
writing after the Award agreement is issued, a grantee's rights in any shares of
Restricted Stock that have not vested shall automatically terminate upon the
grantee's termination of employment (or other service relationship) with the
Company and its Subsidiaries and such shares shall be subject to the Company's
right of repurchase as provided in Section 6(c) above.
(e) Waiver, Deferral and Reinvestment of Dividends. The Restricted Stock
----------------------------------------------
Award agreement may require or permit the immediate payment, waiver, deferral or
investment of dividends paid on the Restricted Stock.
10
<PAGE>
SECTION 7. DEFERRED STOCK AWARDS
---------------------
(a) Nature of Deferred Stock Awards. A Deferred Stock Award is an Award of
-------------------------------
phantom stock units to a grantee, subject to restrictions and conditions as the
Administrator may determine at the time of grant. Conditions may be based on
continuing employment (or other service relationship) and/or achievement of pre-
established performance goals and objectives. The grant of a Deferred Stock
Award is contingent on the grantee executing the Deferred Stock Award agreement.
The terms and conditions of each such agreement shall be determined by the
Administrator, and such terms and conditions may differ among individual Awards
and grantees. At the end of the deferral period, the Deferred Stock Award, to
the extent vested, shall be paid to the grantee in the form of shares of Stock.
(b) Election to Receive Deferred Stock Awards in Lieu of Compensation. The
-----------------------------------------------------------------
Administrator may, in its sole discretion, permit a grantee to elect to receive
a portion of the cash compensation or Restricted Stock Award otherwise due to
such grantee in the form of a Deferred Stock Award. Any such election shall be
made in writing and shall be delivered to the Company no later than the date
specified by the Administrator and in accordance with rules and procedures
established by the Administrator. The Administrator shall have the sole right to
determine whether and under what circumstances to permit such elections and to
impose such limitations and other terms and conditions thereon as the
Administrator deems appropriate.
(c) Rights as a Stockholder. During the deferral period, a grantee shall
-----------------------
have no rights as a stockholder; provided, however, that the grantee may be
credited with Dividend Equivalent Rights with respect to the phantom stock units
underlying his Deferred Stock Award, subject to such terms and conditions as the
Administrator may determine.
(d) Restrictions. A Deferred Stock Award may not be sold, assigned,
------------
transferred, pledged or otherwise encumbered or disposed of during the deferral
period.
(e) Termination. Except as may otherwise be provided by the Administrator
-----------
either in the Award agreement or, subject to Section 13 below, in writing after
the Award agreement is issued, a grantee's right in all Deferred Stock Awards
that have not vested shall automatically terminate upon the grantee's
termination of employment (or cessation of service relationship) with the
Company and its Subsidiaries for any reason.
SECTION 8. UNRESTRICTED STOCK AWARDS
-------------------------
Grant or Sale of Unrestricted Stock. The Administrator may, in its sole
-----------------------------------
discretion, grant (or sell at par value or such higher purchase price determined
by the Administrator) an Unrestricted Stock Award to any grantee pursuant to
which such grantee may receive shares of Stock free of any restrictions
("Unrestricted Stock") under the Plan. Unrestricted Stock Awards may be granted
in respect of past services or other valid consideration, or in lieu of cash
compensation due to such grantee.
11
<PAGE>
SECTION 9. PERFORMANCE SHARE AWARDS
------------------------
(a) Nature of Performance Share Awards. A Performance Share Award is an
----------------------------------
Award entitling the recipient to acquire shares of Stock upon the attainment of
specified performance goals. The Administrator may make Performance Share Awards
independent of or in connection with the granting of any other Award under the
Plan. The Administrator in its sole discretion shall determine whether and to
whom Performance Share Awards shall be made, the performance goals, the periods
during which performance is to be measured, and all other limitations and
conditions.
(b) Rights as a Stockholder. A grantee receiving a Performance Share Award
-----------------------
shall have the rights of a stockholder only as to shares actually received by
the grantee under the Plan and not with respect to shares subject to the Award
but not actually received by the grantee. A grantee shall be entitled to receive
a stock certificate evidencing the acquisition of shares of Stock under a
Performance Share Award only upon satisfaction of all conditions specified in
the Performance Share Award agreement (or in a performance plan adopted by the
Administrator).
(c) Termination. Except as may otherwise be provided by the Administrator
-----------
either in the Award agreement or, subject to Section 13 below, in writing after
the Award agreement is issued, a grantee's rights in all Performance Share
Awards shall automatically terminate upon the grantee's termination of
employment (or cessation of service relationship) with the Company and its
Subsidiaries for any reason.
(d) Acceleration, Waiver, Etc. At any time prior to the grantee's
-------------------------
termination of employment (or other service relationship) by the Company and its
Subsidiaries, the Administrator may in its sole discretion accelerate, waive or,
subject to Section 13, amend any or all of the goals, restrictions or conditions
applicable to a Performance Share Award.
SECTION 10. PERFORMANCE-BASED AWARDS TO COVERED EMPLOYEES
---------------------------------------------
Notwithstanding anything to the contrary contained herein, if any
Restricted Stock Award, Deferred Stock Award or Performance Share Award granted
to a Covered Employee is intended to qualify as "Performance-based Compensation"
under Section 162(m) of the Code and the regulations promulgated thereunder (a
"Performance-based Award"), such Award shall comply with the provisions set
forth below:
(a) Performance Criteria. The performance criteria used in performance
--------------------
goals governing Performance-based Awards granted to Covered Employees may
include any or all of the following: (i) the Company's return on equity, assets,
capital or investment, (ii) pre-tax or after-tax profit levels of the Company or
any Subsidiary, a division, an operating unit or a business segment of the
Company, or any combination of the foregoing; (iii) cash flow, funds from
operations or similar measure; (iv) total shareholder return; (v) changes in the
market price of the Stock; (vi) sales or market share; or (vii) earnings per
share.
12
<PAGE>
(b) Grant of Performance-based Awards. With respect to each Performance-
---------------------------------
based Award granted to a Covered Employee, the Committee shall select, within
the first 90 days of a Performance Cycle (or, if shorter, within the maximum
period allowed under Section 162(m) of the Code) the performance criteria for
such grant, and the achievement targets with respect to each performance
criterion (including a threshold level of performance below which no amount will
become payable with respect to such Award). Each Performance-based Award will
specify the amount payable, or the formula for determining the amount payable,
upon achievement of the various applicable performance targets. The performance
criteria established by the Committee may be (but need not be) different for
each Performance Cycle and different goals may be applicable to Performance-
based Awards to different Covered Employees.
(c) Payment of Performance-based Awards. Following the completion of a
-----------------------------------
Performance Cycle, the Committee shall meet to review and certify in writing
whether, and to what extent, the performance criteria for the Performance Cycle
have been achieved and, if so, to also calculate and certify in writing the
amount of the Performance-based Awards earned for the Performance Cycle. The
Committee shall then determine the actual size of each Covered Employee's
Performance-based Award, and, in doing so, may reduce or eliminate the amount of
the Performance-based Award for a Covered Employee if, in its sole judgment,
such reduction or elimination is appropriate.
(d) Maximum Award Payable. The maximum Performance-based Award payable to
---------------------
any one Covered Employee under the Plan for a Performance Cycle is 200,000
Shares (subject to adjustment as provided in Section 3(b) hereof).
SECTION 11. TAX WITHHOLDING
---------------
(a) Payment by Grantee. Each grantee shall, no later than the date as of
------------------
which the value of an Award or of any Stock or other amounts received thereunder
first becomes includable in the gross income of the grantee for Federal income
tax purposes, pay to the Company, or make arrangements satisfactory to the
Administrator regarding payment of, any Federal, state, or local taxes of any
kind required by law to be withheld with respect to such income. The Company and
its Subsidiaries shall, to the extent permitted by law, have the right to deduct
any such taxes from any payment of any kind otherwise due to the grantee. The
Company's obligation to deliver stock certificates to any grantee is subject to
and conditioned on tax obligations being satisfied by the grantee.
(b) Payment in Stock. Subject to approval by the Administrator, a grantee
may elect to have the minimum required tax withholding obligation satisfied, in
whole or in part, by (i) authorizing the Company to withhold from shares of
Stock to be issued pursuant to any Award a number of shares with an aggregate
Fair Market Value (as of the date the withholding is effected) that would
satisfy the withholding amount due, or (ii) transferring to the Company shares
of Stock owned by the grantee with an aggregate Fair Market Value (as of the
date the withholding is effected) that would satisfy the withholding amount due.
13
<PAGE>
SECTION 12. TRANSFER, LEAVE OF ABSENCE, ETC.
-------------------------------
For purposes of the Plan, the following events shall not be deemed a
termination of employment:
(a) a transfer to the employment of the Company from a Subsidiary or from
the Company to a Subsidiary, or from one Subsidiary to another; or
(b) an approved leave of absence for military service or sickness, or for
any other purpose approved by the Company, if the employee's right to re-
employment is guaranteed either by a statute or by contract or under the policy
pursuant to which the leave of absence was granted or if the Administrator
otherwise so provides in writing.
SECTION 13. AMENDMENTS AND TERMINATION
--------------------------
The Board may, at any time, amend or discontinue the Plan and the
Administrator may, at any time, amend or cancel any outstanding Award for the
purpose of satisfying changes in law or for any other lawful purpose, but no
such action shall adversely affect rights under any outstanding Award without
the holder's consent. If and to the extent determined by the Administrator to be
required by the Code to ensure that Incentive Stock Options granted under the
Plan are qualified under Section 422 of the Code or to ensure that compensation
earned under Awards qualifies as performance-based compensation under Section
162(m) of the Code, if and to the extent intended to so qualify, Plan amendments
shall be subject to approval by the Company stockholders entitled to vote at a
meeting of stockholders. Nothing in this Section 13 shall limit the
Administrator's authority to take any action permitted pursuant to Section 3(c).
SECTION 14. STATUS OF PLAN
--------------
With respect to the portion of any Award that has not been exercised and
any payments in cash, Stock or other consideration not received by a grantee, a
grantee shall have no rights greater than those of a general creditor of the
Company unless the Administrator shall otherwise expressly determine in
connection with any Award or Awards. In its sole discretion, the Administrator
may authorize the creation of trusts or other arrangements to meet the Company's
obligations to deliver Stock or make payments with respect to Awards hereunder,
provided that the existence of such trusts or other arrangements is consistent
with the foregoing sentence.
SECTION 15. CHANGE OF CONTROL PROVISIONS
----------------------------
Upon the occurrence of a Change of Control as defined in this Section 15:
(a) Except as otherwise provided in the applicable Award agreement, each
outstanding Stock Option shall automatically become fully exercisable.
14
<PAGE>
(b) Except as otherwise provided in the applicable Award Agreement,
conditions and restrictions on each outstanding Restricted Stock Award, Deferred
Stock Award and Performance Share Award which relate solely to the passage of
time and continued employment will be removed. Performance or other conditions
(other than conditions and restrictions relating solely to the passage of time
and continued employment) will continue to apply unless otherwise provided in
the applicable Award agreement.
(c) "Change of Control" shall mean the occurrence of any one of the
following events:
(i) any "Person," as such term is used in Sections 13(d) and 14(d)
of the Act (other than the Company, any of its Subsidiaries, or any
trustee, fiduciary or other person or entity holding securities under any
employee benefit plan or trust of the Company or any of its Subsidiaries),
together with all "affiliates" and "associates" (as such terms are defined
in Rule 12b-2 under the Act) of such person, shall become the "beneficial
owner" (as such term is defined in Rule 13d-3 under the Act), directly or
indirectly, of securities of the Company representing 25 percent or more of
the combined voting power of the Company's then outstanding securities
having the right to vote in an election of the Company's Board of Directors
("Voting Securities") (in such case other than as a result of an
acquisition of securities directly from the Company); or
(ii) persons who, as of the Effective Date, constitute the Company's
Board of Directors (the "Incumbent Directors") cease for any reason,
including, without limitation, as a result of a tender offer, proxy
contest, merger or similar transaction, to constitute at least a majority
of the Board, provided that any person becoming a director of the Company
subsequent to the Effective Date shall be considered an Incumbent Director
if such person's election was approved by or such person was nominated for
election by either (A) a vote of at least a majority of the Incumbent
Directors or (B) a vote of at least a majority of the Incumbent Directors
who are members of a nominating committee comprised, in the majority, of
Incumbent Directors; but provided further, that any such person whose
initial assumption of office is in connection with an actual or threatened
election contest relating to the election of members of the Board of
Directors or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board, including by reason of
agreement intended to avoid or settle any such actual or threatened contest
or solicitation, shall not be considered an Incumbent Director; or
(iii) the approval by the stockholders of the Company of a
consolidation, merger or consolidation or sale or other disposition of all
or substantially all of the assets of the Company (a "Corporate
Transaction") or if consummation of such Corporate Transaction is subject,
at the time of such approval by stockholders, to the consent of any
government or governmental agency, obtaining of such consent (either
explicitly or implicitly by consummation); excluding, however, a Corporate
15
<PAGE>
Transaction in which the stockholders of the Company immediately prior to
the Corporate Transaction, would, immediately after the Corporate
Transaction, beneficially own (as such term is defined in Rule 13d-3 under
the Act), directly or indirectly, shares representing in the aggregate more
than 50 percent of the voting shares of the corporation issuing cash or
securities in the Corporate Transaction (or of its ultimate parent
corporation, if any); or
(iv) the approval by the stockholders of any plan or proposal for
the liquidation or dissolution of the Company.
Notwithstanding the foregoing, a "Change of Control" shall not be deemed to
have occurred for purposes of the foregoing clause (i) solely as the result of
an acquisition of securities by the Company which, by reducing the number of
shares of Voting Securities outstanding, increases the proportionate number of
shares of Voting Securities beneficially owned by any person to 25 percent or
more of the combined voting power of all then outstanding Voting Securities;
provided, however, that if any person referred to in this sentence shall
thereafter become the beneficial owner of any additional shares of Voting
Securities (other than pursuant to a stock split, stock dividend, or similar
transaction or as a result of an acquisition of securities directly from the
Company) and immediately thereafter beneficially owns 25 percent or more of the
combined voting power of all then outstanding Voting Securities, then a "Change
of Control" shall be deemed to have occurred for purposes of the foregoing
clause (i).
SECTION 16. GENERAL PROVISIONS
------------------
(a) No Distribution; Compliance with Legal Requirements. The Administrator
---------------------------------------------------
may require each person acquiring Stock pursuant to an Award to represent to and
agree with the Company in writing that such person is acquiring the shares
without a view to distribution thereof.
No shares of Stock shall be issued pursuant to an Award until all
applicable securities law and other legal and stock exchange or similar
requirements have been satisfied. The Administrator may require the placing of
such stop-orders and restrictive legends on certificates for Stock and Awards as
it deems appropriate.
(b) Delivery of Stock Certificates. Stock certificates to grantees under
this Plan shall be deemed delivered for all purposes when the Company or a stock
transfer agent of the Company shall have mailed such certificates in the United
States mail, addressed to the grantee, at the grantee's last known address on
file with the Company.
(c) Other Compensation Arrangements; No Employment Rights. Nothing
contained in this Plan shall prevent the Board from adopting other or additional
compensation arrangements, including trusts, and such arrangements may be either
generally applicable or applicable only in specific cases. The adoption of this
Plan and the grant of Awards do not
16
<PAGE>
confer upon any employee any right to continued employment with the Company or
any Subsidiary.
(d) Trading Policy Restrictions. Option exercises and other Awards under
---------------------------
the Plan shall be subject to such Company's insider trading policy, as in effect
from time to time.
(e) Loans to Grantees. The Company shall have the authority to make loans
-----------------
to grantees of Awards hereunder (including to facilitate the purchase of shares)
and shall further have the authority to issue shares for promissory notes
hereunder.
(f) Designation of Beneficiary. Each grantee to whom an Award has been
--------------------------
made under the Plan may designate a beneficiary or beneficiaries to exercise any
Award or receive any payment under any Award payable on or after the grantee's
death. Any such designation shall be on a form provided for that purpose by the
Administrator and shall not be effective until received by the Administrator. If
no beneficiary has been designated by a deceased grantee, or if the designated
beneficiaries have predeceased the grantee, the beneficiary shall be the
grantee's estate.
SECTION 17. EFFECTIVE DATE OF PLAN
----------------------
This Plan shall become effective upon approval by the holders of a majority
of the votes cast at a meeting of stockholders at which a quorum is present or
by written consent of stockholders. Subject to such approval by the stockholders
and to the requirement that no Stock may be issued hereunder prior to such
approval, Stock Options and other Awards may be granted hereunder on and after
adoption of this Plan by the Board.
SECTION 18. GOVERNING LAW
-------------
This Plan and all Awards and actions taken thereunder shall be governed by,
and construed in accordance with, the laws of the State of Delaware, applied
without regard to conflict of law principles.
DATE APPROVED BY BOARD OF DIRECTORS: December 21, 1999
DATE APPROVED BY STOCKHOLDERS: December 23, 1999
17
<PAGE>
Exhibit 10.3
CYPRESS COMMUNICATIONS, INC.
EMPLOYEE STOCK PURCHASE PLAN
The purpose of the Cypress Communications, Inc. Employee Stock Purchase
Plan (the "Plan") is to provide eligible employees of Cypress Communications,
Inc. (the "Company") and certain of its subsidiaries with opportunities to
purchase shares of the Company's common stock, par value $0.001 per share (the
"Common Stock"). 900,000 shares of Common Stock in the aggregate have been
approved and reserved for this purpose. The Plan is intended to constitute an
"employee stock purchase plan" within the meaning of Section 423(b) of the
Internal Revenue Code of 1986, as amended (the "Code"), and shall be interpreted
in accordance with that intent.
1. Administration. The Plan will be administered by the person or
--------------
persons (the "Administrator") appointed by the Company's Board of Directors (the
"Board") for such purpose. The Administrator has authority to make rules and
regulations for the administration of the Plan, and its interpretations and
decisions with regard thereto shall be final and conclusive. No member of the
Board or individual exercising administrative authority with respect to the Plan
shall be liable for any action or determination made in good faith with respect
to the Plan or any option granted hereunder.
2. Offerings. The Company will make one or more offerings to eligible
---------
employees to purchase Common Stock under the Plan ("Offerings"). The initial
Offering will begin on the first day of the Company's Initial Public Offering
and will end on the following
<PAGE>
October 31, 2000 (the "Initial Offering"). Thereafter, unless otherwise
determined by the Administrator, an Offering will begin on the first business
day occurring on or after each November 1 and May 1 and will end on the last
business day occurring on or before the following April 30 and October 31,
respectively. The Administrator may, in its discretion, designate a different
period for any Offering, provided that no Offering shall exceed six months in
duration or overlap any other Offering.
3. Eligibility. All employees of the Company (including employees who
-----------
are also directors of the Company) and all employees of each Designated
Subsidiary (as defined in Section 11) are eligible to participate in any one or
more of the Offerings under the Plan, provided that as of the first day of the
applicable Offering (the "Offering Date") they are customarily employed by the
Company or a Designated Subsidiary for more than 20 hours a week.
4. Participation. An employee eligible on any Offering Date may
-------------
participate in such Offering by submitting an enrollment form to his appropriate
payroll location at least 15 business days before the Offering Date (or by such
other deadline as shall be established for the Offering). The form will (a)
state a whole percentage to be deducted from his Compensation (as defined in
Section 11) per pay period, (b) authorize the purchase of Common Stock for him
in each Offering in accordance with the terms of the Plan and (c) specify the
exact name or names in which shares of Common Stock purchased for him are to be
issued pursuant to Section 10. An employee who does not enroll in accordance
with these procedures will be deemed to have waived his right to participate.
Unless an employee files a new
2
<PAGE>
enrollment form or withdraws from the Plan, his deductions and purchases will
continue at the same percentage of Compensation for future Offerings, provided
he remains eligible. Notwithstanding the foregoing, participation in the Plan
will neither be permitted nor be denied contrary to the requirements of the
Code.
5. Employee Contributions. Each eligible employee may authorize payroll
----------------------
deductions at a minimum of one percent (1%) up to a maximum of ten percent (10%)
of his Compensation for each pay period. The Company will maintain book
accounts showing the amount of payroll deductions made by each participating
employee for each Offering. No interest will accrue or be paid on payroll
deductions.
6. Deduction Changes. Except as may be determined by the Administrator
-----------------
in advance of an Offering, an employee may not increase or decrease his payroll
deduction during any Offering, but may increase or decrease his payroll
deduction with respect to the next Offering (subject to the limitations of
Section 5) by filing a new enrollment form at least 15 business days before the
next Offering Date (or by such other deadline as shall be established for the
Offering). The Administrator may, in advance of any Offering, establish rules
permitting an employee to increase, decrease or terminate his payroll deduction
during an Offering.
7. Withdrawal. An employee may withdraw from participation in the Plan
----------
by delivering a written notice of withdrawal to his appropriate payroll
location. The employee's withdrawal will be effective as of the next business
day. Following an employee's withdrawal, the Company will promptly refund to him
his entire account balance under the Plan (after
3
<PAGE>
payment for any Common Stock purchased before the effective date of withdrawal).
Partial withdrawals are not permitted. The employee may not begin participation
again during the remainder of the Offering, but may enroll in a subsequent
Offering in accordance with Section 4.
8. Grant of Options. On each Offering Date, the Company will grant to
----------------
each eligible employee who is then a participant in the Plan an option
("Option") to purchase on the last day of such Offering (the "Exercise Date"),
at the Option Price hereinafter provided for, (a) a number of shares of Common
Stock, which number shall not exceed the number of whole shares which is less
than or equal to $12,500 divided by the closing price per share of Common Stock
on the Offering Date, or (b) such other lesser maximum number of shares as shall
have been established by the Administrator in advance of the Offering.
Notwithstanding the foregoing, on the Offering Date for the Initial Offering,
the Company will grant to each eligible employee who is then a participant in
the Plan an Option to purchase on the Exercise Date, at the Option Price
hereinafter provided for, a number of shares of Common Stock, which number shall
not exceed the number of whole shares which is less than or equal to $25,000
divided by the "Price to the Public" (or equivalent) set forth on the cover page
for the final prospectus relating to the Company's Initial Public Offering. The
purchase price for each share purchased under each Option (the "Option Price")
will be 85% of the Fair Market Value of the Common Stock on the Offering Date or
the Exercise Date, whichever is less.
Notwithstanding the foregoing, no employee may be granted an option
hereunder if such employee, immediately after the option was granted, would be
treated as owning stock
4
<PAGE>
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or any Parent or Subsidiary (as defined
in Section 11). For purposes of the preceding sentence, the attribution rules of
Section 424(d) of the Code shall apply in determining the stock ownership of an
employee, and all stock which the employee has a contractual right to purchase
shall be treated as stock owned by the employee. In addition, no employee may be
granted an Option which permits his rights to purchase stock under the Plan, and
any other employee stock purchase plan of the Company and its Parents and
Subsidiaries, to accrue at a rate which exceeds $25,000 of the fair market value
of such stock (determined on the option grant date or dates) for each calendar
year in which the Option is outstanding at any time. The purpose of the
limitation in the preceding sentence is to comply with Section 423(b)(8) of the
Code.
9. Exercise of Option and Purchase of Shares. Each employee who
-----------------------------------------
continues to be a participant in the Plan on the Exercise Date shall be deemed
to have exercised his Option on such date and shall acquire from the Company
such number of whole shares of Common Stock reserved for the purpose of the Plan
as his accumulated payroll deductions on such date will purchase at the Option
Price, subject to any other limitations contained in the Plan. Any amount
remaining in an employee's account at the end of an Offering solely by reason of
the inability to purchase a fractional share will be carried forward to the next
Offering; any other balance remaining in an employee's account at the end of an
Offering will be refunded to the employee promptly.
10. Issuance of Certificates. Certificates representing shares of Common
------------------------
Stock
5
<PAGE>
purchased under the Plan may be issued only in the name of the employee, in the
name of the employee and another person of legal age as joint tenants with
rights of survivorship, or in the name of a broker authorized by the employee to
be his, or their, nominee for such purpose.
11. Definitions.
-----------
The term "Compensation" means the amount of base pay, prior to salary
reduction pursuant to either Section 125 or 401(k) of the Code, but excluding
overtime, commissions, incentive or bonus awards, allowances and reimbursements
for expenses such as relocation allowances or travel expenses, income or gains
on the exercise of Company stock options, and similar items.
The term "Designated Subsidiary" means any present or future Subsidiary (as
defined below) that has been designated by the Board to participate in the Plan.
The Board may so designate any Subsidiary, or revoke any such designation, at
any time and from time to time, either before or after the Plan is approved by
the stockholders.
The term "Fair Market Value of the Common Stock" on any given date means
the fair market value of the Common Stock determined in good faith by the
Administrator; provided, however, that if the Common Stock is admitted to
-------- -------
quotation on the National Association of Securities Dealers Automated Quotation
System ("NASDAQ"), NASDAQ National System or national securities exchange, the
determination shall be made by reference to market quotations. If there are no
market quotations for such date, the determination shall be made by reference to
the last date preceding such date for which there are market quotations.
Notwithstanding the foregoing, if the date for which Fair Market Value of the
Common Stock
6
<PAGE>
is determined is the first day when trading prices for the Common Stock are
reported on NASDAQ or on a national securities exchange, the Fair Market Value
of the Common Stock shall be the "Price to the Public" (or equivalent) set forth
on the cover page for the final prospectus relating to the Company's Initial
Public Offering.
The term "Initial Public Offering" means the consummation of the first
fully underwritten, firm commitment public offering pursuant to an effective
registration statement under the Securities Exchange Act of 1934, as amended,
other than on Forms S-4 or S-8 or their then equivalents, covering the offer and
sale by the Company of its Common Stock.
The term "Parent" means a "parent corporation" with respect to the Company,
as defined in Section 424(e) of the Code.
The term "Subsidiary" means a "subsidiary corporation" with respect to the
Company, as defined in Section 424(f) of the Code.
12. Rights on Termination of Employment. If a participating employee's
-----------------------------------
employment terminates for any reason before the Exercise Date for any Offering,
no payroll deduction will be taken from any pay due and owing to the employee
and the balance in his account will be paid to him or, in the case of his death,
to his designated beneficiary as if he had withdrawn from the Plan under Section
7. An employee will be deemed to have terminated employment, for this purpose,
if the corporation that employs him, having been a Designated Subsidiary, ceases
to be a Subsidiary, or if the employee is transferred to any corporation other
than the Company or a Designated Subsidiary.
13. Special Rules. Notwithstanding anything herein to the contrary, the
-------------
7
<PAGE>
Administrator may adopt special rules applicable to the employees of a
particular Designated Subsidiary, whenever the Administrator determines that
such rules are necessary or appropriate for the implementation of the Plan in a
jurisdiction where such Designated Subsidiary has employees; provided that such
rules are consistent with the requirements of Section 423(b) of the Code. Such
special rules may include (by way of example, but not by way of limitation) the
establishment of a method for employees of a given Designated Subsidiary to fund
the purchase of shares other than by payroll deduction, if the payroll deduction
method is prohibited by local law or is otherwise impracticable. Any special
rules established pursuant to this Section 13 shall, to the extent possible,
result in the employees subject to such rules having substantially the same
rights as other participants in the Plan.
14. Optionees Not Stockholders. Neither the granting of an Option to an
--------------------------
employee nor the deductions from his pay shall constitute such employee a holder
of the shares of Common Stock covered by an Option under the Plan until such
shares have been purchased by and issued to him.
15. Rights Not Transferable. Rights under the Plan are not transferable
-----------------------
by a participating employee other than by will or the laws of descent and
distribution, and are exercisable during the employee's lifetime only by the
employee.
16. Application of Funds. All funds received or held by the Company under
--------------------
the Plan may be combined with other corporate funds and may be used for any
corporate purpose.
17. Adjustment in Case of Changes Affecting Common Stock. In the event of
----------------------------------------------------
a subdivision of outstanding shares of Common Stock, or the payment of a
dividend in Common
8
<PAGE>
Stock, the number of shares approved for the Plan, and the share limitation set
forth in Section 8, shall be increased proportionately, and such other
adjustment shall be made as may be deemed equitable by the Administrator. In the
event of any other change affecting the Common Stock, such adjustment shall be
made as may be deemed equitable by the Administrator to give proper effect to
such event.
18. Amendment of the Plan. The Board may at any time, and from time to
---------------------
time, amend the Plan in any respect, except that without the approval, within 12
months of such Board action, by the stockholders, no amendment shall be made
increasing the number of shares approved for the Plan or making any other change
that would require stockholder approval in order for the Plan, as amended, to
qualify as an "employee stock purchase plan" under Section 423(b) of the Code.
19. Insufficient Shares. If the total number of shares of Common Stock
-------------------
that would otherwise be purchased on any Exercise Date plus the number of shares
purchased under previous Offerings under the Plan exceeds the maximum number of
shares issuable under the Plan, the shares then available shall be apportioned
among participants in proportion to the amount of payroll deductions accumulated
on behalf of each participant that would otherwise be used to purchase Common
Stock on such Exercise Date.
20. Termination of the Plan. The Plan may be terminated at any time by
-----------------------
the Board. Upon termination of the Plan, all amounts in the accounts of
participating employees shall be promptly refunded.
21. Governmental Regulations. The Company's obligation to sell and
------------------------
deliver
9
<PAGE>
Common Stock under the Plan is subject to obtaining all governmental approvals
required in connection with the authorization, issuance, or sale of such stock.
The Plan shall be governed by Delaware law except to the extent that such
law is preempted by federal law.
22. Issuance of Shares. Shares may be issued upon exercise of an Option
------------------
from authorized but unissued Common Stock, from shares held in the treasury of
the Company, or from any other proper source.
23. Tax Withholding. Participation in the Plan is subject to any minimum
---------------
required tax withholding on income of the participant in connection with the
Plan. Each employee agrees, by entering the Plan, that the Company and its
Subsidiaries shall have the right to deduct any such taxes from any payment of
any kind otherwise due to the employee, including shares issuable under the
Plan.
24. Notification Upon Sale of Shares. Each employee agrees, by entering
--------------------------------
the Plan, to give the Company prompt notice of any disposition of shares
purchased under the Plan where such disposition occurs within two years after
the date of grant of the Option pursuant to which such shares were purchased.
25. Effective Date and Approval of Shareholders. The Plan shall take
-------------------------------------------
effect on the first day of the Company's Initial Public Offering, subject to
approval by the holders of a majority of the votes cast at a meeting of
stockholders at which a quorum is present or by written consent of stockholders.
10
<PAGE>
Exhibit A
---------
TERMS OF THE
SERIES Z JUNIOR PARTICIPATING CUMULATIVE
PREFERRED STOCK
of
CYPRESS COMMUNICATIONS, INC.
1. Designation and Amount. The total number of shares of Series Z
----------------------
Preferred Stock which the Corporation shall have authority to issue is [number
spelled out] ([number]) shares.
2. Dividends and Distributions.
---------------------------
(a) (i) Subject to the rights of the holders of any shares of any
series of Undesignated Preferred Stock (or any similar stock) ranking prior and
superior to the Series Z Preferred Stock with respect to dividends, the holders
of shares of Series Z Preferred Stock, in preference to the holders of shares of
Common Stock and of any other junior stock, shall be entitled to receive, when,
as and if declared by the Board of Directors out of funds legally available for
the purpose, quarterly dividends payable in cash on the first day of March,
June, September and December in each year (each such date being referred to
herein as a "Quarterly Dividend Payment Date"), commencing on the first
Quarterly Dividend Payment Date after the first issuance of a share or fraction
of a share of Series Z Preferred Stock, in an amount per share (rounded to the
nearest cent) equal to the greater of (a) $1.00 or (b) subject to the provisions
for adjustment hereinafter set forth, 1,000 times the aggregate per share amount
of all cash dividends, and 1,000 times the aggregate per share amount (payable
in kind) of all non-cash dividends or other distributions other than a dividend
payable in shares of Common Stock or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise), declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series Z Preferred Stock. The multiple
of cash and non-cash dividends declared on the Common Stock to which holders of
the Series Z Preferred Stock are entitled, which shall be 1,000 initially but
which shall be adjusted from time to time as hereinafter provided, is
hereinafter referred to as the "Dividend Multiple." In the event the
Corporation shall at any time after __________, 2000 (the "Rights Declaration
Date") (i) declare or pay any dividend on Common Stock payable in shares of
Common Stock, or (ii) effect a subdivision or combination or consolidation of
the outstanding shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or lesser number
of shares of Common Stock, then in each such case the Dividend Multiple
thereafter applicable to the determination of the amount of dividends which
holders of shares of Series Z
A-1
<PAGE>
Preferred Stock shall be entitled to receive shall be the Dividend Multiple
applicable immediately prior to such event multiplied by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(ii) Notwithstanding anything else contained in this paragraph
(a), the Corporation shall, out of funds legally available for that purpose,
declare a dividend or distribution on the Series Z Preferred Stock as provided
in this paragraph (a) immediately after it declares a dividend or distribution
on the Common Stock (other than a dividend payable in shares of Common Stock);
provided that, in the event no dividend or distribution shall have been declared
on the Common Stock during the period between any Quarterly Dividend Payment
Date and the next subsequent Quarterly Dividend Payment Date, a dividend of
$1.00 per share on the Series Z Preferred Stock shall nevertheless be payable on
such subsequent Quarterly Dividend Payment Date.
(b) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series Z Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series Z Preferred Stock, unless
the date of issue of such shares is prior to the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue from the date of issue of such shares, or unless the date of
issue is a Quarterly Dividend Payment Date or is a date after the record date
for the determination of holders of shares of Series Z Preferred Stock entitled
to receive a quarterly dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and be cumulative
from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall
not bear interest. Dividends paid on the shares of Series Z Preferred Stock in
an amount less than the total amount of such dividends at the time accrued and
payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix
in accordance with applicable law a record date for the determination of holders
of shares of Series Z Preferred Stock entitled to receive payment of a dividend
or distribution declared thereon, which record date shall be not more than such
number of days prior to the date fixed for the payment thereof as may be allowed
by applicable law.
3. Voting Rights. In addition to any other voting rights required by
-------------
law, the holders of shares of Series Z Preferred Stock shall have the following
voting rights:
(a) Subject to the provision for adjustment hereinafter set forth,
each share of Series Z Preferred Stock shall entitle the holder thereof to 1,000
votes on all matters submitted to a vote of the stockholders of the Corporation.
The number of votes which a holder of a share of Series Z Preferred Stock is
entitled to cast, which shall initially be 1,000 but which may be adjusted from
time to time as hereinafter provided, is hereinafter referred to as the "Vote
Multiple." In the event the Corporation shall at any time after the Rights
Declaration Date (i) declare or pay any dividend on Common Stock payable in
shares of Common Stock, or (ii) effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise than by payment of a dividend in shares of Common Stock) into
A-2
<PAGE>
a greater or lesser number of shares of Common Stock, then in each such case the
Vote Multiple thereafter applicable to the determination of the number of votes
per share to which holders of shares of Series Z Preferred Stock shall be
entitled shall be the Vote Multiple immediately prior to such event multiplied
by a fraction, the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
(b) Except as otherwise provided herein or by law, the holders of
shares of Series Z Preferred Stock and the holders of shares of Common Stock and
the holders of shares of any other capital stock of this Corporation having
general voting rights, shall vote together as one class on all matters submitted
to a vote of stockholders of the Corporation.
(c) Except as otherwise required by applicable law or as set forth
herein, holders of Series Z Preferred Stock shall have no special voting rights
and their consent shall not be required (except to the extent they are entitled
to vote with holders of Common Stock as set forth herein) for taking any
corporate action.
4. Certain Restrictions.
--------------------
(a) Whenever dividends or distributions payable on the Series Z
Preferred Stock as provided in Section C.2 are in arrears, thereafter and until
all accrued and unpaid dividends and distributions, whether or not declared, on
shares of Series Z Preferred Stock outstanding shall have been paid in full, the
Corporation shall not:
(i) declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for
consideration any shares of stock ranking junior (either
as to dividends or upon liquidation, dissolution or
winding up) to the Series Z Preferred Stock;
(ii) declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution
or winding up) with the Series Z Preferred Stock, except
dividends paid ratably on the Series Z Preferred Stock and
all such parity stock on which dividends are payable or in
arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) except as permitted in subsection C.4(a)(iv) below,
redeem, purchase or otherwise acquire for consideration
shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up)
with the Series Z Preferred Stock, provided that the
Corporation may at any time redeem, purchase or otherwise
acquire shares of any such parity stock in exchange for
A-3
<PAGE>
shares of any stock of the Corporation ranking junior
(either as to dividends or upon dissolution, liquidation
or winding up) to the Series Z Preferred Stock; or
(iv) purchase or otherwise acquire for consideration any shares
of Series Z Preferred Stock, or any shares of any stock
ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series Z
Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by
the Board of Directors) to all holders of such shares upon
such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative
rights and preferences of the respective series and
classes, shall determine in good faith will result in fair
and equitable treatment among the respective series or
classes.
(b) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for consideration any shares of
stock of the Corporation unless the Corporation could, under subsection (a) of
this Section C.4, purchase or otherwise acquire such shares at such time and in
such manner.
5. Reacquired Shares. Any shares of Series Z Preferred Stock purchased
-----------------
or otherwise acquired by the Corporation in any manner whatsoever shall be
retired and canceled promptly after the acquisition thereof.
6. Liquidation, Dissolution or Winding Up. Upon any liquidation
--------------------------------------
(voluntary or otherwise), dissolution or winding up of the Corporation, no
distribution shall be made (x) to the holders of shares of stock ranking junior
(either as to dividends or upon liquidation, dissolution or winding up) to the
Series Z Preferred Stock unless, prior thereto, the holders of shares of Series
Z Preferred Stock shall have received an amount equal to accrued and unpaid
dividends and distributions thereon, whether or not declared, to the date of
such payment, plus an amount equal to the greater of (1) $1,000.00 per share or
(2) an aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 1,000 times the aggregate amount to be
distributed per share to holders of Common Stock, or (y) to the holders of stock
ranking on a parity (either as to dividends or upon liquidation, dissolution or
winding up) with the Series Z Preferred Stock, except distributions made ratably
on the Series Z Preferred Stock and all other such parity stock in proportion to
the total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. In the event the Corporation shall at
any time after the Rights Declaration Date (i) declare or pay any dividend on
Common Stock payable in shares of Common Stock, or (ii) effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise than by payment of a dividend in shares of Common
Stock) into a greater or lesser number of shares of Common Stock, then in each
such case the aggregate amount per share to which holders of shares of Series Z
Preferred Stock were entitled immediately prior to such event under clause (x)
of the preceding
A-4
<PAGE>
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Neither the consolidation of nor merging of the Corporation with or into
any other corporation or corporations, nor the sale or other transfer of all or
substantially all of the assets of the Corporation, shall be deemed to be a
liquidation, dissolution or winding up of the Corporation within the meaning of
this Section C.6.
7. Consolidation, Merger, etc. In case the Corporation shall enter into
--------------------------
any consolidation, merger, combination or other transaction in which the shares
of Common Stock are exchanged for or changed into other stock or securities,
cash and/or any other property, then in any such case the shares of Series Z
Preferred Stock shall at the same time be similarly exchanged or changed in an
amount per share (subject to the provision for adjustment hereinafter set forth)
equal to 1,000 times the aggregate amount of stock, securities, cash and/or any
other property (payable in kind), as the case may be, into which or for which
each share of Common Stock is changed or exchanged, plus accrued and unpaid
dividends, if any, payable with respect to the Series Z Preferred Stock. In the
event the Corporation shall at any time after the Rights Declaration Date (i)
declare or pay any dividend on Common Stock payable in shares of Common Stock,
or (ii) effect a subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by payment of a
dividend in shares of Common Stock) into a greater or lesser number of shares of
Common Stock, then in each such case the amount set forth in the preceding
sentence with respect to the exchange or change of shares of Series Z Preferred
Stock shall be adjusted by multiplying such amount by a fraction, the numerator
of which is the number of shares of Common Stock outstanding immediately after
such event and the denominator of which is the number of shares of Common Stock
that were outstanding immediately prior to such event.
8. Redemption. The shares of Series Z Preferred Stock shall not be
----------
redeemable; provided, however, that the foregoing shall not limit the ability of
the Corporation to purchase or otherwise deal in such shares to the extent
otherwise permitted hereby and by law.
9. Ranking. Unless otherwise expressly provided in this Certificate or a
-------
certificate of designations relating to any other series of Undesignated
Preferred Stock, the Series Z Preferred Stock shall rank junior to every other
series of Preferred Stock previously or hereafter authorized, as to the payment
of dividends and the distribution of assets on liquidation, dissolution or
winding up and shall rank senior to the Common Stock.
10. Amendment. This Certificate shall not be amended in any manner which
---------
would materially alter or change the powers, preferences or special rights of
the Series Z Preferred Stock so as to affect them adversely without the
affirmative vote of the holders of two-thirds or more of the outstanding shares
of Series Z Preferred Stock, voting separately as a class.
A-5
<PAGE>
11. Fractional Shares. Series Z Preferred Stock may be issued in whole
-----------------
shares or in any fraction of a share that is one one-thousandth (1/1,000th) of a
share or any integral multiple of such fraction, which shall entitle the holder,
in proportion to such holder's fractional shares, to exercise voting rights,
receive dividends, participate in distributions and to have the benefit of all
other rights of holders of Series Z Preferred Stock. In lieu of fractional
shares, the Corporation may elect to make a cash payment as provided in the
Shareholder Rights Agreement, dated ___________, 2000, between the Corporation
and State Street Bank & Trust Company, for fractions of a share other than one
one-thousandth (1/1,000th) of a share or any integral multiple thereof.
A-6
<PAGE>
Exhibit B
---------
[Form of Right Certificate]
Certificate No. R- ______ Rights
NOT EXERCISABLE AFTER _____________, 2010 OR EARLIER IF NOTICE OF REDEMPTION IS
GIVEN. THE RIGHTS ARE SUBJECT TO REDEMPTION, AT THE OPTION OF CYPRESS
COMMUNICATIONS, INC., AT $0.01 PER RIGHT ON THE TERMS SET FORTH IN THE
SHAREHOLDER RIGHTS AGREEMENT BETWEEN CYPRESS COMMUNICATIONS, INC. AND STATE
STREET BANK AND TRUST COMPANY, AS RIGHTS AGENT, DATED AS OF ___________, 2000
(THE "RIGHTS AGREEMENT"). AS SPECIFIED IN SECTION 7(e) OF THE RIGHTS AGREEMENT,
RIGHTS BENEFICIALLY OWNED BY AN ACQUIRING PERSON OR AN ASSOCIATE OR AFFILIATE OF
AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT) AND ANY
SUBSEQUENT HOLDER OF SUCH RIGHTS BECOME NULL AND VOID.
Right Certificate
CYPRESS COMMUNICATIONS, INC.
This certifies that _________________________________, or registered assigns, is
the registered owner of the number of Rights set forth above, each of which
entitles the owner thereof, subject to the terms, provisions and conditions of
the Shareholder Rights Agreement dated as of _____________, 2000 (the "Rights
Agreement") between Cypress Communications, Inc. (the "Company") and State
Street Bank and Trust Company, as Rights Agent (the "Rights Agent"), to purchase
from the Company at any time after the Distribution Date (as such term is
defined in the Rights Agreement) and prior to the close of business on
____________, 2010 at the office or offices of the Rights Agent designated for
such purpose, or its successors as Rights Agent, one one-thousandth of a fully
paid, non-assessable share of the Series Z Junior Participating Cumulative
Preferred Stock (the "Preferred Stock") of the Company, at a purchase price of
_____ per one one-thousandth of a share (the "Exercise Price"), upon
presentation and surrender of this Right Certificate with the Form of Election
to Purchase and the related Certificate duly executed. The number of Rights
evidenced by this Right Certificate (and the number of shares which may be
purchased upon exercise thereof) set forth above, and the Exercise Price per
share set forth above, are the number and Exercise Price as of _______________,
based on the Preferred Stock as constituted at such date.
B-1
<PAGE>
Upon the occurrence of a Section 11(a)(ii) Event (as such term is defined
in the Rights Agreement), if the Rights evidenced by this Right Certificate are
beneficially owned by (i) an Acquiring Person or an Affiliate or Associate of
any such Person (as such terms are defined in the Rights Agreement), (ii) a
transferee of any such Acquiring Person, Associate or Affiliate, or (iii) under
certain circumstances specified in the Rights Agreement, a transferee of a
Person who, after such transfer, became an Acquiring Person, or an Affiliate or
Associate of an Acquiring Person, such Rights shall become null and void and no
holder hereof shall have any right with respect to such Rights from and after
the occurrence of such Section 11(a)(ii) Event.
As provided in the Rights Agreement, the Exercise Price and the number of
shares of Preferred Stock or other securities which may be purchased upon the
exercise of the Rights evidenced by this Right Certificate are subject to
modification and adjustment upon the happening of certain events.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Right Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the principal office of the
Company and the designated office of the Rights Agent and are also available
upon written request to the Company or the Rights Agent.
This Right Certificate, with or without other Right Certificates, upon
surrender at the office or offices of the Rights Agent designated for such
purpose, may be exchanged for another Right Certificate or Certificates of like
tenor and date evidencing Rights entitling the holder to purchase a like
aggregate number of shares of Preferred Stock as the Rights evidenced by the
Right Certificate or Certificates surrendered shall have entitled such holder to
purchase. If this Right Certificate shall be exercised in part, the holder
shall be entitled to receive upon surrender hereof another Right Certificate or
Certificates for the number of whole Rights not exercised. If this Right
Certificate shall be exercised in whole or in part pursuant to Section 11(a)(ii)
of the Rights Agreement, the holder shall be entitled to receive this Right
Certificate duly marked to indicate that such exercise has occurred as set forth
in the Rights Agreement.
Under certain circumstances, subject to the provisions of the Rights
Agreement, the Board of Directors of the Company at its option may exchange all
or any part of the Rights evidenced by this Certificate for shares of the
Company's Common Stock or Preferred Stock at an exchange ratio (subject to
adjustment) specified in the Rights Agreement.
Subject to the provisions of the Rights Agreement, the Rights evidenced by
this Certificate may be redeemed by the Board of Directors of the Company at its
option at a
B-2
<PAGE>
redemption price of $0.01 per Right (payable in cash, Common Stock or other
consideration deemed appropriate by the Board of Directors).
The Company is not obligated to issue fractional shares of stock upon the
exercise of any Right or Rights evidenced hereby (other than fractions which are
integral multiples of one one-thousandth of a share of Preferred Stock, which
may, at the election of the Company, be evidenced by depositary receipts). If
the Company elects not to issue such fractional shares, in lieu thereof a cash
payment will be made, as provided in the Rights Agreement.
No holder of this Right Certificate, as such, shall be entitled to vote or
receive dividends or be deemed for any purpose the holder of shares of Preferred
Stock, Common Stock or any other securities of the Company which may at any time
be issuable on the exercise hereof, nor shall anything contained in the Rights
Agreement or herein be construed to confer upon the holder hereof, as such, any
of the rights of a shareholder of the Company or any right to vote for the
election of directors or upon any matter submitted to shareholders at any
meeting thereof, or to give or withhold consent to any corporate action, or to
receive notice of meetings or other actions affecting shareholders (except as
provided in the Rights Agreement), or to receive dividends or subscription
rights, or otherwise, until the Right or Rights evidenced by this Right
Certificate shall have been exercised as provided in the Rights Agreement.
This Right Certificate shall not be valid or obligatory for any purpose
until it shall have been countersigned by an authorized signatory of the Rights
Agent.
WITNESS the facsimile signature of the proper officers of the Company as a
document under seal.
Attested: CYPRESS COMMUNICATIONS, INC.
By:__________________________________ By: ___________________________________
[Secretary or Assistant Secretary] Name:
Title: [Chairman, Vice Chairman,
President or Vice President]
Countersigned:
[RIGHTS AGENT]
By:____________________________________
Name:
Title:
B-3
<PAGE>
[Form of Reverse Side of Right Certificate]
FORM OF ASSIGNMENT
------------------
(To be executed by the registered holder if such
holder desires to transfer the Right Certificate.)
FOR VALUE RECEIVED ___________________________ hereby sells, assigns and
transfers unto ____________________________________ (Please print name and
address of transferee) ____________________________________ this Right
Certificate, together with all right, title and interest therein, and does
hereby irrevocably constitute and appoint ___________________ Attorney, to
transfer the within Right Certificate on the books of the within-named Company,
with full power of substitution.
Dated: ______________, _____ ___________________________________
Signature
Signature Guaranteed: _______________________
B-4
<PAGE>
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Right Certificate ____ are ____ are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, the
undersigned ____ did ____ did not directly or indirectly acquire the Rights
evidenced by this Right Certificate from any Person who is, was or became an
Acquiring Person or an Affiliate or Associate of any such Person.
Dated: ______________, _____ ___________________________________
Signature
B-5
<PAGE>
NOTICE
------
The signature to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-6
<PAGE>
FORM OF ELECTION TO PURCHASE
----------------------------
(To be executed if holder desires to
exercise the Right Certificate.)
To CYPRESS COMMUNICATIONS, INC.:
The undersigned hereby irrevocably elects to exercise _______ Rights
represented by this Right Certificate to purchase the shares of Preferred Stock
issuable upon the exercise of the Rights (or such other securities of the
Company or of any other person which may be issuable upon the exercise of the
Rights) and requests that certificates for such shares be issued in the name of:
Please insert social security
or other identifying taxpayer number: __________________
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
______________________________________________________________________________
If such number of Rights shall not be all the Rights evidenced by this
Right Certificate or if the Rights are being exercised pursuant to Section
11(a)(ii) of the Rights Agreement, a new Right Certificate for the balance of
such Rights shall be registered in the name of and delivered to:
Please insert social security
or other identifying taxpayer number: _____________________
______________________________________________________________________________
(Please print name and address)
______________________________________________________________________________
______________________________________________________________________________
Dated: ______________, _____ ___________________________________
Signature
Signature Guaranteed: _______________________
B-7
<PAGE>
CERTIFICATE
-----------
The undersigned hereby certifies by checking the appropriate boxes that:
(1) the Rights evidenced by this Right Certificate ____ are ____ are not
being exercised by or on behalf of a Person who is or was an Acquiring Person or
an Affiliate or Associate of any such Person (as such terms are defined in the
Rights Agreement); and
(2) after due inquiry and to the best knowledge of the undersigned, the
undersigned ____ did ____ did not directly or indirectly acquire the Rights
evidenced by this Right Certificate from any Person who is, was or became an
Acquiring Person, or an Affiliate or Associate of any such Person.
Dated: __________________, ____ _______________________________
Signature
B-8
<PAGE>
NOTICE
------
The signature to the foregoing Election to Purchase and Certificate must
correspond to the name as written upon the face of this Right Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-9
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference of our reports included in this Form 10-K, into the Company's
previously filed Registration Statements on Form S-8, No. 333-30004 and No. 333-
30504.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 29, 2000
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 69,475,288
<SECURITIES> 0
<RECEIVABLES> 1,665,203
<ALLOWANCES> 367,805
<INVENTORY> 0
<CURRENT-ASSETS> 71,461,007
<PP&E> 27,028,102
<DEPRECIATION> 2,733,443
<TOTAL-ASSETS> 122,854,601
<CURRENT-LIABILITIES> 15,585,722
<BONDS> 0
100,277,750
0
<COMMON> 2,760
<OTHER-SE> 6,704,900
<TOTAL-LIABILITY-AND-EQUITY> 122,854,601
<SALES> 7,437,496
<TOTAL-REVENUES> 7,437,496
<CGS> 4,966,851
<TOTAL-COSTS> 4,966,851
<OTHER-EXPENSES> 17,436,970
<LOSS-PROVISION> 395,618
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (14,156,280)
<INCOME-TAX> 0
<INCOME-CONTINUING> (14,156,280)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (93,233,780)
<EPS-BASIC> (35.22)
<EPS-DILUTED> (35.22)
</TABLE>
